Fight Back Against Internal Fraud

Internal fraud is estimated to drain approximately $3.1 billion annually from global businesses, and not-for-profit organizations aren't exempt. The median loss suffered by a nonprofit victimized by fraud was $76,000, according to the most recent Report to the Nations by the Association of Certified Fraud Examiners (ACFE).

Although organizations can experience pilferage from volunteers, vendors and other sources, employees account for the highest losses, when factoring in offenses such as fraudulent insurance claims, unauthorized time off and theft of proprietary information. Crimes can be as simple as stealing supplies or as complex as sophisticated financial statement fraud.

Highest Dollar Losses

Fraud by managers and key executives generates the highest dollar losses because these employees are in a good position to falsify financial, credential, work-related or test-related documents for personal gain. What can your organization do to prevent theft? The ACFE has found that these measures are effective:

Improve internal controls. For example, don't allow the same employee to keep books, collect funds, write checks and reconcile bank accounts. Arrange for monthly bank statements to be delivered unopened to the head of your organization, who should review them for unusual transactions such as declining deposits and checks to unfamiliar parties.

Conduct background checks. New employees should be screened for criminal records and, depending on the position, other issues.

Arrange for fraud audits. These should be conducted by outside accountants. CPAs can conduct regular independent reviews of cash accounts, bank statements and other items to detect criminal activity. Surprise audits are often an effective, yet underutilized tool in the fight against fraud.

Be willing to prosecute perpetrators. Just over half of not-for-profit and for-profit organizations that are victimized by fraud report the cases to law enforcement. The main reasons some organizations took no legal action? They were afraid of bad publicity, reached a private settlement, wanted closure or considered internal punishment sufficient.

Provide ethics training for employees. Educate staff members about the possible sources of fraud and consequences, such as the loss of jobs, raises and profits.

Institute anonymous fraud reporting mechanisms. Confidential hotlines are critical. Fraud is commonly discovered through tips from employees, vendors, members or other sources. These people are frequently in a position to see violations of standards or excessive personal spending by a colleague.

Install workplace surveillance devices. Consider placing a video camera in your building where theft is suspected.

Look for behavioral red flags. These include the perpetrator living beyond his or her means and having financial difficulties. They can also involve an unwillingness to share duties, a "wheeler-dealer" attitude, divorce or family issues, addiction problems, and an unusually close relationship with vendors or customers.

Examine Your Workplace Environment

Attitudes are one important factor in whether staffers steal. Employees who feel they're treated fairly by their employers are less likely to commit fraud. Many offenses are committed by people who hold grudges and are looking for revenge or for the "compensation" they think they deserve.

A Few Basic Procedures

Your nonprofit needs to adopt a zero tolerance policy for fraud. With a few basic procedures in place, internal theft can be significantly reduced — or even eliminated — so your organization can flourish.