Combating Nonprofit Fraud

Boards of small nonprofits are typically populated by a few community volunteers who know and trust each other. There is also a high degree of turnover on the boards. These two facts inhibit the kind of hard-nosed inquisition necessary for fraud detection.

Small nonprofits often don’t have audits. Engaging an accountant to conduct a review or compilation may serve to supplement the organization’s fraud detection program. A volunteer CPA and/or other financial experts on the board or an independent finance committee can help.

Small community nonprofits are particularly vulnerable to fraud. One reason is they are typically run by unpaid volunteers who do not give their full attention to the organization, and may not have the proper training for fraud detection. Unscrupulous volunteers may take advantage of these organizations.

These organizations should be sure to obtain background checks on all executives and board members. Personnel can be covered by fidelity bonds; however, the bonding companies typically require proper accounting procedures and may refuse to pay if they are not implemented.

Financial literacy programs for executives and board members can be valuable.

Segregation of duties in small organizations is problematic. At a minimum the various activities involving cash should be segregated.

CPAs can help by:

• Being treasurer or serving on the finance committee.
• Making sure there are adequate officers and directors insurance and fidelity bonding.
• Requiring background checks
• Identifying areas of vulnerability
• Providing bro-bono or reduced rate assurance or compilation services
• Providing financial literacy and internal control education
• Helping with hiring in sensitive positions

From The CPA Journal, January 2006. For the complete article, click on the following link: http://www.nysscpa.org/cpajournal/2006/106/essentials/p60.htm.