By Robert Marchbanks, CPA/CGMA
Audit Manager at Atchley & Associates, LLP
Most nonprofit organizations operate with limited staff and in a manner that assumes all employees are trustworthy. While the majority of employees are honest and believe in the organization’s mission, there are employees that may face financial hardship from a spouse losing a job, incurring medical bills, or sending a child to college. Other employees believe they are entitled to higher pay and will “justify” embezzling from the organization.
Donald Cressey’s hypothesis on why people commit fraud is referred to as the fraud triangle: Motivation, Rationalization, and Opportunity.
- Motivation or pressure may include financial problems, addictions like gambling, shopping or drugs, pressure to show good performance or results, or just the thrill of being able to get away with something.
- Rationalization is when individuals think they are justified because they are underpaid, or it’s for their family, or they need it now but they’ll pay it back before anyone notices.
- Opportunity is created when there are weaknesses in controls. Individuals think they won’t get caught because nobody is looking, or reviewing, or performing reconciliations and reviews.
While an organization may not be able to prevent motivation or rationalization, there are certain steps the organization can take to minimize the opportunity and the risk of an employee committing fraud. These include:
- Set the tone at the top – Management should set the tone at the top for ethical behavior in the organization.
- Segregation of duties – No single person should be responsible for receiving, depositing, recording, and reconciling receipt of funds. No single person should be responsible for approving payments, disbursing funds, recording the disbursement transaction, and reconciling the bank statement.
- Reconcile accounts in a timely manner – Bank accounts should be reconciled timely by an individual not responsible for recording cash receipts and disbursements.
- Documentation and Authorization – You should have invoices to support cash disbursements and the expenditures should be approved by someone outside of accounting. The approval should be in the form of a signed purchase order or signed approval on the invoice. Maintain proper accounting records for all transactions.
- Written whistleblower and conflict of interest policies – The whistleblower policy should provide a phone number for the employee to call to report the fraud and remain anonymous. The conflict of interest policy should prevent private inurement.
- Look for employees living beyond their means – Be aware of the type of car the employee drives, the vacation destinations they travel to, and the jewelry that they wear.
- Carry insurance for employee theft – Even with the fraud policies and procedures in place, you should carry insurance to cover employee theft. This will minimize the risk of the financial hardship of the nonprofit organization.
- Keep check stock in a secure location accessed only by authorized personnel.
While the above list is not all-inclusive, hopefully it will encourage you to review your current policies and procedures at your nonprofit organization and implement procedures to deter and detect employee fraud. Please let us know if we can help in reviewing your risk assessment of your policies and procedures.