10 Key Steps for Effectively  Managing Fraud Risk in Not for Profits (2024)

Informed my professional work experience and result of recent studies, the risk of fraud is a serious concern for all types of organizations- nor organization is immune to fraud, but fraud can be particularly damaging to a nonprofit organization. Generally, Nonprofits are attractive targets for fraudsters due to more than enough trust altitudes by top executives who are passionate their missions. Moreover, Not for profit top leaders including board members may not be proficient in fraud risk governance and in addition, limited resources available to address internal controls making them more vulnerable fraud.

According to the Association of Certified Fraud Examiners' 2020 biennial update to its Report to the Nations

• Nonprofit fraud cases in the 2020 report incurred average losses of $639,000.
• Individuals at the management, officer, or executive level were responsible for 74% of fraud in nonprofits
• 57% of nonprofits had a department for internal auditing, compared to 76% of other organizations.
• Only 21% of nonprofits conducted surprise audits compared to 40% of other organizations.
• Only 24% of nonprofits conducted formal risk assessments for fraud, compared to 43% of other types of organizations.
• 44% of nonprofits had official policies and procedures for managerial review of internal controls compared to 68% of other organizations.

According to the report, the top three reasons why nonprofits fall victim to fraud were lacking internal controls, failing to review and improve existing internal controls, and overriding existing controls (deciding not to follow the rules).

Therefore effective managing fraud risk in not-for-profit organizations is crucial to safeguard their resources and reputation. It is a prove of accountable and responsible governance and to excusive leadership should take key step that include;

1. Establish a Fraud Policy: As an extension Employees code of conduct, create a formal fraud policy that outlines the organization's stance on fraud prevention, detection, and response. Ensure all employees and volunteers are aware of this policy.
2. Fraud Risk Assessment: Identify and assess potential fraud risks within the organization. This can involve reviewing financial processes, donor transactions, project, and procurement and program operations preferably guided by a forensic professional of a certified fraud Examiner.
3. Implement Strong Internal Controls: As response to fraud focused risk assessment strengthen your internal controls to prevent and detect fraud. This includes segregation of duties, job rotations, requiring authorization for financial transactions, procurement controls, regular reconciliations, and secure storage of financial records. This also includes conducting enhanced background checks and reference checks for all person sensitive roles. This can help you identify individuals with a history of fraudulent behavior.
4. Whistleblower Policy: Establish a confidential whistleblower policy that include hotlines that allows employees, volunteers, and other stakeholders to report suspected fraud without fear of retaliation. Ensure there is a clear process for reporting and investigating allegations,
5. Training and Awareness: Provide training and awareness programs to educate staff and volunteers about the risks of fraud, the organization's policies, and how to identify suspicious activities.
6. Regular Audits and Management Review: Conduct regular audits by independent auditors to review the organization's financial management and reporting and internal controls. The audit process can help identify irregularities and provide recommendations for improvement.
7. Monitoring and Reporting: Continuously monitor financial transactions and records for any anomalies or red flags. Encourage a culture of reporting any suspicious activities promptly.
8. Investigate Suspected Fraud: If fraud is suspected, initiate a thorough investigation following the organization's established procedures. Fraud investigation is a legal process and should be carried out by a qualified expert. This may involve engaging external experts if necessary. After addressing a fraud incident, use the lessons learned to improve internal controls, policies, and prevention measures.
9. Periodic Review: Regularly review and update your fraud prevention and management processes to adapt to changing risks and circ*mstances. At least every two year carryout fraud focused risk assessment and review
10. Board Oversight: Ensure that the board of directors is actively involved in overseeing and supporting fraud prevention efforts. This include approving the fraud policy, delegating accountability to executive management, approving resources, review major fraud report, reviewing fraud risk reports and setting the right tone at the top

In conclusion, always remember that best approach to managing fraud is prevention. A strong culture of ethics, transparency, and accountability can go a long way in deterring fraudulent activities within a not-for-profit organization.