by J. Scott Dick, CPA
We’ve heard much about fraud and embezzlement in the news headlines of recent years. Meanwhile, our nation continues to weather the storm of one of the worst financial crises since the Great Depression. How is your organization managing? How about your employees and trusted volunteers?
Many schemes of fraud and embezzlement are carried out by a person you would least expect, someone above suspicion. The reality is you can never be totally sure of what is going on in a personal life. Experience has shown that there are often three conditions present when fraud occurs: (1) incentive (e.g., personal financial hardship, drug problem), (2) opportunity (e.g., weak internal controls) and (3) rationalization (e.g., righting a perceived wrong, a sense of entitlement).
One of the biggest challenges for smaller organizations is proper segregation of duties. Yet, it is possible to put some meaningful controls in place even when your entire accounting department consists of only one employee or volunteer. Past studies have shown that nonprofits have higher fraud risk in three specific areas: (1) incoming checks from members, sponsors, attendees (2) printing and postage expenses, and (3) personnel expenses (payroll, payroll taxes, fringe benefits).
Here are a few practical suggestions to help your nonprofit strengthen its internal controls, when resources are limited:
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Separate the handling of cash receipts from accounting transaction processing:
- Setup a lockbox service at the bank.
- Have someone outside of accounting (e.g., receptionist) open mail, list checks, and immediately and restrictively endorse. Spell out the name of your organization (not the acronym) and include the bank name and account number. Lock up endorsed checks and prepare the daily/weekly deposit. Independently verify the bank receipt with the intended deposit items. Do not give original checks to a department that generated the revenue (e.g., fundraising).
- Require bank statements to be forwarded, unopened, to a chief staff executive or officer. Ask the bank to ensure that copies of cancelled checks are included. Open and review for unusual items, unfamiliar vendors. Randomly select a few checks and request supporting documentation. Require 2 signatures on checks, avoiding accounting personnel. Review monthly bank reconciliations. Investigate old items.
- Separate those in purchasing authority from transaction processing. Prepare and approve a budget and assign accountability. Review monthly budget vs. actual.
- Secure check stock, bank account, and confidential member information and restrict personnel access.
- Perform background checks on persons with accounting responsibility.
- Hire an independent CPA to conduct an annual audit. Take suggestions seriously.
- Implement a whistleblower protection policy and conflicts of interest policy.
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