Don’t Cut Financial Corners

Stretching resources and doing more with less is familiar territory for many nonprofits. That might work in some areas, but it doesn’t work in all of them. When it comes to financial matters, limited staff, lax policies and procedures, and lack of proper oversight could converge to create an ideal atmosphere for fraud and embezzlement.No matter how long your staff and volunteers have been with you and how well you feel you know them, it’s a mistake to think that fraud can’t happen. While it’s not possible to completely prevent fraud from occurring, it is possible to reduce the likelihood that fraudulent behavior will go unnoticed.The Board’s RoleStrong board oversight is an effective fraud prevention tool. The board (or finance committee) should establish and implement appropriate internal controls -- procedural safeguards put in place to protect financial assets.An annual review of internal controls will help ensure they are effective and provide an opportunity to add new controls as necessary. The board should also be on the lookout for new risks the organization might be facing.How Internal Controls WorkA key mechanism behind internal controls is segregation of duties -- spreading financial duties and responsibilities among two or more people.Here are the basics:

• Don’t allow the same person to open the mail, record and reconcile donations, and prepare the bank deposits.
• Require two authorized signatures on checks for more than a certain amount.
• Make sure an executive or board member receives and reviews a copy of all bank statements and logs into and reviews all online accounts.

Watch for Red FlagsCertain behaviors can indicate something is amiss. For example, if someone with key financial responsibilities consistently avoids taking a day off or scheduling vacation, he or she may be hiding something. Employees in financial positions should be required to take vacation time, and someone else should fill in while they’re away.There may be other telltale clues. Employees who are living beyond their means, struggling with financial issues, or gambling may be more likely to commit fraud.Making Fraud an IssueAs a general rule, people steal because they think it’s safe. You can establish a good defense by taking steps that make the workplace unsafe for fraud. In addition to implementing strong internal controls, speak openly with your staff and volunteers about fraud and fraud prevention. Encourage them to speak up. Let them know who to go to (confidentially, of course) if they suspect something isn’t right.Audits are another way to keep people on their toes. Surprise internal audits and external audits can be effective ways of discouraging fraud.Report It!Internal controls and other safeguards will help with fraud prevention, but they aren’t foolproof. Your organization could still be the victim of internal fraud.If that happens, report it. Countless instances of nonprofit fraud and embezzlement go unreported out of fear that donors and funders will stop supporting an organization that allowed itself to be victimized.However, board members and executives have a fiduciary duty to protect the organization’s financial assets and preserve its ability to perform its mission. Reporting the crime is your best opportunity to recoup some or all of the assets that rightfully belong to your organization. Failure to report fraud may result in a breach of fiduciary duty.The “Fraud Triangle”Here are the three factors that specialists say generally must be present for someone to commit fraud:

• Financial need or pressure. Keep in mind that the recent recession has created hardship for many people.
• Opportunity. Without opportunity, no crime can be committed.
• Rationalization. The person committing fraud must be able to rationalize or “self-justify” the crime. Thefts often begin with a small rationalization -- the person is just “borrowing” the money to get through a rough patch, for example. Unfortunately, small rationalizations often escalate into larger thefts.