Fraud is a word that conjures up many images in your mind. Maybe your definition of fraud is someone lying to you, stealing from you or conspiring against you while pretending to help you. All of these are true…and it can happen to your nonprofit if you don’t know how to protect it.
Those who seek to harm or defraud you can come from both inside and outside your nonprofit. Either can be devastating to the health of your organization, both financially and psychologically. Let’s take a look at both scenarios and I’ll give you some tips on how to avoid becoming a victim.
Outsiders. For anyone who hasn’t been victimized by an outsider, it can seem like a remote concern. “Surely we can spot a scam”, you tell yourself. Ask any victim of Bernie Madoff how easy it is to be taken. Just among our clientele at The Foundation Group, we have a Florida nonprofit that invested its entire endowment in a sure-thing Madoff fund. It’s all gone…every penny. Granted, this one was hard to spot. Madoff made-off for many years right under the noses of regulators! But it doesn’t take a Bernie Madoff to cause severe damage to your organization.
I once had an acquaintance (considered a friend at the time) who seemed to have a real heart for charity. He was a former NFL player with the Pittsburgh Steelers and had a great life story. He frequently spoke before civic groups, churches and other community groups. He was an ordained minister. Seemed like he knew everyone. I even remember seeing him on television counseling with families who lost loved ones on 9/11. Turns out, he was a complete fraud. He never wore yellow and black for even a day…or any other jersey for that matter. He was a felon, previously convicted of check kiting. Worse, he used his fake persona and clergy credentials to ingratiate himself with organizations with the ultimate aim of stealing money. More than once he pocketed money he got from an organization that trusted him to help them with fundraising events. He even went so far as to con a mentally-challenged couple (who had inherited a small fortune) into letting him “manage” their assets. He cleaned them out! The law finally caught up with this charlatan, but not until a lot of people were hurt.
The point is this: If in doubt, check them out! In fact, check them out even if you don’t see any red flags. The fella I’m talking about seemed like the real deal. But a simple check into his story would have blown his cover. Nobody bothered.
Insiders. Getting ripped off by an insider really hurts. It is the ultimate betrayal for a nonprofit. And, just like with an outsider, it can happen under the radar and not be seen until huge damage is done.
The most common form of insider fraud is direct embezzlement. We’ve uncovered it ourselves. Several years ago, we were hired by a Nashville historic site to review their books. The board had concern that mistakes had been made by their recently departed secretary/bookkeeper. Turns out, the only mistake this person made was employing an amateurish method of stealing money. It took us about 30 minutes to discover what she had done. It took weeks to assess the full amount of the damage…nearly $70,000!
One way to prevent insider fraud is fairly simple: do a background check. It takes a little time, but isn’t difficult nor is it expensive. The other thing you simply must do is institute internal checks and balances. The fact is, the lady I mentioned would have checked out clean. She had no criminal record and had a great resume. But, if this organization had a system of overseeing her handling of the money, something as simple as someone else reconciling the books every month, this could have been prevented. Such internal controls protect not only the organization, but also the integrity of those who work honestly for the organization. The last thing you want is a good person falsely blamed for something.
Will you be able to stop all possible fraud? Probably not. But by using your good sense, and instituting reasonable procedures, you can dramatically limit your risk. In this era of tight organizational budgets, you can little afford to let down your guard!