Non-Profits Fraud
Non-profit organizations focus their goals and mission by dedicating nearly all their funds to their cause instead of to owners. Non-profits provide essential services to the public, and in doing so, they are exempt from income taxes, which helps such organizations provide their services and stay afloat. According to the National Council of Nonprofits, in 2012 non-profits contributed $878 billion (5.4% of the GDP) to the U.S. economy and employed 11.4 million people.[1] Despite the good intentions these organizations bring, they are not immune to fraud. Greenlee, Fischer, Gordon, and Keating (2007) suggest that non-profits lose approximately $40 billion per year to fraud.[2]
Fraud can easily take place in non-profits because directors tend to focus their efforts on achieving the mission and often neglect other areas of the organization. Another circumstance that make non-profits vulnerable to fraud is their high reliance on volunteers. In some cases, fraud can easily occur when volunteers are not well trained or assume responsibilities they are not qualified. In other cases, fraud may also happen when volunteers have access to information and areas of the organization with no internal controls. In addition, non-profits are a target for cyber-attacks because they often possess sensitive information about donors and lack adequate training and resources in the IT area.
Additionally, with more use of cryptocurrencies by individuals, non-profits are facing the choice of accepting this form of donation. A non-profit might decide to accept cryptocurrency directly or indirectly by using a donation-facilitating organization. If accepting the donation directly, the non-profit might need to take steps to make sure the cryptocurrency donation can be stored safely and have a system in place to convert it into cash. In order to store cryptocurrency, the organization needs a digital wallet. It is important to keep in mind that setting up a digital wallet will require the organization to share sensitive data. Like any other online platform, wallets are vulnerable to cyber-attacks. An alternative is to store the digital currency in an electronic hard wallet—a hardware device that stores the user’s private keys. Whichever method an organization decides for receiving cryptocurrency, a safe system for receiving, storing and converting into cash should be implemented.[3]
Common fraud schemes on non-profits include:
- Skimming
- Deceptive fundraising
- Payroll fraud
- Credit card abuse
- Misrepresenting the number of charitable donations reported
Although only 9% of non-profits are victims of fraud, the median loss of $75,000 a year[4] could be devastating since many such organizations have limited resources. In addition, non-profits are unlikely to report fraud because bad publicity may damage the organization’s reputation.
Similar to commercial businesses, non-profits should establish internal controls that lead to educated employees and volunteers to help reduce fraud risk. Establishing a hotline for anyone to report suspicious activity or to speak openly without retaliation should be a priority for fraud deterrence. All efforts should start at the top, so the management team is aware of the circumstances that could bring fraud. Fraud can be explained by the fraud triangle that predicts opportunity, pressure, and rationalization as the main factors leading employees or volunteers to commit fraud.
[1] National Council of Nonprofits. Economic Impact. Retrieved on November 6, 2018
from https://www.councilofnonprofits.org/economic-impact
[2] Greenlee, J., Fischer, M., Gordon, T., & Keating, E. (2007). An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents. Nonprofit and Voluntary Sector Quarterly 36(4), 677. doi: 10.1177/0899764007300407
[3] Searing, J. M., MacLeod, D. (2019, February). Cryptocurrency gift strategies for not-for-profits: Here’s what organizations should consider as they ponder whether and how to accept donations of virtual currency. Journal of Accountancy, 34-39.
[4] Association of Certified Fraud Examiners. (2018). Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse (p.20). Retrieved on October 29, 2018, from https://s3-us-west-2.amazonaws.com/acfepublic/2018-report-to-the-nations.pdf