Fraud prevention strategies for not-for-profit organizations

Fraud risk is a top-of-mind concern for not-for-profit organization executives, board members, donors and other key stakeholders. Over the years, numerous fraud cases have made headlines, becoming a hot topic in workplace conversations. When it comes to preventing fraud, the crucial first step is understanding fraud: how and why it happens, how to identify it and how to prevent it.

Types of fraud

There are three types of fraud: external, internal (occupational) and individual. Board members and management teams primarily focus on internal fraud, which includes corruption, asset misappropriation and financial statement misstatement. A widely accepted explanation for why people commit fraud is known as the “fraud triangle,” which includes the following three components: financial pressure or incentive, opportunity and rationalization. Fraud can happen when an individual has financial pressures, is presented with an opportunity to act on it and finds a way to rationalize that the potential fraud is deserved.

For example, an employee with personal financial challenges (unexpected bills, medical expenses, other surprise costs) finds a window or opportunity to misappropriate assets from their organization. The employee will justify the fraudulent act because they rationalize it. Perhaps they feel underpaid, overworked or underappreciated; these feelings and situations can rationalize committing fraud. History shows that fraud often starts with smaller amounts that are less likely to be detected. Over time, the fraud continues and escalates, often leading to catastrophic financial losses that may go unnoticed for a long period until significant damage is finally detected.

What can management do to prevent fraud?

There are many beneficial initial steps that can be taken to prevent fraudulent activity. One approach Baker Tilly specialists recommend is regularly scheduled fraud awareness training for management and board members. A fraud-focused training session can define individual responsibilities in fraud prevention and detection, offer common tools or procedures to prevent fraud and loss and raise awareness, so everyone involved recognizes the signs of potentially fraudulent activity.