Fraud in NPOs – Whether it’s receiving a school scholarship or participating in sports or community activities, individuals benefit from a multitude of services provided bynot-for-profit organizations(hereinafter referred to as “organizations”) over the course of their lives.
However, organizations don’t always have the financial and material resources to respond effectively to demand. Combined with other issues, this can lead to your organization not fulfilling its mandate effectively, and restrict the implementation of effective internal controls. Often, the trust that members place in each other acts as a control.
It is by taking advantage of this climate of trust and control weaknesses that volunteers, employees, members of senior management and directors, hereinafter referred to as “stakeholders”, can seize the opportunity to commit fraud. Lower salaries than in the corporate world and the donation of time without financial compensation are generally the reasons why an individual commits fraud.
EXAMPLES OF FRAUD AND CONTROLS
Conflict of interest
A conflict of interest situation, real or apparent, arises when a stakeholder has the opportunity to promote his or her personal interests or those of other related persons to the detriment of the organization’s interests, and the situation is not disclosed to other stakeholders.
A director proposes to sign a service contract with a company without disclosing to the other directors that he has a financial interest in the company. This undeclared conflict of interest could result in the perpetration of a scheme to overcharge service fees for his own benefit, knowing full well that no one else will be auditing the transactions related to this contract.
Tips :
- Create, implement and involve employees in the development of a code of conduct and a policy for declaring conflicts of interest. Employees may be more motivated to denounce unethical behavior if they are involved in policy-making.
- Involve Board members in overseeing decisions made by senior management by encouraging directors to ask questions and get answers.
Use of organization funds for personal purposes
A stakeholder may use the organization’s funds for personal purposes, either to pay personal expenses out of petty cash or the organization’s credit card, or to file an expense report that includes personal expenses (or to obtain property from the organization). Generally, personal expense transactions will not be documented (justified) with an invoice or receipt so as not to reveal the reason for the expense.
The general manager uses the organization’s credit card to pay for her travels and meals in luxury restaurants without reimbursing the organization. In addition, the General Manager is not required to submit supporting documents for transactions or payments, since there is no validation of the expense report by an administrator.
Tips :
- Always obtain the original supporting documents for each accounting process. Missing or altered supporting documents can be an indication of fraud.
- The involvement of directors can lead to earlier detection of fraud perpetrated by senior management.
Fraud related to payroll
Payroll fraud occurs when the employee responsible for payroll uses one or more techniques to increase his or her remuneration, such as paying a fictitious employee, stealing time, recording hours not worked or making unauthorized changes to his or her hourly rate.
In order to increase his pay, which he finds inadequate, the employee responsible for payroll adds unworked hours to his time sheet, which is not validated by his superior.
Tips :
- Establish proper segregation of duties, rotate jobs and force employees to take vacation. Variations in financial information following a change of employee may be an indication of fraud.
Misappropriation of funds and collected goods
Employees and volunteers are the organization’s first point of contact for donations. There is therefore a risk that funds (or assets) may be misappropriated for personal use before they are recorded in the organization’s books.
A volunteer responsible for receiving, sorting and distributing clothing donations to the needy takes a few garments at each collection for personal use, since there are no controls on items entering or leaving the warehouse.
Tips :
- Require at least two people to participate in the receipt of goods (or funds), consign the goods (or funds) at the time and place of receipt, carry out accounting and secure the premises. The presence of a second person reduces opportunities for asset misappropriation.
OTHER BEST PRACTICES
- Training your members will always be the best means of prevention. Fraud can seriously damage your organization’s reputation and even bring it to a halt.
- Create, implement and train employees on an anonymous alert system. Employee whistle-blowing will always remain the best means of detection.
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Article on fraud in non-profit organizations written by Audrey de Rancourt-Raymond, CPA auditor, CFE in collaboration with Jacqueline Lemay, CPA, CA, CA,EJC, CFF.
