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.