Fraud is an unpleasant reality of doing business, one every company, regardless of location, industry served and revenue size, faces. The threat that dishonest employees, vendors and others pose to the financial vitality of a company cannot be overstated. While most would like to believe it can’t happen here, the sad truth is fraud can happen anywhere – and the more prepared you are the better the chances of preventing it from occurring.
Nonprofits must be especially careful because they often lack the deep pockets and resources to implement robust fraud prevention programs. The large volunteer workforce of many nonprofits makes these organizations more susceptible to fraud than others. Coupled with the reduced amount of resources often available, it can make fraud prevention quite challenging. In fact, according to the Association of Certified Fraud Examiners‘ 2018 Global Study on Occupational Fraud, nonprofits experienced a year-over-year increase in the loss resulting from fraud. The study shows the median loss per incident had increased by $8,000 between 2016 and 2018. To help clients and prospects better understand the study and its impact on their efforts, Wilson Lewis has provided a summary of key points below.
Key Fraud Insights
- Average Loss – The median average loss for cases reporting during the study for religious charitable and social service organizations was $90,000. This is slightly more than the loss reported by arts, entertainment and recreation organizations, which reported a loss of $88,000. The highest loss per case was within the communications and publishing industry, which had a per incident loss of $525,000 followed by energy companies, which experienced a $300,000 per incident loss. The average loss per incident for nonprofits was on the lower end of the spectrum, but the year-over-year increase reflects the need for more robust controls.
- Common Fraud Tactics – To understand how to design a fraud prevention program, it’s essential to identify the most frequently used tactics. According to the study, 40 percent of cases involved billing fraud, 34 percent involved corruption, 29 percent involved expense reimbursement issues, 22 percent involved payroll fraud and 20 percent involved cash on hand. Other notables included skimming, financial statement fraud, and check and payment tampering. It’s important for nonprofits to focus their fraud prevention program around the accounting department, with special attention given to the billing and expense functions.
- Behavioral Red Flags – The study reveals there are behavioral red flags that can indicate the right conditions for fraud exist. According to the study, 38 percent of reported cases included perpetrators living beyond their means, 31 percent were having financial difficulties, 19 percent had an unusually close association with a vendor or customer, 16 percent exhibited control issues and didn’t want to share duties and responsibilities with others, 15 percent were going through a divorce and 11 percent exhibited a wheeler-dealer attitude. Use these red flags as general guidelines for situations in which conditions could be right for bad decisions to be made.
- Fraud Scheme Length – Various fraud schemes last for varying lengths. The study identified the schemes with the longest duration and highest potential to cause damage and loss. According to the survey, the average payroll scheme lasted 30 months; check and payment tampering lasted 24 months; financial statement fraud, expense reimbursement and cash larceny schemes lasted 24 months; skimming last 18 months and cash on hand lasted 12 months. The more hands involved in a process the longer the scheme is perpetrated because of the ability to hide the illegal behavior. Nonprofits need to be sure to implement controls to monitor those in “high-touch” situations.
- Concealing Fraud – The ability to conceal fraud is essential to ensuring the long life of the scheme. According to the study, 55 percent of cases involved the creation of fraudulent physical documents, 48 percent included altered physical documents, 42 percent entered fraudulent accounting transactions, 34 percent altered transactions in the accounting system, 31 percent altered electronic documents or files and 30 percent destroyed physical documents. Having insight into concealment methods provides additional opportunities to create effective controls that can help eliminate illegal behavior.
Contact Us
Nonprofits play a vital role in serving members of the community whether it’s through formal programs, enrichment or education. It’s essential to protect yourself, donors and programs from the risks of fraud. If you have questions about your fraud prevention policies, are suspicious of fraud or need assistance with another matter, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.