10 steps to decrease fraud at your nonprofit

Nonprofits benefit significantly from having internal controls in place to reduce fraudulent activity and loss of funds due to fraud.

According to ACFE’s 2024 Annual Report, 10 percent of nonprofit fraud occurs from internal stakeholders and accounts for losses of more than $3.1 billion.

Nonprofits are susceptible and frequent targets for fraud because they have less oversight and often lack internal controls.

Anyone in your organization can commit fraud, and many people who do so may also feel motivated to continue doing so due to a lack of consequences or detection. According to the report, fraud cases typically take a year to detect, and about 50% of cases were caused by corruption.

Fraud usually takes place through:

• Embezzlement
• Kickbacks
• Bribes
• Rewards
• Extortion
• Conflicts of interest

So what can your organization do to prevent fraud? By proactively addressing potential fraud risks at your nonprofit, you will be able to decrease the loss of funds to fraud.

Nonprofits have an effective tool to fight fraud through internal controls or policies and regulations that prevent misuse and misappropriation of assets. From customizable user controls to auditable transaction ledgers, internal controls safeguard your organization’s financials.

Your finance team plays a key role in fraud prevention. Your organization’s financial statements are critical to determine if your charity is experiencing fraud. Some examples of falsifying financial documents in nonprofit organizations include:

• Overstatement of revenue
• Inappropriate asset valuation
• Absence of disclosure

Ensuring that no one person has complete control over your charity’s funds and financial access by separating all necessary tasks is a great way to execute nonprofit fraud prevention.

Here are 10 steps to decreasing your fraud risk:

1. Create a clear fraud policy for your company and employees
2. Hold a company-wide refresher on the fraud policy at least twice a year
3. Ensure your fraud policy is part of your new employee onboarding process
4. Encourage employees to submit a tip or concern of fraud at any time and make sure they can do so via email, phone or in an anonymous tip box onsite
   
   FACT

   43% of frauds were detected by tips, which is more than 3x as many cases as the next most common detection method.

5. Use software with a built-in audit trail
6. Don’t depend on or wait for a yearly audit to find fraud
7. Require dual signatures and more than one layer of approval for checks
8. Keep all blank checks and cash in a locked cabinet, and don’t pre-sign checks
9. Reconcile bank statements each month
10. Build dates into your fiscal calendar to conduct quarterly internal audit/fraud assessments

Fighting fraud is an organization-wide mission. By implementing these steps, nonprofits can protect their mission, maintain donor confidence, and ensure resources are used to create a lasting impact in their communities.