NONPROFITS FACE SPECIAL CHALLENGES IN PROTECTING AGAINST FRAUD

by James Leisner, CPA

Reprinted with permission from More than Money: Financial News & Notes for Nonprofit Organizations newsletter

You may think your nonprofit organization is protected from fraud. Maybe you should review the status of your internal control systems to be sure.

Internal controls are the safeguards put in place to protect an organization’s assets. Nonprofits face special challenges in this area:

• Nonprofits often have limited financial resources to attract and retain well-qualified and experienced management and staff. Turnover and vacancies can be high, so there may not be enough personnel to allow an ideal segregation of duties.
• Management may have little financial background and may be trying to stretch limited resources to cover multiple program demands while serving hundreds or even thousands of clients.
• Board members may be supportive and passionate about the agency and its mission but not well-versed in financial statements, cash flow and internal controls.

Responsibilities of this committee are to:

• Maintain awareness of the organization’s exposure to theft or loss – which usually revolves around cash disbursements and cash receipts
• Evaluate current risks and consider safeguards to reduce and mitigate them
• Review the organization’s financial statements and financial trends
• Monitor cash flow, accounts receivables and accounts payable
• Evaluate opportunities and their costs, e.g., a new program or site location
• Engage and communicate with external accountants/auditors
• Communicate the organization’s financial results and the finance committee’s activities to the rest of the board

• Protect checks in a secure area with limited access.
• Limit the number of bank accounts and authorized check signers. Do not pre-sign checks.
• Consider requiring certain board members to co-sign checks of significant amounts, e.g., $2,500 or $5,000.
• Insist on timely prepared and reviewed bank reconciliations.
• Require the treasurer or another board member to receive, open and review bank statements and cancelled checks.
• Assure that requests for payment are adequately documented and the documentation efficiently filed.
• Scrutinize all expense reports before reimbursement, including those of management.
• Insist on timely financial statements each and every month, without exception.
• Do not accept just a statement of operations (equivalent to a profit and loss statement), or just a statement of position (equivalent to a balance sheet in the business world). You need both. There is a relationship between these financial statements. If receivables, prepaid expenses, accounts payable or accrued expenses are misstated or overlooked, your statement of operations will be affected as well.
• Ask for proof of timely filed payroll tax returns and deposit of payroll tax withholdings as well ass ales tax returns, where applicable.
• Insist on a budget for the next year before the year starts.
• Compare current year results to the budget, and investigate variances.
• Seek board members with a financial background. Find people who can offer practical financial advice to management and the rest of the board and are able to recognize when the organization’s events and activities do not appear to reconcile with the organization’s financial results.
• Seek, identify and groom candidates for the board and leadership positions.
• Ask questions. Don’t be shy. Do not assume you are the only one who doesn’t know the background or the organization’s history or procedures. Ask. And if you don’t understand the answer, ask for clarification.
• Make it known that the theft of the organization’s assets will not be tolerated – termination and prosecution will result.
• Identify a board member to whom organization staff can report suspected improprieties.

Contact our firm for assistance in assuring that your nonprofit organization has adequate internal controls to prevent fraud.