NFPs are at Greater Risk of Fraud Loss
An average not-for-profit organization loses 5-6% of its annual revenue to fraud – which is on-average about $145,000 – and generally takes an average of 18 months to be detected.
So what is fraud, and how can you protect your organization?
Fraud is a false representation of a matter of fact which deceives and is intended to deceive another. Fraud can be committed by an individual within an organization or external to an organization. Not-for-profit organizations are often more susceptible to fraud and abuse than many for-profit enterprises because your environments are based on trust, which is often not found in the for-profit organizations.
There are three types of fraud that can be committed within an organization:
Fraudulent Financial Reporting: an intentional misstatement or omission of material information from the organization’s financial reports to make an organization appear more profitable that it really is. It includes:
- Fictitious revenue
- Timing Difference
- Concealed Liabilities or Expenses
- Improper Asset Valuation
Corruption/Bribery: schemes in which the fraudsters use their influence in transactions that violates their duty to their employer in order to obtain a benefit for themselves, such as:
- Conflicts of interest
- Extort Funds
Misappropriation of Assets: perpetrator steals or misuses an organizations resources, including:
- Stealing inventory
- Payroll Schemes
- Billing Schemes
- Cheque tampering
- Inappropriate expense claims
- Credit cards
For fraud to occur, there needs to exist two of the three sides of the Fraud Triangle:
- Motivation –a personal financial problem or a professional problem OR the individual desires for bigger and better status symbols
- Opportunity – the individual determines if there is a way they can use their position to solve their problem with a low perceived risk of getting caught
- Rationalization – the perpetrator makes the fraud an acceptable or justifiable act
The key to fraud deterrence is breaking the fraud triangle. Opportunity is the one condition that can most effectively be managed to address fraud risks, and is controlled by designing and implementing a control environment that prevents, detects and deters fraud.
The Avail CPA Not-for-Profit group can help you detect and prevent fraud in your organization. Talk to us today about fraud prevention measures that will protect your NFP. 403.382.6800.