GOVERNING NONPROFIT FRAUD

Florida Lt. Gov. Jennifer Carroll has resigned amid state and federal probes of a nonprofit veterans group, according to The Miami Herald. While serving in the state House in 2010, Carroll introduced legislation to legalize sweepstakes games such as those in cafes operated by Allied Veterans of the World, a Florida nonprofit that operates a chain of Internet sweepstakes cafes as a pseudo-charity. Carroll later withdrew the proposed law, saying it was filed erroneously and that she wasn’t interested in legalizing Internet cafes, which operate in a legal gray area. At issue is Carroll’s connections to Allied Veterans, as nearly 60 people associated with the company were arrested this week on various charges, including illegal gambling, racketeering and money laundering. 

Lessons Learned 

Losses due to fraudulent activities are particularly troublesome in the nonprofit sector because they directly reduce resources available to address worthy socioeconomic causes — and for which nonprofit organizations are granted tax-exempt status. Related bad publicity also may reduce subsequent dollar contributions or grants.

The U.S. nonprofit sector continues to grow and is a tantalizing target with upwards of US $1 trillion in revenues, more than 10 million employees, and an estimated 65 million adults providing volunteer services each year. Many U.S. jurisdictions are reporting that fraud among nonprofit entities may be on the rise.

Fraud may be easier to perpetrate in a nonprofit organization for several reasons: an atmosphere of trust, difficulty in verifying certain revenue streams, weaker internal controls, lack of business and financial expertise, and reliance on volunteer boards are all potential contributing factors. Absence of  a strong external regulatory and compliance framework and enforcement resources are also factors, and action always may not be taken — even where evidence of fraud has been uncovered.

While we do not yet know exactly how the alleged fraud was perpetrated, recent academic and Association of Certified Fraud Examiner studies of fraud in the nonprofit sector indicate that, overwhelmingly, these involve collusion among several individuals to fraudulently disburse large sums of misappropriated cash.

Auditors in the field of financial management, with expertise in the detection and investigation of fraud, will no doubt recognize five major types of fraudulent disbursement transactions to look for:

  • Fraudulent billing. False or inflated invoices are paid — a predominant type of fraudulent disbursement affecting nonprofit organizations.
  • Payroll fraud. A payroll check or other form of payment is issued based on overstated hours worked or to fictitious “ghost” employees.
  • Expense reimbursement fraud. Falsified claims for expenses (e.g., travel reimbursement) are submitted by employees.
  • Check tampering. An organization’s check is stolen or altered.
  • Fraudulent register disbursements. False entries are made in a cash register (or equivalent electronic payment system), or cash refunds are made without documentation.

In terms of methods to detect and deter fraud in nonprofit organizations, the existence of strong internal controls is essential but not necessarily mandated in many jurisdictions or considered as important as one might anticipate. Among these are:

  • Employee background checks.
  • Presence of an anonymous reporting method, including tips and hotlines.
  • Existence of an internal audit or fraud examination function.
  • An annual audit by a certified public accountant and/or public reporting of financial statements.
  • Carrying insurance to cover losses from fraud.

Providing orientation and increased training to volunteers about thefts and establishing a strong code of ethics and board of directors, including an audit committee.


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April 2014IaCover