Financial fraud is damaging to any organization, but it’s even more painful at nonprofit organizations where every dollar matters. In addition to a loss of funds, news of internal theft at nonprofits may result in a loss of donor confidence, compounding the crisis. Can nonprofit fraud be prevented? In an article with Nonprofit Information, Dan Draz says yes.
Fraud, stealing, theft, embezzlement…it’s called many things but the end result is that an employee took money that didn’t belong to them, without permission, and converted it to their own personal use. These kinds of insider thefts have major financial impact! According to the Association of Certified Fraud Examiners (ACFE), organizations around the world lose an estimated 5% of their annual revenues due to fraud.
Fraud at a “for profit” company can be detrimental enough but at a nonprofit, where margins are thin and donations are hard to come by, especially in a depressed economy, every dollar is needed to serve the organization’s mission statement. Consequently, a large embezzlement can easily account for significantly more than 5% of the organization’s annual revenues and this type of financial loss can be catastrophic to the organization, their reputation and continued operation. Further, fraud at a non-profit significantly impacts the organizations ability to raise donor money due to the perceived loss of confidence in how the non-profit manages their business and dollars raised.
After an embezzlement at a nonprofit, where the former director was sentenced to prison for stealing from the organization, employees reiterated this point when they stated “donors have become more hesitant in aiding the agency after hearing about the theft. They’ve lost their trust in the organization.” This sentiment is expected as embezzlement represents a fairly significant violation of trust and lack of financial oversight in an organization. Seven years later, the organization is still reeling from the effects of the embezzlement which is indicative of the long term impact that major fraud events have on an organizations ability to operate successfully.
We’re often asked if fraud can be prevented. Absolutely. While nothing is completely foolproof, preventing fraud in all businesses is largely about the strength of the internal controls and nonprofits are certainly no different than any other business in that regard. Internal controls, and anti-fraud processes, were the focus of Nonprofit Check Up – Is Your Bookkeeper Embezzling? (June 12, 2013). Rather than revisit the internal controls necessary for nonprofits to prevent fraud, this article takes a completely different approach, focusing instead on some of the reasons employees steal, the behavioral symptoms (red flags) which may appear and signs nonprofits should look out for.
Visit Nonprofit Information to find out how nonprofits can reduce the risk of embezzlement by spotting signs of fraud and understanding what motivates potential thieves.