There’s a soft spot in many hearts for nonprofit organizations as they pursue their worthy cultural, scientific, civic, medical, social, and recreational missions. So, it’s especially upsetting when nonprofits are the targets of fraud, and doubly sad when the perpetrator is an employee.
According to the Association of Certified Fraud Examiners Report to the Nations: 2020 Study on Occupational Fraud and Abuse, occupational fraud—which is fraud committed by employees against employers—is among the costliest types of financial fraud. The organization estimates that 5 percent of revenues are lost to fraud each year.
Of course, nonprofits are not exempt from this crime. In fact, the ACFE says nonprofit organizations can be more susceptible to fraud because they often have fewer resources to prevent and detect losses, less oversight, and a lack of certain internal controls.
Three Types of Schemes
Three types of schemes account for 94 percent of occupational fraud aimed at nonprofits. ACFE research indicates that the median duration of fraud is 14 months and that quick detection is key to reducing financial losses.
For nonprofit 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 nonprofit 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.
Nonprofit Weaknesses
The ACFE identified three top control weaknesses that leave nonprofit organizations particularly susceptible to occupational fraud: a lack of internal controls and management review and overrides of existing internal controls.
In addition, nonprofit organizations have fewer controls in place compared to other organizations. For example, nonprofits are less likely to have an internal audit department, formal fraud risk assessments, and surprise audits.
Detection
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.
Act Now
Nonprofit organizations work hard for every penny, and your donors are counting on you to be responsible stewards of their donations. Form 990 asks if the organization became aware of a significant diversion of assets. Also, the loss may be considered an excess benefit transaction, which carries a 25 percent tax, which could increase to 200 percent if not corrected in a timely manner. For private foundations, this may be considered a self-dealing transaction. The IRS may also select the Form 990 for audit.
Don’t wait for something bad to happen. Contact our Nonprofit Group and they would be happy to share their input on fraud deterrence.
Source: ACFE 2020 Report to the Nations