Nonprofits should be wary of scammers in their organization

Few staff members plus overworked employees could lead to more than burnout for workers at small nonprofits. In fact, a nonprofit payment processing system handled by only one employee could lead to trouble in the books or even worse - fraud.

Not all scammers trying to take advantage of charities and other nonprofits are found on the outside trying to hack into a system or use stolen credit cards on an organization's website.

That's why nonprofit leaders must be vigilant to ensure the funds that keep their work going aren't misappropriated. 

Stolen funds
More than 1,000 nonprofits reported from 2008 to 2012 that someone either stole, embezzled or defrauded a significant amount of money from them, according to a study performed by The Washington Post. In this instance, a significant amount of money equals $250,000 or 5 percent of the organization's assets.

Fraud from the inside can be difficult to spot, with the Post finding hundreds of millions of dollars misappropriated over the four-year span and $170 million taken in 2009 alone. The majority of organizations listing a problem with their accounts were charitable nonprofits.

"I come across these cases all the time," Christopher T. Marquet, founder and CEO of Marquet International, told the Post. "The control structures in these organizations are much weaker."

Marquet's firm provides investigations and security consulting for businesses affected by fraud. It also performed a study that found the not-for-profit sector is frequently a victim of fraud, coming in second only to financial institutions.

Small staffs
Meanwhile, a consultant with BDO, an international consulting and accountancy firm, agreed that small staffs with little oversight could make it easier for nonprofit employees to embezzle funds.

Nidhi Rao, a director at BDO's Washington, D.C. office, told The Nonprofit Times few balances in place and only a select group of senior staff members handling the money may lead to trouble. Her firm found a nonprofit executive who charged $1 million to the organization's credit card. 

"Splitting up responsibilities among multiple people - with each serving as a check or balance on the other - is a basic form of internal control," Rao noted. "Nonprofits tend to have relatively small staffs, so it can be a challenge to find enough employees to segregate duties in an adequate manner. This can be a big problem."

Breaking up tasks, changing log-in passwords and keeping track of business items such as laptops may help keep potential fraudulent activities in check. In addition, using donor management software can counteract nefarious irregularities in a charity's accounting books if it uses fraud protection features such as address verification. With an address verification system attached to its certified payment processing, a nonprofit may be able to track exactly where the money is coming from and if a transaction appears fraudulent. 

Analytic software will also help as it examines the funds going in and out of an organization. 

Blowing the whistle
Software that analyzes ledgers may work, but consultants noted that fellow nonprofit employees may work just as well if they see something untoward in the office. Many times an overworked and fearful work environment at a charity can make it easier for an employee or boss to begin embezzling from their organization. This is one reason why a nonprofit should encourage employees of any rank to report any suspicious behavior that they see either in the office or in the numbers. 

According to The Nonprofit Times, charities may also fall victim to internal fraud by not regularly saving their data or checking it periodically. 

Fraud triangle
Creating the right kind of office environment might be the best solution for the dilemma. Segmenting jobs and work loads means more eyes will be on the nonprofit's books, creating a system of checks and balances.

Even though nonprofits usually have to do a lot with just a little, giving employees smaller workloads may also deter workers from stealing funds. Long work hours for little pay could cause someone to enter what the Association of Certified Fraud Examiners describes as the fraud triangle.

The triangle includes several factors that may lead employees to defraud or embezzle from their company, including: pressure, opportunity and rationalization. Life and workplace pressures such as not being able to meet work expectations or being heavily in debt can fall under the pressure category. Meanwhile, a potential defrauder will find the right moment and rationalize the crime sometimes feeling their salary is too low for the amount of work they do. 

Finding ways to de-stress the workplace and providing an environment of openness could assist nonprofits in stopping any insider fraud or scams before they even begin.


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