Fraud in Non Profit Organizations

Fraud may occur in any organization, by anyone, and in many ways. It can have a major impact in all areas of the business. Fraud can be either misappropriation of assets or fraudulent financial reporting. Fraudulent activities occur when there is opportunity, rationalization, and pressure.

Fraud in nonprofits is not only detrimental to the financial side of an organization, it can have a significant impact to the nonprofit’s reputation and fundraising efforts. It is vital to keep an eye on areas where potential fraud could occur and have a plan in place if it does. But why would anyone target a nonprofit? What signs should organizations look for? What can a nonprofit do to mitigate the risk of fraud?

Nonprofit organizations are considered “easy targets” for fraudulent activities for several reasons. Why? Nonprofit organizations typically involve handling cash and a variety of people with different levels of involvement, from the Board of Directors to individual volunteers. There are also several processes, such as fundraising, that could present opportunities for fraudulent activities to occur. These activities are vital to the success of many nonprofit organizations and eliminating these activities due to the risk of fraud, isn’t feasible. Therefore, it is important to be aware of opportunities and signs of fraud. It is also vital to know how to prevent and detect fraudulent activities.

The signs do not necessarily mean that there is fraud, but it is important to be aware of them to protect the organization. Fraudulent activities may be committed by anyone associated with the organization, and significant changes in their behavior or lifestyle may be a tell-tale sign. If an employee or volunteer is living beyond their means, unwilling to share duties, has a defensive behavior, or unusual, close relationships form with vendors, it might be worth looking into.

There are many steps an organization can take to mitigate the risk of fraud. Overall, it is best to introduce strong controls that are monitored and adapted as needed. An example of this is to ensure segregation of duties. If an organization does not have enough people to maintain strong controls, it may be necessary to require the Board of Director’s participation in certain activities. An audit committee should play an important role in ensuring that controls are working as expected. Another step an organization may take is to ensure that the ethical tone begins with the Board of Directors and flows through the organization to the employees and volunteers. Encouraging ethical actions from the top down, may eliminate the rationalization aspect in some fraudulent activities. To encourage ethical actions, creating an anonymous hotline for employees and volunteers to report suspected fraudulent activities may be a useful control.

Fraud is a difficult topic to assess and deal with, but it is necessary to consider the risks and implement proper controls in order to protect an organization. Knowing where fraud may occur, the signs of someone that may be participating in these activities, and how to prevent and detect it are vital to ensuring the nonprofit’s continued success.

June 5, 2020

Board Members Responsibilities for Form 990

A nonprofit board members’ review of Form 990 is not required, but the form encourages board participation and may provide several benefits to an organization. A draft of the form should be provided to board members, whether it is to everyone on the board or a select few, for review before filing.

What’s the big deal? The purpose of the Form 990 is to aide the IRS in determining continued tax-exempt status, ensuring the organization is following certain requirements and implementing best practices into everyday operations of the organization. The form is also easily accessible to the public, and potential donors can review the financial performance, policies, compensation of officers and more within the Form 990. 

The Form 990 contains a question regarding whether the governing board members were provided a copy of the Form 990 before it was filed.  All nonprofit organizations must describe the review process, if any, the organization’s governing board and management uses to review the Form 990.  Such description will be different for all nonprofits depending on size and operations. 

There are several benefits to the board’s review of Form 990:

  • An indication of better governance within the organization to outside parties.
  • Provides assurance to external parties that the organization intends to continue operating for tax-exempt purposes.
  • Provides an opportunity for members to inquire, understand, and be comfortable with information that will be available to the public once filed.
  • Assures external parties of greater accountability within the not-for-profit organization.

What should be reviewed? This varies based on the organization, but the main areas of concentration are typically on the mission of the organization, financial information, and anything else that would interest the IRS, potential donors, and any other readers. It is important to keep in mind the purpose of the form, which is to ensure the IRS that the organization is operating for tax-exempt purposes and not abusing their status as a nonprofit organization.

Examples of items that may be reviewed:

  • Mission/purpose of the organization and any changes from previous years
  • Financial information to detect any obvious errors or misstatements
  • Appropriateness of amounts reported for compensation, fundraising efforts, etc.
  • Related party transactions
  • Reporting on program accomplishments and activities (marketing opportunity)

Questions members may ask themselves when reviewing:

  • Does the information reported accurately depict the organization’s activities?
  • Does the organization appear to be operating as a nonprofit?
  • Does any information in the form appear questionable?

There are extensive checklists online that may direct a board member’s review of the Form 990.

If board member does not understand questions or information on the form, he or she should ask the preparer. In most cases, organizations request an external CPA prepare the Form 990.  Nonprofits should have the external CPA available for questions after the board has had time to review the draft. This provides an opportunity for the board to gain a better understanding of the form and feel more confident with the information being reported. 

For more information regarding the Form 990 or the board’s review of the Form 990, contact the nonprofit professionals at Ketel Thorstenson, LLP.

March 4, 2020