Aug 26 Apply These Three Tips to Keep Your Not-for-Profit Out of the Headlines

Recently, a former not-for-profit executive director from Long Island made headlines after being indicted on charges of embezzling hundreds of thousands of dollars from Human First, Inc., a social services charity she ran for six years. The misdirected funds were used to pay for credit card debt, home renovations, vacations and other personal expenses.

As shocking and unimaginable as it might sound, this is neither the first nor last time that a not-for-profit organization will experience such a betrayal from the very same people who have vowed to protect and advance their missions.  In fact, studies have shown that more than half of workplace fraud is committed on the management level.

The financial damages that result from fraud often pale in comparison to the harm caused by loss of donor confidence and public credibility.  Fortunately, fraud is highly preventable when the proper internal controls are in place.

Is your organization equipped to prevent fraud before it even happens – or to detect it shortly thereafter?  Protect your organization, mission and donations with the following 3 important tips:

1. Have your organization’s bank transactions reviewed by someone who was not involved in preparing the organization’s bank reconciliations. This is particularly important for smaller organizations that have a small number of employees and therefore lack segregation of duties.  For example, a board member who has some level of experience in finance can periodically access the organization’s bank account on-line and review all of the transactions that are disbursements, including wire transfers. He or she can then request back-up documentation from the Director of Finance for anything that appears to be strange or out of the ordinary.   I suggest that this also happen on a “surprise” basis to keep everyone on their toes.
2. Have a list of approved vendors that the organization is allowed to use. Additions to this “approved” list would need to be reviewed by both the board of trustees and a member of management who does not have access to paying invoices.  On an annual basis, a board member with financial experience should review the list of approved vendors and the amounts paid to them and present their findings to the Finance Committee.  Fictitious vendors is a popular way for fraud to occur within a not-for-profit.  The expense looks legitimate; however, the vendor is not.
3. When it comes to your organization’s employees, trust but verify. Typically, it is the most trusted and least suspected person in an organization that commits fraud.  The fraud triangle is comprised of:

• Perceived financial need – “I really need the money.”
• Perceived opportunity – “Nobody is really watching me.”
• Rationalization – “I deserve more than what I am getting.”

There are often warning signs that go totally unnoticed by others who are in contact with the person who commits the fraud. Know your people! Keep your eyes and ears open to any unexpected change in the employees’ lifestyles and attitudes. Usually fraud starts out small,  but as the person gets away with it, the more brazen they become to try and get away with more.  It almost becomes a game.  So be a little less trusting.

While fraud may occur despite your best attempts to prevent it, these three tips should limit some of the more common ways it occurs – and keep your not-for-profit from becoming the next big headline.