Risk Insider: Greg Bangs

When Do-Gooders Do Wrong: Fraud at Nonprofits

By: | May 21, 2015 • 2 min read

Gregory W. Bangs is senior vice president, crime regional leader for North America at AXA XL, a division of AXA XL. Over the last 30 years, he’s been underwriting insurance and developing new products in the U.S., UK, Hong Kong and France. He can be reached at [email protected]

Recently, a former Emory University employee pleaded guilty to wire fraud after embezzling more than $300,000 in tuition and fees paid by students. She instructed students to wire their tuition into her own Paypal account.

According to her attorney, “Based on the circumstances at her life at the time, she made some poor choices.”

From universities to religious groups to a host of local, national and global charities, nonprofit organizations are full of honest, hard-working people dedicated to improving society in some way. Unfortunately, even the most well-meaning individuals can find themselves in situations — faced with financial troubles or other personal circumstances — that tempt them to act inappropriately. Before they know it, they find themselves in financial hot water and, in turn, their nonprofit employer is in it as well.

According to the latest “Report to the Nations on Occupational Fraud and Abuse, 2014 Global Fraud Study,” by the Association of Certified Fraud Examiners, not-for-profit organizations continue to make up more than 10 percent of frauds committed.

While a for-profit organization may see stolen money take a bite out of its profits, a charitable organization may see even greater financial and reputational damage when money intended for doing good goes elsewhere.

That’s why the temptation to cover up financial problems can be particularly attractive for nonprofits. For organizations that rely on charitable giving, the notion that they are not safeguarding donations more carefully can put a dent in the future donation stream.

It’s also a bit of a double-edged sword for nonprofits. Putting fraud controls in place may entail some administrative costs and many donors evaluate their giving decisions based on nonprofits’ cost allocations, leaning towards organizations that show more of a donor’s dollar goes directly to their cause, not administrative costs.

While a for-profit organization may see stolen money take a bite out of its profits, a charitable organization may see even greater financial and reputational damage when money intended for doing good goes elsewhere.

In the long-run however, internal processes and protocols can prove to be a wise investment that will assure that money given to a cause is allocated to do the good it is intended, not to get swiped by employees.

Like any for profit organization, not-for-profits need to maintain a strong system of internal controls, among them:

  • Segregate duties. This assures that one employee cannot perform a complete financial transaction from end-to-end without involving someone along the way.
  • Background checks. For a nominal cost, nonprofits can make sure that employees have not already had some past issues that would affect their judgment with the organization’s money
  • Invest in technology. Today software accounting packages can raise a variety of red flags such as repetitive withdrawals or employee expense reimbursements.
  • Identify the role of board members for responding to or investigating allegations of fraud. Many seasoned financial and business professionals serve on charitable organization’s boards of directors and can be valuable sources for setting up fraud control procedures.
  • Commit to an independent audit every 4-5 years. Larger charitable organizations may commit to independent audits more regularly as they are often required in order to receive federal funding. Smaller organizations can seek more affordable methods of evaluating the nonprofit’s financial positions, such as a review of certified financial statements.
  • Prosecute offenders. Again, many nonprofits can be reluctant to go public with fraud cases because of its potential effect on donors. Not acting however, can be equally detrimental, sending a signal that employees who dip into an organization’s bank account may just walk away with a slap on the wrist.

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The R&I Editorial Team can be reached at [email protected]