Managing a nonprofit organization can be a challenging task filled with competing needs and priorities. The size of the nonprofit often dictates how much support is available to manage the operational, financial, and service demands faced by many. For some, attention can be shared evenly across the functions, while others are forced to prioritize based on need. The unfortunate reality is this often leaves little time and resources available to address fraud prevention. While it may be easy to delay these efforts, it can come at a significant cost. According to the 2020 Global Study on Fraud and Abuse, in reviewing 191 nonprofit cases, the median loss, per incident, was $75,000. This is an astonishing number when considering how such funds could be otherwise used to achieve the organization’s mission. While fraud will not happen at every nonprofit, it is important to ensure effective fraud prevention controls exist to discourage potential bad actors. To help clients and others in the nonprofit community, McKonly & Asbury has provided a summary of key nonprofit fraud trends below.
About the Survey
There was a total of 191 nonprofit fraud cases examined and detailed information about detection, organizational characteristics, fraudster characteristics, post-detection activity, and finally perpetrator punishment. Each case was submitted by a Certified Fraud Examiner (CFE) and they were required to answer 77 questions they investigated. All the information included was compiled through the Global Fraud Survey.
Key Nonprofit Fraud Trends
- Common Nonprofit Schemes – When it comes to fraud prevention the unfortunate reality is that many organizations have fewer resources available to implement the necessary safeguards. In fact, it was determined that in 41% of cases corruption was the primary scheme, 30% billing fraud, 23% expense reimbursements, 17% cash on hand, 15% skimming and 14% check and payment tampering. Other less frequent schemes included cash larceny, payroll fraud, financial statement fraud and register disbursements. The findings reflect the importance of implementing internal controls that can help to detect and limit such behaviors.
- Top Control Weaknesses – Given the limited resources available to organizations, the survey wanted to understand the top weaknesses to address. It was found that in 35% of cases the main issue was a lack of internal controls, 19% a lack of management review and 14% an override of existing internal controls. This data again reinforces the need for effective internal controls.
- Fraud Detection Methods – The survey also wanted to understand the most common fraud detection methods. It was found that 40% of cases were detected by a tip or complaint, 17% internal audit, 13% management review, 7% by accident and 6% by examination of documents. It is clear that organizations without robust internal controls should consider a reporting hotline to bolster prevention efforts.
- Fraud Perpetrators & Loss – The survey also wanted to understand who most frequently perpetrates fraud and cost to the organization. It was found that in 39% of cases a high level/executive was the perpetrator with a median loss of $250,000, 35% involved a manager/supervisor with a loss of $95,000 per incident and 23% of cases involved an employee with a loss of $21,000 per incident. These results illustrate the importance of prevention efforts that focus on senior leadership as the loss is often significant.
- Behavioral Red Flags – There are common behavioral characteristics which are often exhibited by fraudsters. While the presence of a single item does not mean an individual is committing fraud, the confluence of several should be a red flag. It was found that in 42% of cases the fraudster was living beyond their means, 26% experienced financial difficulties, 29% had an unusually close association with a customer/vendor, 15% control issues, 12% divorce or family problems and 9% experienced addiction challenges.
Fraud is an ever-present threat that can jeopardize an organization’s financial stability. Although it can be easy to minimize the need for prevention programs, especially when it means diverting funds, it is essential to protect the organization. If you have questions about the information outlined above or need assistance with fraud prevention or detection, McKonly & Asbury can help. For additional information, contact Gary Dubas, Partner, and Director of Nonprofit Services.