As professionals, many of us have had or will have the opportunity to serve on the Board of Directors of a nonprofit organization. This can be a rewarding experience and a way to maintain civic involvement and a connection to the community. But what if the nonprofit organization is defrauded by an employee, or worse yet, by the CEO? This event can have serious ramifications, especially if the organization receives government grants, not to mention the effects on those whom the nonprofit benefits.
As board members, it is important to understand the contributing environmental factors for fraud within a nonprofit organization. That is:
- Many nonprofits are small, with limited personnel, resources, and funding – and therefore have limited systems of internal control.
- Staff are often overworked and paid less than their peers in other industries.
- Nonprofit organizations stay busy and must balance intense fundraising, operations, special events, and marketing, among other efforts.
- Personnel are often trusted because of the cause that the organization supports.
Combined, these factors can foster an environment in which there is pressure, opportunity, and rationalization for fraud. Understanding these factors is critical in order for board members to understand the financial condition and operations of the organization as well as the risks that the nonprofit faces.
It is important to remember the “ABCs” of board involvement:
A – Ask questions. Pay attention to financial presentations made in board meetings and ask critical questions about the financial statements, operations, and any other issues that are presented. It is important that someone on the board have an accounting knowledge or background.
B – Be watchful for red flags. Does the CEO appear to be living beyond his or her means? Do the financial statements show a spike in any particular account over the last period? Has the bookkeeper taken a vacation in the past year? Are purchases that have been expensed to the nonprofit organization consistent with the furniture, equipment, and supplies found at the office – i.e., if computers were purchased, are all computers on site?
C – Comfort over controls. Even though nonprofit organizations are often too small to implement the ideal extensive system of internal controls, it is important that compensating controls are implemented when appropriate to ensure that there is adequate monitoring and supervision. Are duties appropriately segregated and/or monitored? Are purchases approved at an appropriate level and threshold? Are at least two people signing checks? Is inventory secured and controlled?
Discovery of fraud within a nonprofit organization can lead, at the very least, to a severe interruption in operations to the detriment of those for whom the organization was established to help. As board members, it is important to be aware of the contributing factors for fraud and to exercise oversight – that is, know your ABCs!