Know Your ABCs – Serving on Nonprofit Boards

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!

When Should You Start Looking for Fraud?

Larger organizations are more likely to experience fraud by an employee’s misuse of influence in a business transaction in order to gain a direct or indirect benefit. Small organizations, however, typically fall victim to the rogue employee who directly steals the organization’s assets or misuses its resources.

Regardless of the type of scheme or size of the organization, many employees who defraud their employers either get themselves into a predicament or have personalities that are more prone to “cross the line” if given the opportunity. With that being said, there are common behavioral red flags that may be present and are indicative of unscrupulous behavior.

Life events and behavioral tendencies

Even honest employees can turn to fraud to alleviate personal life stressors. Remaining involved in office socialization and staying abreast of office murmurings can help identify some of these personal indicators of fraud:

  • Substance abuse, gambling habits and living beyond one’s means are the most common behavioral indicators of malfeasance.
  • Family instability like unsure employment (or spouse’s employment) and extraordinary medical expenses are all potential motivators to commit fraud.
  • Costly legal problems often create pressures that may lead an individual to desperate measures.
  • A cheating spouse who maintains an expensive affair might find himself or herself in a predicament to make up the shortfall.

Work attitudes

An employee’s personal financial woes can be a catalyst for fraud, but there are also common attitudinal characteristics among occupational fraudsters:

  • If a person displays a questionable code of ethics and is willing to engage in dishonest behavior in other aspects of their life, it will often follow that the same inclination exists at work. Do not ignore workplace “buzz.” Look for clues indicative of participation in unethical behavior.
  • Pay close attention to the employee who shows constant unhappiness with their job. Employees who feel unfairly treated can more easily rationalize their inappropriate actions.
  • Remain alert to employees who show tendencies to work around the system and who habitually try to find a way around established policies and procedures. These employees may have a propensity to attempt to “beat the system” for personal gain.
  • Dishonest employees are often reluctant to relinquish control, share information or swap tasks with colleagues. To conceal their improper activity, they may go to great lengths to ensure that sensitive documents or data are never out of view.
  • It can be tempting for employers to overlook the employee that comes in early, stays late and generally seems “too good to be true.” An employee who looks for opportunities to be alone in the workplace could pose a problem. The same is true for an employee who never takes a vacation. Numerous frauds have been uncovered when employees who, after extended periods of perfect attendance, suddenly have an unexpected illness and are unable to prevent incriminating evidence from coming to light.

We never know when an honest person will begin to commit fraud, but we need to be aware and watch for the telltale signs. If we look, we may find a spouse or child on drugs, in the hospital or even in prison. Any of these reasons, and many others, may indicate an employee’s need to raise cash.

Note: the existence of one or two indicators does not necessarily mean that an employee is stealing – but a red flag should always prompt a closer look.