Fraud and Non-Profits Series | Part 3: Asking Questions to Uncover Fraud

To defend against fraud within the organization, a non-profit should think of its accounting and bookkeeping processes as if they were hospital patients.

To find out if there’s a problem, or what the issue might be, a patient undergoes a battery of tests to find the answers to a series of questions. One-by-one, different conditions are ruled out until a cause is discovered or until it’s determined there’s no reason for concern. A non-profit’s protection against fraud is similar. It requires asking questions, seeking answers, and getting regular financial physical exams.

Here are the kinds of questions that will help you in this effort:

• What financial reporting areas are susceptible to misstatement?
• Who holds a position, decision-making or operationally, to defraud the   organization?
• What areas are susceptible to asset misappropriation?
• Are there business components over which there are continuing disagreements or arguments?
• Do you have adequate internal controls - and how do you know they’re adequate?
• Can your controls be overridden or circumvented, and how difficult would it be?
• Are controls appropriately modified if activities are changed within your non-profit, or is it possible to hide fraudulent financial actions?
• Do your organization’s reported assets actually exist?
• If an employee sees potential fraud, can it be reported anonymously?
• What process do you have in place to screen new vendors and employees?
• How can relationships be identified between parties involved in financial activities of your non-profit?

The two most prominent dangers facing non-profits are trust and inattention:

• People in charge trust the people who work for them.
• People in charge are busy doing other things and don’t have time to delve into the details of financial goings-on.

The fallacy in this approach is that if the financials aren’t right, the ship could sink before you realized there was a leak. Tragically, there are situations in which leadership either knows or suspects a problem but does nothing for fear of bad publicity, criticism, relationships, or for some other reason.

An article from the Washington Post spotlighting the American Legacy Foundation, located in Washington D.C., described the foundation’s disclosures on a federal reporting form:

Legacy officials typed “yes” on Page 6 of their 2011 form and provided a six-line explanation 32 pages later, disclosing that they “became aware” of a diversion “in excess of $250,000 committed by a former employee.” They wrote that the diversion was due to fraud and now say they believe they fulfilled their disclosure requirement.

Records and interviews reveal the full story: an estimated $3.4 million loss, linked to purchases from a business described sometimes as a computer supply firm and at others as a barbershop, and to an assistant vice president who now runs a video game emporium in Ni­ger­ia.

Also not included in the disclosure report: details about how Legacy officials waited nearly three years after an initial warning before they called in investigators.

Some wounds come from malefactors, but self-inflicted wounds are inexcusable. And potentially criminal. Non-profits exist to do good. The most good can come from being the most vigilant about their financials.

In case you missed our previous posts in our series on Fraud and Non-Profits, you can find them here:

Fraud and Non-Profits Series | Part 1:  Misappropriation Schemes

Fraud and Non-Profits Series | Part 2: False Reporting