Fraud: Protecting Your Nonprofit


Following up on our earlier post on fraud in the nonprofit sector, here are some tips for preventing fraud and the diversion of charitable assets:

  1. Create a Strong Policy Against Fraud:  Organizations should create comprehensive and forceful policies that go beyond the words on paper. The policies should incorporate reporting mechanisms and real consequences for violations. The policy should also be tailored to the specific nonprofit, explained in detail to all employees when training, and revisited yearly for effectiveness. Additionally, the board of directors must ensure that fraud reports are taken seriously, and that outside legal counsel is brought in when appropriate.
  2. Implement a Culture of Honesty and Ethics:  In addition to an anti-fraud policy, organizations should prepare a code of conduct that incorporates a zero tolerance for unethical behavior by volunteers, employees, officers, and directors. This code should be trained, exhibited, and reinforced within every aspect of the organization, especially at the top in order to set the example.
  3. Encourage Whistleblowing:  Employees are unlikely to report theft or mismanagement if they believe that their jobs are in jeopardy. Implementing anti-retaliation protections and providing a fraud hotline for anonymous reporting may provide confidence to employees exposing abuse.
  4. Conduct Internal and External Audits:  Every effective policy requires oversight. The board of directors should establish an audit committee responsible for reviewing the organization’s financials, as well monitoring the anti-fraud policies. One suggestion for the audit committee is to conduct surprise or unplanned audits. In addition to supervision by the nonprofit’s management and board of directors, nonprofits may also engage in regular external audits by hiring a CPA or an attorney.
  5. Check Backgrounds:  Consider conducting background checks on new employees or volunteer leaders.  Pre-screening potential employees may be helpful in assessing whether the candidate has a criminal record, prior history of fraud, or heavy debts that may make fraudulent activity a bit more likely.
  6. Separate Cash Handling Duties:  Ensure that no single employee is responsible for handling cash, issuing checks, or reconciling financials.  Instead, require two signatures on checks and have at least two individuals count money and verify receipts.
  7. Prepare Responses:  Organizations should contemplate the consequences for and responses to fraudulent activities. This includes responding to small mistakes or grave deceptions, both privately within the organization and publicly to the community.

Stay turned for our next post on fraud, which will focus on what to do if your organization is victimized by fraud.