Friday, June 15, 2012

8 Things That Make Nonprofits Vulnerable To Fraud

Nonprofit boards and executives never want to believe that fraud can happen to their organization. It's one of those things that happen to the unprepared, they think, surely it can never happen to us.

Unfortunately, that is far from the truth. Fraud can happen to all nonprofits because, according Marci Thomas, CPA, MHA and Kim Strom-Gottfried, Ph.D. In their book "The Best of Boards," the two authors wrote that nonprofits are especially vulnerable to financial crimes because they rely on the trust of their donors, funders, and employees. If that trust is broken, organizations will have a hard time finding success.

Thomas and Strom-Gottfried wrote that organizations must have strong internal controls to make sure these factors don’t lead to fraud:

  • Control by a chief executive; employees believe that there is no one to whom they can report unusual actions or requests;
  • Existence of transactions, such as contributions, which are very easy to steal;
  • Environment of trust, especially in financial personnel;
  • Focus on the mission to the exclusion of administrative systems of controls and risk management;
  • Failure to devote sufficient resources to financial management;
  • Failure to include people with financial oversight expertise on the board;
  • Failure of the board to challenge the chief executive for fear of losing the person; and,
  • Fear that the cost of implementing controls will outweigh the benefit and spending money that, in their view, would be better spent on programs.

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