Nonprofits must avoid these pitfalls or risk fraud losses

“A federal judge recently sentenced Michael Meakem, the former chief executive of a Connecticut nonprofit, to two years in prison for siphoning off more than $680,000 from the organization’s accounts over eight years," -The Middletown (Connecticut) Press

“Former Clinton County United Way Director Maria Garlick, who was charged and entered guilty pleas to the theft of more than $21,000 from the agency, has been sentenced to serve four to 23 months in the Clinton County Correctional Facility.” -The Loch Haven (Pennsylvania) Express

What do these incidents have in common? The boards of directors, staff members and clients of these nonprofits were cheated. And it speaks to the accounting mistakes – exacerbated by the COVID-19 pandemic – that often bedevil organizations created to do good.

It’s natural for people involved with a nonprofit to believe or expect that everyone else shares their motives to help others. But what about when those motives either are, or become, criminal?

That’s the purpose of careful, exacting accounting procedures and controls. Most organizations understand the importance of such controls, but that doesn’t mean they’re always followed, or that mistakes aren’t made.

Be aware of these nonprofit accounting issues and avoid these mistakes.

  • COVID-19 has pushed or prodded many employees out of their traditional workplaces into a work-from-home situation. Accompanying this change are financial statement audit implications  – and the potential for fraud that exists within this new environment.

    One example, as reported by the Journal of Accountancy in early 2021,  “…auditors may have to scrutinize two sets of internal controls (pre-pandemic in-office as well as during-pandemic remote) for not-for-profits whose operations shifted to work-from-home arrangements during the pandemic. And the elevated potential for fraud in the current environment needs to be considered carefully in risk assessments.”
  • Have a formal, written, exacting accounting policy – and stick to it. Too many nonprofits skip this step. This is essential for everyday activities, and must be followed absolutely at times when stresses — such as COVID-19, a major fundraising campaign, natural disaster, or some other event — triggers the impulse to say, “Let’s not worry about the details now; We’ll figure it out later.”

    To ensure consistency, legality, and absence of fraud, it’s vital to abide by accounting policies at all times, especially under times of stress. These protocols can’t be done in-house by employees who only believe themselves to be experienced in accounting or bookkeeping. You need professionals to guide you through the thicket of rules and regulations of the IRS, General Accepted Accounting Principles; Financial Accounting Standard Board; Government Accounting Standards Board – to name a few.
  • Internal controls are a transcendent issue, and mistakes often happen when one person has too much authority over the organization’s finances. Most people are indeed trustworthy – but those who aren’t can kill an organization.

    Does your organization allow a single person to sign checks? If so, that’s a loaded cannon rolling loosely about a ship’s deck.

    Have background checks been conducted on all employees involved in the organization’s finances, or were they hired on the word of a friend, donor, or board member who recommended them? How often is the organization’s list of vendors verified? A non-existent company in the accounts receivable column can look exactly like a legitimate company.
  • Reporting of in-kind contributions is a challenge. This can be tricky for nonprofits, in that many individuals and organizations want to volunteer their time, and accounting can be overlooked or ignored for such contributions. If a nonprofit is receiving professional services, they must be recorded as in-kind contributions. Accurately. And take requires knowledge.

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