Many people hold a soft spot in their hearts for nonprofit organizations as they pursue their worthy cultural, scientific, civic, medical, social, and recreational missions. So when fraudsters target nonprofits, it can feel particularly upsetting, especially when the perpetrator comes from within the organization.
According to the Association of Certified Fraud Examiners (ACFE) Report to the Nations: 2020 Study on Occupational Fraud and Abuse, occupational fraud — which is fraud committed by employees against employers — ranks among the costliest types of financial fraud. The organization estimates that five percent of revenues are lost to fraud each year.
The ACFE says nonprofit organizations can be more susceptible to fraud because they often have fewer resources to prevent and detect losses, less oversight, and a lack of certain internal controls. Understanding the types of fraud, who commits it, and how to detect or prevent it can save your organization a good deal of heartache and protect your resources.
Three Types of Schemes
Three types of schemes account for 94% of occupational fraud aimed at nonprofits. ACFE research indicates that the median duration of fraud lasts 14 months and recommends quick detection to reduce financial losses.
For nonprofit organizations, corruption represents the most common fraud scheme, accounting for 41% of cases. Corruption includes bribery, illegal gratuities, economic extortion, and conflicts of interest such as purchasing and sales schemes.
Thirty percent of cases involving nonprofit organizations involve billing schemes, which include personal purchases, shell companies, and invoices from non-accomplice vendors.
Expense reimbursement fraud accounts for 23% of cases examined. These schemes include mischaracterized, overstated, and fictitious expenses, as well as multiple reimbursements.
Who Are the Perpetrators?
The higher the ranking the perpetrator holds the greater the loss. Losses also increase with the employee’s tenure. A correlation also exists between the perpetrator’s level of education and median loss — the higher the degree the greater the loss.
People in the owner/executive role account for 39% of cases and cause median losses of $250,000. Those at the manager/supervisor level perpetrate 35% of cases and cause median losses of $95,000. Lower-level employees account for 23% of cases and cause median losses of $21,000.
More than 70% of fraudsters are men, and men cause significantly greater median losses than women. Fifty-three percent are between the ages of 31 and 45.
The ACFE identified three top control weaknesses that leave nonprofit organizations particularly susceptible to occupational fraud: a lack of internal controls, limited or no management review, and overrides of existing internal controls. For example, nonprofits are less likely to have an internal audit department, formal fraud risk assessments, or surprise audits.
Interestingly, the lowest-tech fraud detection method is the most common, with 40% of fraud schemes uncovered by a simple tip or complaint. This is nearly three times more common as the next-most-common method, which is via internal audit.
Using tip hotlines is a particularly effective way of lowering losses and speeding detection, and fraud awareness training increases the likelihood of detection by tip. Telephone hotlines, email, and online forms are all equally attractive to whistleblowers when it comes to submitting tips.
Nonprofit organizations work hard for every penny, and your donors count on you to be responsible stewards of their donations. Don’t wait for something bad to happen. Use our free diagnostic tool to assess your internal controls, and set up a time to talk to one of our fraud and forensic experts.
Source: ACFE 2020 Report to the Nations
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