Non-Profits Not Immune to Fraud

To ensure your organization can continue to do the good work you are called to do, safeguarding against fraud is critical. Donors and potential donors want to be confident that their contributions are helping make a positive difference to the community you serve, and incidents of fraud can negatively impact your fundraising, reputation and your promise to those relying on you.

Taking Advantage of Good Work

Unfortunately, compassion and fundraising approaches associated with non-profits are exploited by some to commit fraud. Here are some of the most common fraud risks at non-profit organizations:

  • Non-reciprocal funds - Unlike for-profit organizations, non-profit entities receive non-reciprocal funds, which are donations without a corresponding transfer to the payer. Also, some non-profit organizations receive numerous contributions of small dollar amounts, and such donations usually do not provide donor acknowledgment. Without the appropriate internal controls — including bookkeeping and cash-tracking techniques — such scenarios make it much easier to steal funds.
  • Volunteers – If a non-profit is understaffed, they may rely on volunteers to help with cash counting, financial statement review and other financial-related duties. Volunteers may also be granted access to sensitive information about the organization or its donors. Anyone handling the organization’s assets or involved in its accounting, whether a volunteer or an employee, should be properly vetted, including being subject to a standard background check.
  • Identity theft – Fraudsters will attempt to raise funds using your name and reputation; therefore, you should actively monitor online fundraising platforms and other channels for fake charities using your name or similar names.
  • Misclassification of operating expenditures – Misreporting of financial results is not limited to for-profit entities. Well-intentioned (and not so well-intentioned) leaders of non-profits may attempt to report non-program expenses as program expenses to make the organization appear more efficient and effective. Of course, the perils of misreporting can result in damage to reputation, criminal or civil prosecution and loss of major funding sources. Management, the board and accounting staff all play a role in preparing accurate financial reports and tax returns.
  • Donor requirements – Many non-profits have donor or grantor requirements that include strict instructions from the donor detailing how the gift should be spent. Spending those funds on anything other than that specific purpose is unethical and may be criminal. Again, management, the board and accounting staff all play a role to assure restricted donations are managed properly and in accordance with the donor’s wishes and applicable law.
  • Deceptive fundraising – This type of fraud occurs when an organization misrepresents the amount of a charitable deduction to a donor.
  • Overstatement of in-kind contributions – Because non-profits receive and record in-kind items, management can commit fraud by overstating the value of those donations to inflate revenues. This will be somewhat alleviated by the new Accounting Standard Update 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Non-financial Assets, which requires specific presentation and disclosures for gifts-in-kind effective for fiscal years beginning after June 15, 2021.
How DHG Can Help

To help safeguard your organization from the consequences of fraud, look to the DHG Non-Profit team. Our multidisciplinary team of professionals focuses on serving not-for-profits, helping them reach their goals. Our advisory services professionals can help you conduct a fraud risk assessment, design and implement robust internal controls and, in the event fraud has occurred, conduct an investigation. Our collaboration integrates assurance, tax and advisory experience and tailors those insights to the specific needs of your not-for-profit so you can confidently continue to serve your cause.

For more on how we can help address your challenges, please reach out us at nonprofit@dhg.com.

ABOUT THE AUTHORS

Deneen Keegan
Senior Manger

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