The Impact of Fraud on Nonprofits

So far this year, 191 fraud cases in the nonprofit sector were reported, resulting in $75,000 in median losses and $639,000 in average losses. Unfortunately, nonprofit organizations are more susceptible to fraud because they typically don’t have the resources to help prevent and properly recover from a fraud event, according to the Association of Certified Fraud Examiners 2020 Global Study.[i]

In this article, we’ll look at the key findings in the ACFE’s study that can help you better understand what your nonprofit clients may be up against, presenting an opportunity for you to discuss how to best mitigate their risk exposure to fraud. 

Of the fraud events nonprofits faced in 2020, the ACFE identified a number schemes where fraud typically occurred. The following is a breakdown of cases.

  • Corruption — 41%
  • Billing — 30%
  • Expense reimbursements — 23%
  • Cash on hand —17%
  • Noncash on hand — 16%
  • Skimming — 15%
  • Check and payment tampering — 14%
  • Cash larceny and payroll — 12%
  • Financial statement fraud — 11%
  • Register disbursement schemes — 3%

Take note! The ACFE cites less oversight and the lack of necessary internal controls as the main areas of fraud vulnerability in nonprofit organizations (35%), followed by lack of management review (19%) and override of internal controls (14%).

Don’t overlook internal perpetrators

Not only are nonprofits grappling with fraud risks due to internal operating control issues, but fraud is also being committed by their own board members, executives, employees and even volunteers. The ACFE report shows that of the perpetrators at nonprofits: 

  • 39% were owners/executives
  • 35% were a manager or a supervisor
  • 23% involved an employee

Take note! Internal perpetrators often display certain behavioral red flags that can tip off an organization to possible fraudulent activities, such as an unusually close association with a vendor or a sudden increase in purchases, control issues and a general unwillingness to share duties, displays of suspiciousness/defensiveness, a refusal to take vacation time, and large bills that are broken into multiple smaller invoices, to name just a few.

Common fraud detectors

There are number of ways nonprofits today are detecting possible fraud events within their organization. The ACFE identifies that most often, fraud red flags are discovered through: 

  • A tip or complaint —  40%
  • An internal audit — 17%
  • A management review — 13%
  • A complete accident — 7%
  • The examination of documents — 6%

Take note! According to the Nonprofit Risk Management Center, many nonprofits make a critical mistake and assume that all fraudulent events will be caught by auditors. The fact is that by the time a fraud scheme is uncovered, the financial and reputational damage likely has already occurred.

Conclusion

By identifying potential gaps in internal controls, developing a proactive fraud detection program and having a risk mitigation plan that includes insurance, nonprofits can significantly reduce their exposure to fraud and the financial impact these types of events have.

Charity First remains committed to providing our retail partners across the country with best-in-class underwriting, consistent and responsive service, and risk management services that include a comprehensive package policy that covers property, inland marine, crime, auto, cyber and workers’ compensation insurance. To learn more about our products, please contact us at 800-352-2761 or marketing@charityfirst.com.

 

[i] 2020 Report to the Nations. Copyright 2020 by the Association of Certified Fraud Examiners Inc.