The Blog

Financial thoughts to keep you focused on money matters

What's Your Plan to Address Fraud Risks?

best practices board finances foundation fraud reporting Dec 08, 2022

     Today I want to share with you a question: 

 How do you know that you're protected against fraud in your organization?

The Reality of Fraud in Nonprofits

     Before we tackle the “how” of fraud prevention, let’s take a step back and look at why this disproportionately affects nonprofits compared with other kinds of organizations. A 2020 study  by the Association of Certified Fraud Examiners shows that nonprofits are actually more susceptible to fraud, primarily because they have fewer resources available to prevent and recover from it. In general, nonprofits are more vulnerable to fraud because they typically have less oversight and lack the internal controls present in most for-profit organizations. These study results (shown on screen in the video above) analyzed 191 nonprofit fraud cases, in which the median loss was $75,000, but the average loss was $639,000. You can review these study results further here. 

     Statistics like these are my inspiration for today’s post. So, what can you do to protect yourself? Well, even though fraud can be a mystery we don’t even want to think about  or plan for, we do know the environment that is most conducive to fraud. 

The Fraud Triangle

     There’s a well-known and powerful illustration called the “fraud triangle” that depicts the three necessary factors of a fraud-friendly environment:  

  1.  Motivation- the person has to have a motive to drive them to steal. And it isn’t always a nefarious motive either. Sometimes it can be as innocent as a child with a chronic illness or a spouse who has just lost their job. Any unforeseen circumstance or need can create a motive at any point in time. 
  2.  Rationale- In addition to motive, they must also feel like they truly deserve something. They may feel they are not appreciated enough. Perhaps they feel their contribution to the organization is overlooked and underpaid, and they bring more value than their compensation acknowledges. 
  3.  Opportunity- While #1 and #2 have nothing to do with the nonprofit and more to do with the way a person feels, the only variable that the nonprofit can control is the opportunity for an individual to commit fraud. 

How to Protect Your Nonprofit From Fraud

     With this in mind, I like to think about fraud prevention as an “umbrella of protection” for those of us who handle finances within an organization. At the top of the umbrella, is ultimately the fear of God, and the understanding that He sees everything and we will give an account for everything we do. Moving down the umbrella, that protection transfers to the governance and oversight of a board, or perhaps the covering of a senior pastor of a church. As this covering extends downward, financial staff find themselves protected under this umbrella. But they are only protected when we do the things that keep them safe. That means we put systems and processes in place to limit opportunity. This is why we have verification procedures and why we conduct financial reviews. These are the tools that will help you to both protect your organization from fraud and protect those vulnerable individuals from having the opportunity to commit fraud. 

     If this topic seems a little overwhelming to you, or you’re just not sure where to start, I want to encourage you to take the free Fraud Factor Assessment on my website. It’s a simple 12 question quiz, but it can really help expose areas where these opportunities most likely to exist. You may be able to apply what you’ve learned today to these areas of risk by utilizing what you have (whether staff or volunteers) to help create systems of checks and balances that can really help protect your organization and your vulnerable individuals from falling into the trap of fraud. 


Sign Up to Receive Financial Tips in Your In Box

We hate SPAM. We will never sell your information, for any reason.