Fraud is a word that conjures up many images in your mind. Perhaps your definition of fraud is someone who lies to you, steals from you, or conspires against you while pretending to help you. All of this is true … and it can happen to your nonprofit if you don’t know how to protect it.
Those looking to harm or defraud you can come from both inside and outside your nonprofit organization. Either one can be devastating to the health of your organization, both financially and psychologically. Let’s take a look at both scenarios and I’ll give you some tips on how to avoid becoming a victim.
Outsiders. To anyone who has not been the victim of a stranger, it may seem like a remote concern. “We can surely detect a scam., “You tell yourself. Ask any Bernie Madoff victim how easy it is to be taken. Just among our clientele at The Foundation Group, we have a Florida nonprofit that invested its entire endowment in a secure fund of Madoff. Everything’s gone … every penny. Okay, this one was hard to spot. Madoff made out for many years under the noses of regulators! But it doesn’t take a Bernie Madoff to cause severe damage to your organization.
I once had an acquaintance (considered a friend at the time) who seemed to have a true heart for charity. He was a former NFL player with the Pittsburgh Steelers and had a great life story. He frequently spoke to civic groups, churches, and other community groups. He was an ordained minister. It seemed like he knew everyone. I even remember seeing him on television counseling families who lost loved ones on 9/11. Turns out it was a complete fraud. He never wore a Steeler shirt for even a day … or any other shirt for that matter. He was a criminal, previously convicted of check fraud. Worse still, he used his fake personality and clergy credentials to ingratiate himself with organizations with the ultimate goal of stealing money. More than once he pocketed money that he got from an organization that trusted him to help them with fundraising events. He even tricked a mentally challenged couple (who had inherited a small fortune) into allowing him to “manage” their assets. He cleaned them up! The law finally got hold of this charlatan, but not until many people were injured.
The point is this: if you have doubts, check them out! In fact, check them out even if you don’t see any red flags. The man she knew seemed like the real deal. But a simple verification of his story would have uncovered his cover. Nobody bothered.
initiated. Being scammed by an informant really hurts. It is the ultimate betrayal for a non-profit organization. And, just like with a stranger, it can go unnoticed and not be seen until great damage is done.
The most common form of internal fraud is outright embezzlement. We have discovered it several times with clients. Several years ago, a Nashville Historic Site hired us to review their books. The board was concerned that its recently deceased secretary / accountant had made mistakes. It turns out that the only mistake this person made was using a hobbyist method of stealing money. It took us about 30 minutes to find out what he had done. It took weeks to assess the full amount of the damages … almost $ 70,000!
One way to prevent insider fraud is pretty simple: check your background. It takes a little time, but it is not difficult or expensive. The other thing you simply MUST do is institute internal checks and balances. The fact is, the lady I mentioned would have come out clean. He had no criminal record and had a great resume. But if this organization had a system to monitor its handling of money, something as simple as having someone else reconcile the books every month, this could have been avoided. Such internal controls protect not only the organization, but also the integrity of those who work honestly for the organization. The last thing you want is to falsely blame a good person for something.
Will you be able to stop all possible fraud? Probably not. But by using your common sense and instituting reasonable procedures, you can dramatically limit your risk. In this age of tight organizational budgets, you can’t afford to let your guard down.