“It’s better to be safe than to be sorry.”
It is a timeless saying that has many meanings for nonprofit organizations. One of the most important meanings of the timeless saying concerns preventing fraud. As one of the leaders of your nonprofit organization, you should make a fraud recovery plan now before your nonprofit is defrauded.
Nonprofit organizations rely heavily on their reputations to recruit volunteers and attract donors that contribute financially to fundraising events. A nonprofit that has to deal with fraudulent activities runs the risk of losing funding and the support provided by volunteers. According to the Association of Certified Fraud Examiners (ACFE), nonprofit organizations represent nearly 10 percent of all defrauded organizations.
Let’s review the steps your nonprofit organization should take to prevent becoming a victim of fraud.
Identify Fraud Risks
Although you cannot expect to identify every type of fraud risk, you should be aware of the most common fraudulent activities faced by nonprofit organizations. Billing fraud is an especially high risk for nonprofits due to the lack of sophisticated accounting software to detect this type of fraud. Your nonprofit also should look for incidents of check tampering and credit card skimming fraud.
Use Reliable Tools To Prevent the Fraud
We already mentioned the importance of using sophisticated accounting software to detect financial fraud. A collaborative software program can easily connect several members of your nonprofit organization to monitor the development of financially motivated fraudulent activities. The most advanced accounting software not only detects financial fraud, but also alerts the leaders of your nonprofit to illicit activities.
Act with a Sense of Urgency
Let’s assume a volunteer has skimmed the credit card numbers of recent donors. You should act quickly by contacting an attorney and a forensic accountant. You might not recover all of the money stolen from your donors, but a forensic accountant digs deep into the theft by interviewing staff members and gathering persuasive physical evidence that determines whether your nonprofit organization should take legal action.
Prioritize Preventing Fraud
Discussing how to prevent fraud, and then determining how to implement a fraud recovery plan should be an item on the agenda of every management meeting. The lack of internal controls represents the primary reason why nonprofit organizations fall victim to fraudulent activities. Managers need to review and adjust fraud prevention strategies to stay ahead of rapidly changing technology trends.
Comply with IRS Regulations
If your nonprofit organization falls victim to one or more fraudulent activities, you might have to report the fraud to the IRS by using Form 990. The IRS requires reporting a “significant diversion” of assets. A significant diversion of assets consists of three possible scenarios: Five percent of a year’s gross receipts, five percent of the value of the assets defrauded for one year, or a total loss due to fraud that reaches $250,000.
The Bottom Line: Educate Your Supporters About Fraud Risks
The more your supporters learn about fraud, the more likely your nonprofit prevents fraudulent activities from causing financial distress. A highly effective way to educate your supporters about fraud risks involves asking the ACFE to administer an anti-fraud course. In addition, ensure every donor, volunteer, and staff member stays current with the latest anti-fraud prevention strategies.