Academic journal article Journal of Accountancy

Catch the Warning Signs of Fraud in NPOs

Academic journal article Journal of Accountancy

Catch the Warning Signs of Fraud in NPOs

Article excerpt

With their high fund-raising and performance goals and with volunteers often handling money and keeping accounting records, nonprofit organizations can be prime targets for fraud, Here are some of the red flags CPAs can advise NPO employers and clients to watch for:

[] Budget cutbacks. Whenever any organization--especially an NPO operating on fund-raising dollars and volunteer leadership--cuts back by reducing its paid workforce, financial controls usually suffer. Remaining employees or unpaid volunteers must pick up the slack. This can lower morale and increase the likelihood of fraud among unhappy workers.

[] High turnover. When NPO volunteers and employees turn over faster than elected positions or job contracts dictate, it could be a sign people are distressed by committing or witnessing fraudulent activity or by being coerced into participating in it. Many guilt-ridden, frustrated bystanders or the fraudsters themselves decide to leave an organization altogether.

[] Refusal to take legitimate perks. When employees or volunteers are involved in an ongoing embezzlement scheme, they often don't take vacation time or offered promotions so they can continue to hide their theft.

[] Overemphasis on short-term fund-raising goals. When board members, officers or executives become too concerned with increasing contributions, they often deemphasize internal controls and accurate financial reporting, leaving room for fraudsters to step in.

[] Poorly monitored remote event or promotional locations. Fraud often proliferates wherever supervision and control are at a minimum--such as during major fund-raising events such as benefits. This is particularly true when organizations--acting without proper accounting supervision--fail to create a paper trail with prenumbered tickets, receipts and the like. When cash is involved, it's always a challenge to determine who took how much from the cash drawer after the fact.

[] Bounced checks. If the NPO's board of directors knows the organization has enough funds to cover its expenditures and checks continue to bounce, chances are good the entity may be a victim of some kind of fraud.

[] Things don't add up. …

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