Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection

Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection

Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection

Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection


Protecting nonprofits from both internal and external fraud
This book addresses the most common fraud and abuse schemes committed against nonprofit organizations and explains how those schemes can be prevented and detected. It includes checklists covering each area of fraud and abuse as well as sample policies. The author, an expert in fraud prevention, focuses on the creation of a comprehensive fraud awareness and deterrence system that goes well beyond traditional internal financial controls.
Gerard M. Zack, CPA, CFE, MBA is a Director (Partner) with Williams Young, LLC. He founded the Nonprofit Resource Center, a training, publishing, and resource center serving nonprofit CFOs and external auditors. He is a frequent speaker on the topic of nonprofit fraud.


Anyone who has read the newspapers or watched the news on television over the last few years is aware of the fact that reports of fraud and abuse appear virtually every day. We are continually bombarded with reports of one company or another misstating earnings or otherwise painting an artificially rosy picture of a company's financial health.

While news of fraud in publicly traded companies seems to flood the media, reports of fraud in the nonprofit sector sometimes get pushed to the back pages of the newspapers. Yet, closer inspection reveals that reports of fraud in nonprofit organizations also appear to be increasing at an alarming rate.

Although several studies on fraud and abuse have been performed, none have focused exclusively on the nonprofit sector. One thing that has become painfully clear over the last ten to fifteen years, however, is that nonprofit organizations are by no means exempt from fraud and abuse. Far from it. In many respects, nonprofit organizations may be even more vulnerable to fraud and abuse than many for-profit businesses.

The latest reports indicate that fraud in the United States is growing at an astounding rate. In its 2002 Report to the Nation, Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) estimated that occupational fraud and abuse results in losses equal to about 6 percent of revenue. When applied to the U.S. Gross Domestic Product, this means that approximately $600 billion per year is lost to fraud and abuse, a 50 percent increase from ACFE's estimate just six years earlier. This translates into an astonishing $4,500 per employee lost to fraud.

Another study, this one sponsored in 2002 by the accounting firm Ernst & Young, LLP, found that one out of every five American workers is personally aware of fraud in their workplace. This survey of 617 workers also found that almost half felt their employers could do more to reduce fraud.

The 2002 ACFE report is based on an analysis of 663 reported cases of fraud and abuse. In 13.4 percent of those cases, a nonprofit organization was the victim, for a median loss of $40,000 per incident. This median loss is only about one-fourth the median loss reported in frauds perpetrated against pub-

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