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By Shawn Richardson, CPA, HoganTaylor Assurance Senior Manager

The risk of fraud occurring in nonprofits does not only extend to the actual fraud itself, but also to the perception and reputation of the entity.  Fraud can lead to the loss of donors who fund the mission of the entity as well as grant revenue.  In the case of the nonprofit People Against Rape (the Organization), the bookkeeper falsified more than $50,000 in grant documentation between 2010 and 2012 as well as embezzled approximately $10,000 ( -fraud-wreaks-havoc-nonprofit-cautionary-tale/).  According to the referenced article, the bookkeeper was submitting reimbursements under a grant agreement that were never paid by People Against Rape.  In addition to the amount embezzled by the bookkeeper, the Organization lost approximately $300,000 in grant funds that were awarded by the grantor but not paid to the Organization.  This was due to the lack of confidence in the financial reporting to the granting agency.  Because of the decrease in grant revenue and funding, People Against Rape had to lay off all staff and the Board of Directors had to determine whether to continue the operations of the organization.

Studies have shown that nonprofits are more susceptible to fraud because of the nature of the organization and management structure.  Most nonprofits’ board of directors are comprised of volunteers who may lack the expertise and skill in financial management and oversight.  Additionally, due to the size of the entity’s staff, an individual typically controls the financial management of the entity with no oversight.  There has been an emphasis in nonprofits regarding the importance of internal controls to help prevent and detect fraud.

In the case above, the fraud could have been prevented by implementing appropriate segregation of duties.  If the submission of expenditures to the grant agency were reviewed by the Board of Directors or Executive Director prior to submission and agreed to cleared checks, appropriate segregation of duties would have been obtained.  Additionally, segregating the check writing, processing of cash receipts and bank reconciliation functions would help to strengthen the internal control structure of the organization.  The Organization could also require dual signatures on all checks.  This would ensure that any checks or monies misappropriated would require collusion by two individuals within the Organization.

There are easy and low-cost ways to improve internal controls but it starts with more involvement by those charged with governance.  This includes learning about the entity and asking appropriate questions to ensure that governance is properly obtained.  The more transparent an entity can be, the less likely is fraud to occur.  The reputation and perception of an entity reflects management and governance.  If the public loses confidence in the entity, the short and long-term implications can extend well beyond the actual fraud.

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