In a time where funding is scarce, fraud is proving to be devastating to not-for-profit organizations and the communities that they service.  According to the 2012 Report to the Nations on Occupational Fraud & Abuse, published by the Association of Certified Fraud Examiners (ACFE), organizations lose an estimated five percent of their annual revenue as a result of fraud.  Nearly half of the victim organizations do not recover these losses.  Fortunately, there are some easy to implement controls to help prevent fraud.

• Set a strong tone from the top to let your employees and volunteers know that unethical behavior of any kind will not be tolerated.  Fraud is less likely to occur in an environment with an established fraud policy, a hotline for tips, management review and mandatory vacation for employees, to name a few.

• Define fraud.  Employee tips are the number one method of detecting fraud.  Make sure your employees are trained to look for fraud and have a safe environment to report concerns.

• Watch for red flags in employee behavior.  There are many common behavior warning signs to watch out for.  Are your employees living beyond their means?  Are they experiencing personal financial difficulties?  Have they become controlling of their work?  Do they have unusually close associations with vendors?  Changes in behavior and attitude are often a sign of something else, so don’t ignore your gut feelings.

• Review, review, review.  For fraud to occur something must be altered.  Misappropriation of assets schemes accounted for 87% of the cases in the ACFE report.  Remember, checks can be changed after signature and contributions might not make it to the bank, but that also means that a vendor did not get paid and a donor is still receiving invoices for an outstanding pledge.  Scan the monthly bank statement for unusual items, review canceled checks for changes, listen to vendor/donor complaints, and question the need for accounting adjustments and write-offs.  While it is less likely that an employee will be so bold as to steal $100,000 dollars in one transaction, instead he/she might skim $10 here and $100 there.  The frauds included in the 2012 study lasted a median of 18 months before being detected.

• Do not rely on your annual financial statement audit to detect fraud.  According to the ACFE’s study, external audits detected fraud in only three percent of the frauds reported in their study.  Your auditor is not specifically looking for fraud, however, he or she will certainly make you aware of questionable transactions as they are discovered.

• Be proactive.  Your fraud policy should change as your organization changes.  Ask yourself, what could go wrong? And what are we doing to keep that fraud from happening? If the answer is nothing you have a problem.

For those of you that are thinking, “But my organization is too small for all of this.  We cannot afford to implement these procedures.  Plus, I know my employees; everyone is honest, no one would steal.”  The truth is you can’t afford to not take fraud seriously.  The ACFE’s report states that small organizations, defined as 100 or fewer employees, suffer the largest losses.  The majority of perpetrators are first time offenders with clean employment records. Additionally, perpetrators with high levels of authority and long-time employees are the cause of the largest losses.

For more information on the 2012 Report to the Nations on Occupational Fraud and Abuse, visit www.acfe.com