Risk Management Topics

What is Fraud?

Perpetrators of fraud against nonprofit organizations look like people who work at nonprofit organizations. They are often motivated by the same things that motivate white-collar criminals in the for-profit and public sectors: financial pressure and a sense of entitlement.

In NRMC’s experience, nonprofit leaders often misunderstand fraud. They believe that fraud is when an employee steals money or property. In his book Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection, Gerry Zack helps his readers develop a more nuanced understanding of fraud.

He describes three fraud classifications:

Fraud committed against the nonprofit (e.g., phony vendors, expense report fraud, or cash receipt schemes)
Fraud committed by the nonprofit (e.g., faked grant reporting documents or noncompliance with grant/contract requirements)
Fraud committed through the nonprofit (e.g., identity theft of donor, phishing attack, or ransomware attack)

There is no single step or practice—or even a combination of steps and practices—that will eliminate the risk of fraud within a nonprofit. Nonprofits should establish policies and practices that persuade would-be fraudsters that they will get caught, and commit to carefully reviewing transactions and financial reports for irregularities.

What is Financial (Fiscal) Oversight?

In a nonprofit, financial oversight is the responsibility for ensuring that:

The financial records of the organization are accurate
Budgets and forecasts are prepared and presented
Internal controls reduce the likelihood of errors and detect errors in a timely fashion
Internal controls deter and detect fraudulent transactions and theft
Accurate financial reports are presented on a regular basis
Financial reports support board decisions to build and protect the financial health of the organization

The ultimate risk of poor financial oversight is a crisis that the board ‘didn’t see coming.’ Sometimes angry board members call NRMC to share tales of financial woe, and they most often lay blame at the desk of the CEO. Our training and experience tell us inadequate oversight also played a role in many cases.

Financial crises can happen to the best-run organizations and under the watch of the most ethical managers. However, many surprises are due to a failure to ‘mind the store.’ Learn more about the strategies NRMC recommends to improve fiscal oversight in your organization in “Heads Up: Why Fortified Fiscal Oversight is Key to Financial Well Being”.

These strategies include:

Develop and share relevant oversight questions
Establish ambitious financial health goals
Provide annual financial training for the entire board
Require all board members to serve a tour on the Finance Committee
Use a fiscal dashboard to tell your financial story

Your mission deserves strong financial management practices and thoughtful oversight by leaders who can share insights and perspectives on financial goals and fiscal well-being. When a board develops the skills and confidence to ask tough questions about financial health, managers experience less worry that they are on the journey alone. An active Finance Committee that understands and embraces its oversight role is a priceless asset for a nonprofit mission.

Want to dive deeper into the topics of fraud and financial risk for nonprofits?

Check out these NRMC resources to help develop capabilities in these areas:

Build your knowledge

Draft or revise your anti-fraud policies

One place to start fortifying your nonprofit against fraud is to examine any policies that address anti-fraud practices. Recently, Melanie Lockwood Herman, NRMC’s Executive Director, offers her top 5 tips on fixing what’s wrong with many organizational policies in Do This, Not That: 5 Essential Risk Policy Drafting Tips.

Analyze exposure and risk

An essential step in the risk management process is analyzing your organization’s potential exposure to and vulnerability to a particular risk. These steps are also helpful as you resolve to fortify your mission against fraud risks.

Read A Violation of Trust: Fraud Risk in Nonprofit Organizations for insights into the cost of fraud risk, where and why nonprofits are vulnerable, common red flags to watch for, and helpful controls and principles that will enhance your action plan.

Create a plan of action

There are different ways nonprofits can respond or fortify against fraud. Check out these NRMC resources for inspiration as you draft your anti-fraud action plan:

Provide reporting avenues and protections

According to the 2020 Report to the Nations produced by the Association of Certified Fraud Examiners (ACFE), 40% of fraud incidents were detected at nonprofits because of a tip or complaint. Therefore, it’s critical that nonprofit leaders encourage and support employees in raising concerns! Check out these NRMC resources on whistleblower protections.