THE PERFECT STORM:PROTECTING YOUR NONPROFITFROM THE DEVASTATION OF FRAUD

Dena Jansen, CPA, Nonprofit Audit Partner, Maxwell Locke & RitterDan Murphy, Product Manager, Abila

THE PERFECT STORM: PROTECTING YOUR NONPROFIT FROM THE DEVASTATION OF FRAUD

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Though these are fictitious nonprofits, the scenarios are very real, indeed. Could something like this happen at your nonprofit?

Town Square Humane Society

The receptionist at Town Square Humane Society took a call from a very displeased vendor accusing the nonprofit of being delinquent in paying for electrical work completed at the society’s new shelter. She answered a few questions, then directed the caller to the Finance team. The vendor gleaned just enough information during their conversation to beef up an email to Finance requesting payment. The Finance group ran it through all the internal checks and balances, and paid the vendor. It wasn’t until a few weeks later, when the actual electrician called to request payment, that TSHS realized it had fallen victim to a fictitious vendor scheme. Hometown Healthcare Organization

A member of the Accounting team at Hometown Healthcare received an email from the organization’s executive director requesting a financial transaction, specifically, a rather large reimbursement to her. Because it came from the top, the transaction was expedited and completed.

In reality, it wasn’t the ED, at all. In fact, a hacker had gained access to the organization’s email system – a classic example of IT fraud. American Art Association

At American Art Association’s annual golf tournament, a volunteer working registration the day-of was selling “bogies” left and right, at $100 a pop! However, when all the money – including lots of cash – was finally counted, the numbers weren’t nearly as impressive as the event team had anticipated. AAA had fallen prey to a rather common form of fraud called, “skimming,” where cash is pocketed before it’s ever recorded. And, the volunteer was never seen again.

The Perfect Storm is Brewing Is Your Nonprofit Protected from the Devastation of Fraud?

THE PERFECT STORM: PROTECTING YOUR NONPROFIT FROM THE DEVASTATION OF FRAUD

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As a nonprofit leader, you’re probably thinking these types of scams perpetrated against nonprofits would never happen at your organization. You’ve built an environment of trust, surrounded yourself with people who’re passionate about your mission, and have very strong internal controls as part of your policies and procedures. Think again. Because, the nonprofit sector – which takes great pride in serving the public good – is often the victim of bad; vulnerable to fraudsters who see them as easy prey. Consider this: As part of its 2016 Global Fraud Study, the Association of Certified Fraud Examiners asked respondents to provide demographic information. Of those who responded, 10.1 percent of victim organizations were nonprofits that reported a median loss of $100,000; 18.7 percent were government agencies that reported a median loss of $109,000.

The reality is, a perfect storm for fraud is currently brewing at most nonprofits. The following combination of “events” could be contributing to the drastic aggravation of a situation at your nonprofit: Your team members are wearing too many hats. The need to do more with less is a strong trend that emerged from Abila’s Nonprofit Finance & Accounting Study. The top three finance/accounting trends identified by all participants, regardless of

organization size or respondent age, are: 1) small, lean finance teams; 2) cross-functional expertise for all staff; and 3) key decision makers for technology, software, and services reside inside finance. In addition to feeling pressure to perform on multiple fronts, nearly half of the nonprofit finance and accounting professionals who responded to the survey identified interruptions from other departments as the number one most common challenge they face on a daily basis. Lots of conflicting responsibilities compounded by lots of interruptions can make an otherwise attentive, detail-oriented professional very unfocused and unaware. Your nonprofit experiences high employee turnover. Overall turnover rates in the nonprofit sector increased to 19 percent in 2014 compared with 16 percent in 2013, according to the latest 2015 Nonprofit Employment Practices Survey. Employee turnover was identified as a top organizational trend in the Abila Nonprofit Finance & Accounting study, with a whopping 87 percent of respondents saying it’s problematic. Let’s face it: The pay is lower (while expectations and responsibilities are higher) in the nonprofit sector than the for-profit, and consequently, the sector is often viewed as a stepping stone in one’s career. And, when people walk out the door, so does critical knowledge and control and oversight of key accounting processes. Training is a luxury. Who in the nonprofit sector has time (or budget dollars) for professional development? In fact, a ProInspire survey of nonprofit managers revealed that, despite demand for professional development programs, such offerings are scarce and access is limited in the sector, reports the HuffPost Impact.

10.1%of fraud victim organizations

were nonprofits that reporteda median loss of $100,000

THE PERFECT STORM: PROTECTING YOUR NONPROFIT FROM THE DEVASTATION OF FRAUD

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Nine out of 10 nonprofit managers indicated interest in leadership or managerial training, and believe that it will make them more effective in their roles, yet only half of them have received such training since assuming a role managing direct reports. What’s more, only 39 percent of respondents said their organizations pay for leadership or managerial training. The logic is pretty simple here: less training, equals less competence, equals less awareness, equals more risk. You have limited or ineffective controls in place. Internal controls are the financial processes and procedures that enable an organization to safeguard its assets, as defined by the Greater Washington Society of CPAs. The goal of internal controls is to create business practices that serve as “checks and balances” on staff (and sometimes board members) or outside vendors to reduce the risk of misappropriation of funds/assets, says the National Council of Nonprofits.

