Nearly everyone agrees that there are many fraud risks in nonprofit organizations.  So, the real question is what are the most common fraud risks in nonprofit organizations and how can you prevent or, at the very least, detect fraud in a timely manner.  Remember, there is no such thing as a small fraud: there are only frauds that are detected early in the scheme.  This article will introduce some questions to ask within your organization to help determine where to focus your fraud risk reduction efforts.

Before getting into more specifics, let’s take a step back to discover who commits fraud and how much.  According to the 2014 Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse, nonprofit organizations suffer a median loss of $100,000 among frauds reported in the biannual study.  Additionally, the study reports that it is an average of 18 months from the start of the fraud until it is initially detected.  People of all working ages commit fraud, although the highest frequency occurs among employees ages 36 – 45.  Another useful statistic in the study is that 54% of frauds involve only one person, and the remaining 46% of frauds involve two or more people.  Of the frauds our firm has investigated over the past few years, they have generally gone undetected for several years and have ranged from under $100,000 to nearly half a million.

Because an organization cannot prevent every possible fraud, thinking through the following questions for your organization will assist you in narrowing your focus:

  • What is valuable in the organization?
  • What are the cash receipts and disbursements processes? Who is involved?
  • What are the internal and external financial and compliance reporting requirements?
  • What opportunities exist for collusion? Are there unusual relationships among employees, vendors, or customers?
  • Are there behavioral red flags such as people living beyond their means or employees having financial difficulties who have access to assets?

In addition to the above questions, looking at the fraud triangle to assess where risks exist is a helpful exercise in determining what internal process or procedural changes may be needed.  The three legs of the fraud triangle are:

  1. Pressure – who has motivation or a need to commit fraud?
  2. Opportunity – who has the access to cash or other valuable assets?
  3. Rationalization – who may have reasons to justify dishonest actions?

In next month’s newsletter, we’ll discuss the top three fraud risks in nonprofit organizations according to the ACFE study, specific anti-fraud controls, and some specific recommendations of ways to reduce fraud risks.

John Kubichek is an audit manager and Certified Fraud Examiner (CFE) and can be reached at [email protected].


What Plan Sponsors Need to Know about DOL Enforcement and Red Flags

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Employee Benefit Plans08/30/2019


Being selected for a Department of Labor (DOL) audit is not exactly a prize most plan sponsors want or intend to win. Often, plan sponsors think service providers will take the blame when compliance issues arise. But plan sponsors are ultimately responsible for plan administration and operation. Plan sponsors that don’t realize this can suffer devastating consequences and become a statistic on the agency’s annual enforcement report.

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