The cost of fraud in nonprofits
A recent survey on global fraud by the Association of Certified Fraud Examiners (ACFE) found that a typical organization loses up to 5 percent of its annual revenue to fraud. Although fraud in nonprofits results in lesser costs than in for-profits, there is an increase in attacks targeting nonprofits. Apart from the immediate loss of funds, there are greater possible losses to these organizations in terms of reputation and infrastructure damage. Since most nonprofits depend on donors and grantors, damage to reputation can affect the relationship with these entities. For nonprofits, losing donors is one of the most damaging factors, leading to the loss of funds that could have been used to fund various causes. Furthermore, scams that target nonprofits often get negative media coverage, leading to mistrust among potential donors.
Vulnerability of nonprofits to fraud
Nonprofits can be attractive targets to hackers and fraudsters. One key aspect that makes them a soft target to malicious individuals is that most of these nonprofits are small, and executives passionate about their cause and missions always trust others who have the same interest or pretend to have the same interest. Moreover, some executives may know more about other fields but may understand little about internal controls and financial issues. Additionally, nonprofits largely have limited resources and talent that could help in internal controls. This makes them vulnerable to employees who could know the company's lack of controls and take advantage of the weaknesses to commit fraud.
The distribution of nonprofits' grants, scholarships, awards, and other financial aid to external agencies or individual recipients also makes them vulnerable. It makes it possible for funds to be misappropriated if there is a lack of adequate control or oversight mechanisms.
The risk control mechanisms in nonprofits are solely the work of management. As such, management should never be complacent and never assume that auditors will identify fraud if they occur. Although auditing is a good step toward flagging fraud, by the time annual auditing is done, it is usually too late to prevent the organization from fraud and reputational damage. Sadly, most board members in nonprofits do not think the way fraudsters do. This makes it hard to develop the right control mechanisms to address fraud.
The best strategy to develop the right is to assess the board's skills and capabilities before deciding where professional help is needed. An effective and empowered audit committee should be formed with complete independence. The committee should be allowed to hire outside counsel. Effective controls should be established by combining internal and cultural controls at the core of the anti-fraud program. Common tools such as security and access control mechanisms like dual authority, audits, monetary authorization limits, inspections and transaction monitoring will play a key role in enhancing fraud management. The right tone should be established right from the top by promoting a culture of integrity and ethics to embolden honest staff and stop possible fraud cases. On top of this, a clear reporting process for suspicious behaviour should be developed.