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Fraud Prevention Tips for Nonprofit Organizations

Posted by Admin Posted on July 08 2016

Last week, a woman from Stoughton, Wisconsin was arrested for embezzling $86K from a nonprofit booster club’s financial accounts. “A treasurer of the Stoughton Wrestling Booster Club was arrested for allegedly draining the club's financial accounts and taking more than $270,000 from a vulnerable adult living in Stoughton, according to a release from the Stoughton Police Department.” (“Treasurer steals $86K from Stoughton wrestling booster club”) 

As a CPA, I find this happens all too often. 

So what should nonprofits do to lessen the chances of this happening?
There are two important points that need to be addressed. First, businesses/entities need internal controls in place, regardless of whether they are for profit, non-profit or government. Secondly, these controls need to be enforced (monitored, evaluated, and taking corrective action, as needed). The most vulnerable groups have been the smaller non-profits and individuals. Unfortunately, those that would/will take advantage of that, also know this. I have seen a number of smaller non-profits that either do not have adequate internal controls in place or they do not enforce them. This is providing an opportunity for someone to take advantage of a situation.  

What are some things that can be done to help prevent this? 
If someone is coming in to “take care of the books”, ask for qualifications and references. Is this person a friend, an acquaintance, or neither? Call their references, check on their work ethic and their character. Be sure that the individual has accounting or bookkeeping experience. In talking with them, discuss what they do for a living and why they want to help the non-profit. This will give you some insight into their intentions, their outlook, and possibly some financial pressures that they may have. If you decide to bring them in, provide them with the set of duties and set of ground rules. Let them know who they will report to, what is expected, and what reports and work papers they will need to produce. Also, let them know what controls are in place, such as a board member needs to sign for any transfers out of the savings account. As a board (or board member), you will want to vet their work. Look at the bank statements. Review the cash inflows and outflows. Does everything look right?  If you know an accountant that may want to donate some time, have them review your financial information. They may see something that you do not.
As long as there is accountability and regular oversight and review, this will help prevent a number of potential problems.  Remember, these people do not just hurt the organization, but all of the people who are helped by the non-profit. As for individuals, trusted friends and family should be able to help. You can also consult with other professionals. One of the best things that you can do is to trust your gut instinct. If something looks or sounds fishy…it probably is. And don’t be bullied. You have the right to say slow down, wait, and no. 

-Michael Hermanson, CPA | CGMA