Is Your Not-For-Profit at Risk from Occupational Fraud?
You’re running a not-for-profit. You have a close-knit team, a worthy mission, and the support of the local community. It can be stressful, and staff is often working double duty, but it’s rewarding and necessary. Could you really be at the risk of fraud? More so than the for-profit sector?
Yes. Unfortunately, due to tighter budgets that lead to fewer internal controls and oversight, not-for-profits can be MORE susceptible.
And The Association of Certified Fraud Examiners reports that fraud committed by employees (or “occupational fraud”) is among the costliest.
What are these schemes, and how can your not-for-profit organization protect itself and the communities it serves?
Three Types of Schemes
Three types of schemes account for 94 percent of occupational fraud aimed at not-for-profits. ACFE research indicates that the median duration of fraud is 14 months, and that quick detection is key to reducing financial losses.
For not-for-profit organizations, corruption is the most common fraud scheme, accounting for 41 percent of cases. Corruption includes bribery, illegal gratuities, economic extortion, and conflicts of interest such as purchasing and sales schemes.
Thirty percent of cases involving not-for-profit organizations involve billing schemes, which include personal purchases, shell companies, and invoices from non-accomplice vendors.
Expense reimbursement fraud accounts for 23 percent of cases examined. These schemes include mischaracterized, overstated, and fictitious expenses, as well as multiple reimbursements.
Who Are the Perpetrators?
The higher ranking the perpetrator, the greater the loss. Losses also increase with the employee’s tenure. There’s also a correlation between the perpetrator’s level of education and median loss—the higher the degree the greater the loss.
People in the owner/executive role account for 39 percent of cases and cause median losses of $250,000. Those at the manager/supervisor level perpetrate 35 percent of cases and cause median losses of $95,000. Lower-level employees account for 23 percent of cases and cause median losses of $21,000.
More than 70 percent of fraudsters are men, and men cause significantly greater median losses than women. Fifty-three percent are between the ages of 31 and 45.
The ACFE identified three top control weaknesses that leave not-for-profit organizations particularly susceptible to occupational fraud: a lack of internal controls and management review and overrides of existing internal controls.
In addition, not-for-profit organizations have fewer controls in place compared to other organizations. For example, not-for-profits are less likely to have an internal audit department, formal fraud risk assessments, and surprise audits.
Interestingly, the lowest-tech fraud detection method is the most common, with 40 percent of fraud schemes uncovered by a simple tip or complaint. This is nearly three times more common as the next-most-common method, which is via internal audit.
Using tip hotlines is a particularly effective way of lowering losses and speeding detection, and fraud awareness training increases the likelihood of detection by tip. Telephone hotlines, email, and online forms are all equally attractive to whistleblowers when it comes to submitting tips.
While donors and your board expect not-for-profit leadership to take the proper steps to prevent occupational fraud, the IRS is monitoring as well, via Form 990. Organizations must report a “significant division of assets” and depending on the type of fraud and how quickly it’s detected, those assets may be taxable at anywhere from 25% to 200%.
Whether you founded a growing not-for-profit organization or are taking over in a leadership role, do not underestimate the risk of occupational fraud undermining your mission and community standing. Dembo Jones experts can provide a risk assessment — helping you devise the proper internal controls necessary to safeguard assets, protect the integrity of your accounting records, and ensure your funds, mission, and reputation are protected. Contact us today.