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Is your nonprofit safe from fraud?

Is your nonprofit safe from fraud?

Guest post by Sharon Latimer, CPA, Partner at RubinBrown LLP

It’s no secret that fraudulent incidents in the nonprofit sector are on the rise. In fact, according to the Association of Certified Fraud Examiners’ (ACFE) 2014 Global Fraud Study, the median loss for nonprofit organizations due to fraud that year was $108,000, up 20 percent from 2010. Even more shocking is that smaller organizations tend to suffer larger losses due to occupational fraud.

When boiled down, fraud occurs when three factors align: pressure, opportunity and rationalization. This is known as the Fraud Triangle. Nonprofits can significantly cut back on these incidents by highlighting ethics as the leading core value upon which all business decisions are made.
There are many meanings of ethical behavior, but simply put, your organization can define the term as “doing the right thing, even when no one is watching.” Nonprofits must be particularly sensitive to implementing ethical conduct as risks are heightened for nonprofit organizations as it relates to compliance requirements, reputation, transparency, conflicts of interest, fundraising, and the conduct of volunteers and employees who represent the organization.   

In order to prevent significant monetary losses and associated risks, nonprofits must have a strategy in place. The CARE (Commitment, Aids, Review, Example) strategy, outlined by Jennifer Elder, CPA and consultant, is an effective approach for nonprofits to utilize without putting strains on financial resources.

  • Commitment: In order for a nonprofit organization to create a culture that values ethical behavior, each and every member of the staff – from leadership to volunteers – must be held accountable for upholding the entity’s integrity. Remember, leadership drives ethical conduct. Organization leaders must transparently abide by the values they set forth and empower volunteers and employees to think about how their personal actions impact the organization.
  • Aids: How do you encourage your team to follow the organization’s values? Employ a selection of aids, including:
    • A code of conduct: This document should outline employment and volunteer workplace practices, such as equal opportunity, harassment, use of the organization’s property and more.
    • Background checks: Although background checks can involve additional costs, they remain a best practice to ensure you hire tip-top employees and must not be undervalued.
    • Ethics training: Holding an annual course will keep employees up to date on all procedures, as well as successfully integrate new employees into the ethical fold.
    • Ethics hotline: Employees who receive ethical training will know what types of behavior qualify as fraud and how to use this anonymous hotline resource.
    • Any combination of these initiatives will help your organization discourage behavior associated with fraud.
  • Review: Any business, for profit or nonprofit, observes a constantly changing environment. This requires, at the very least, an annual review of practices and procedures. Additionally, the review phase should start as early as the talent acquisition stage. Interviewers must convey the importance of ethical behavior in the organization as they survey each job candidate for moral conduct and integrity.
  • Example: Social psychology says social forces outweigh personal integrity. It is critical to establish and maintain a culture that embodies the organization’s missions and values. Again, this starts at the top of the organization. One of the most effective ways to prevent behavior associated with fraud is to lead by example.
Don’t let your organization fall victim to fraud. Used effectively and exercised by all individuals in a nonprofit, the above activities may significantly reduce fraudulent instances in an organization without causing financial hardship.

RubinBrown LLP is a Business Member with Nonprofit Connect. Learn more here.