Lessons Learned from Local Non-Profit Organization Frauds

January 22, 2013

By Reed Risteen, CPA and Michael Frenza CPA/CFF, CFE, CIRA

As non-profit organizations have faced cuts in federal and state funding, declines in contributions and donations, and increased demand for services, many non-profits have been forced to make tough decisions, such as reductions in staffing. Since many already operate on shoestring budgets, inadequate segregation of duties can result. A weak control environment with overlapping employee responsibilities and few checks and balances can result in increased opportunity (and temptation) for employees pressured by economic conditions.

An example of a real-world fraud at a local non-profit – A long-time employee, the bookkeeper, defrauded the organization of more than $1 million over eight years. She committed the theft by issuing unauthorized pay increases and bonus payments to herself, as well as tampering with checks. The methods used to perpetrate and conceal the theft, and the preventative measures that could have been taken to reduce the organization’s risk, are detailed below:

1. Falsified salary and bonuses

  • Opportunity: The bookkeeper submitted false information to the organization’s payroll provider to receive more bonuses and salary increases than she was entitled
  • Concealment: Instead of recording the additional wages as payroll expenses, she split the expenses into smaller amounts and allocated them to other expense line items
  • Prevention: The employee responsible for recording payroll should not have the authority to make changes to employees’ pay, especially her own. Changes in pay rates should be authorized and submitted by an individual independent of the payroll accounting function

2. Fraudulent Disbursements

  • Opportunity: The bookkeeper misappropriated cash by tampering with checks, making them payable to herself and forging her supervisor’s signature.
  • Concealment: She falsified the bank statements.
  • Prevention: Employees who prepare disbursement checks should not have access to check stock without prior approval. After checks are prepared, they should be reviewed and signed by an authorized employee and, if possible, mailed by a third employee.

The impact of fraud at a non-profit can have a lasting effect well beyond the initial theft. Negative publicity can have adverse consequences on future donations, resulting in an additional loss of operating funds.

Implementation of these additional controls may help reduce fraud risk:

  • In accordance with applicable laws, conduct background and credit checks on all personnel who directly handle the organization’s finances.
  • Periodically review the employee payroll registers and compare to active employees.
  • Ensure that an expense reimbursement policy, which requires original receipts, is in place and enforced. All expense reports should be reviewed by the next level of management.
  • Segregate duties for the cash disbursements process.
  • Ensure adequate security over check stock.
  • Bank reconciliations should be performed by an employee who does not prepare checks and is not a signatory to the account. If this is not possible, bank reconciliations should be reviewed by a second employee.
  • Verify the organization has adequate crime insurance (also referred to as fidelity bonding or employee dishonesty insurance) which may protect the organization against employee theft.

Whether in tough or prosperous economic times, non-profits should be transparent and maintain an adequate system of internal controls. Implementing simple, inexpensive internal controls can minimize the risk of costly financial frauds and allow organizations to focus on their core mission.

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