Guest Column: To fight fraud, nonprofits must recognize risk

One might imagine that nonprofit organizations wouldn't have to worry about fraud; after all, who would steal money from an organization whose mission is to help others? Unfortunately, the nonprofit sector is subject to most of the same fraud risks that plague the for-profit business world.

According to the Association of Certified Fraud Examiners, more than 14 percent of all fraud cases in 2008 involved nonprofit organizations, which lost an average of $109,000. Almost any nonprofit organization would be severely affected by a loss of this magnitude. Although no organization likes to lose money, the nonprofit sector has to be especially vigilant against cash flow problems, as it's very rare to hear of a nonprofit group that has too much cash on hand.

Thousands of dollars in losses means that many nonprofits cannot meet basic organizational needs, let alone perform the services they strive to provide in the community.

What's worse is that, on average, the most trusted employees are probably the least trustworthy.

According to the ACFE, in 2008, employees with six to 10 years of experience with an organization caused the highest median loss in fraud cases: $260,000. While longstanding employees bring the benefit of their experience to an organization, this experience can come at a cost. As they earn greater trust, their responsibility levels increase, and they are allowed to do more without as much oversight as before. They also have learned, in detail, how accounting information is processed and reviewed, granting them insight into the weaknesses of the organization. These two factors - less oversight and greater access - can provide a road map to how to commit fraud without getting caught.

It is not only employees who pose a risk to nonprofit organizations, as officers and directors of organizations have committed fraud as well - to the tune of $834,000 in 2008. Executives of a nonprofit organization have access to all financial data and accounts, and they are typically the people who know absolutely everything about the inner workings of the organization. This knowledge makes for a lethal combination when committing fraud: It provides the executives with all the tools that they need to compromise the organization.

The importance of guarding against fraud in nonprofits cannot be overstated. In fact, fraud in a nonprofit organization can cost more - directly and indirectly - than fraud in a for-profit business. For-profit businesses can absorb fraudulent losses without affecting their sales, since most consumers don't evaluate what happens to their money after they purchase a product.

Nonprofit organizations cannot absorb fraud as easily. Donors evaluate several nonprofit organizations before they determine which organizations to support, and they want to be sure that their dollars are being used efficiently and effectively. What if someone's donation is not used by staff to further support the organization's activities, but rather by a staff member or officer to fund the purchase of a new Corvette? Current donations to the organization will likely drop, but, more importantly, the trust associated with the organization will disappear, causing future donations to disappear with it.

Every company and organization has control issues, and these issues extend to all areas of an organization. The first - and most important - step for nonprofit organizations is to recognize this reality; the next step will be to understand the types of fraud that exist in order to better control for it in the future.

Amanda West is a CPA and supervisor at Elliott, Robinson & Co. in Springfield. She may be reached at awest@ercpa.com.