According to the 2016 Global Fraud Study, published by the Association of Certified Fraud Examiners, the most prominent organizational weakness that contributed to the frauds in its study was a lack of internal controls, which was cited in 29.3 percent of cases, followed by an override of existing internal controls, which contributed to just more than 20 percent of cases. Unfortunately, there are many nonprofits, particularly smaller organizations, that run an informal shop and don’t have prescribed controls in place. And, even if they do, they often allocate very limited resources to monitoring, enforcing, and updating them. There are volunteers working at your nonprofit who are privy to confidential information. Often, these volunteers have very little oversight and considerable responsibilities. Because volunteers are such a vital component of nonprofit operations, they should be given appropriate training and oversight when they’re layered into your internal control systems and processes. Your volunteer board has little-to-no financial oversight expertise. Members of your board of directors may be well-connected in your community; they’re likely very passionate about your cause; and, they may even be good fundraisers. However, your financial infrastructure might be far too complex for most board members to fully understand. Or, it could be they simply don’t understand your operations well enough to ask good questions about patterns, trends, risks, and controls.

9 OUT OF 10

THE PERFECT STORM: PROTECTING YOUR NONPROFIT FROM THE DEVASTATION OF FRAUD

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What’s at Stake if Your Nonprofit Falls Victim to Fraud? The obvious answer is hard-earned dollars. You and your team work tirelessly to raise funds for your mission-related programs, and the financial blow inflicted by a fraudster could be devastating. However, the impact of fraud can be far wider-reaching than just financial, including: • Harm to your reputation – At most nonprofits, mission delivery relies heavily – if not, solely – on the generosity of supporters. If your supporters feel they can’t trust you to protect and preserve their donations, those dollars will dry up. • Crisis management – Nonprofits are keenly susceptible to the effects of negative publicity, making many nonprofit decision makers extremely reluctant to even acknowledge or discuss fraud, let alone report it. They are also often unprepared to deal with a crisis. Decisions must be made quickly to respond in a way that is thoughtful, appropriate, and inclusive of the right external experts (think attorneys, forensic accountants, and fraud examiners). And, unfortunately, most nonprofits don’t have a crisis management plan in place to help guide them through these key decisions and communications. • Cost of investigation and litigation – You may have a high-level employee spending hours and hours reviewing surveillance tape – time, money, and energy taken away from the mission. Or, even worse, you could be paying forensic accountants, fraud examiners, or a legal team to investigate, and maybe even prosecute, the perpetrators. Again, time, money, and energy usurped from the real work at hand.

• Deflated employee morale – A crisis shakes the security of all involved, and a tarnished reputation can be demoralizing for those who work tirelessly every day to support your cause. How Do You Mitigate Fraud? Many nonprofit leaders and board members are under the false impression their independent auditors are their first line of defense when it comes to preventing and detecting fraud. Certainly, your auditors are trusted partners who review your financial statements and internal controls, share best practices, and provide reasonable assurances that your financial statements aren’t materially misrepresentative of your fiscal state. However, they can’t, don’t, and aren’t required to guarantee your nonprofit is fraud free. Instead, nonprofits face a critical need to address fraud from the top, says Nonprofit Quarterly, starting with more guidance and engagement from leaders and boards to create an anti-fraud environment and oversee a fraud risk management function. The State of New York Attorney General’s Charities Bureau, in its guidance drafted to assist current and future boards of directors of nonprofit corporations and trustees of charitable trusts states, “A primary responsibility of directors is to ensure that the organization is accountable for its programs and finances to its contributors, members, the public, and government regulators.” -State of New York Attorney General’s Charities Bureau So, step one is to ensure you have a mix of talent on your board, to include those who have a firm grasp of financial oversight. Your board should understand your operations, remain aware and skeptical, and continually ask the tough questions.

THE PERFECT STORM: PROTECTING YOUR NONPROFIT FROM THE DEVASTATION OF FRAUD

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Next, you should have internal controls in place that are well documented, well understood, widely distributed, and strongly enforced. In the ACFE’s 2016 Global Fraud Study, the presence of anti-fraud controls was correlated with both lower fraud losses and quicker detection. The study compared organizations that had specific anti-fraud controls in place against organizations lacking those controls, and found that where controls were present, fraud losses were 14.3 to 54 percent lower, and frauds were detected 33.3 to 50 percent more quickly. Start simple with a few best practices from the experts at Greater Washington Society of CPAs who say, “The most effective procedures are those that have the greatest segregation of duties. The more people involved in the process, the less likely it is that an error or defalcation will occur. For example, the person who writes the checks should not be the person signing the checks. The person who orders the service or product should approve the invoice. The person with budget responsibility should also approve the expenditure and should code the invoice.” For a comprehensive list of general internal controls visit the Greater Washington Society of CPAs site. The development of proper internal controls will help your nonprofit ensure accountability. But, not if they’re buried in a file cabinet or on someone’s hard drive. They should be reviewed, updated, distributed, and discussed on a regular basis. Stay alert especially during times of change – in operations, programs, systems, or employees – that might impact the necessary process or controls.

Finally, nonprofit leaders and board members should work every day to foster an environment of awareness and a culture of open communications and transparency. Get your fraud radars up! Check those operational gauges at times of increased pressure, and always be ready to react. Your team members are, in actuality, your first line of defense, and should be given the tools and the permission to act when necessary, so equip them with policies, procedures, and passion to support your mission and keep it safe from dangers.

About the Authors Dena Jansen, CPA Dena Jansen is the Lead Client Service Partner for the nonprofit niche at Maxwell Locke & Ritter. She serves as an audit partner and trusted business advisor to the nonprofit industry with

a focus on facilitating technical and nontechnical training to internal associates, clients, and external groups. With more than 13 years in public accounting, Dena enjoys creating connections for others, and is proud to serve on boards in her community.

Dan Murphy Dan Murphy is currently the Product Manager for Abila MIP Fund Accounting™. He has a background in nonprofit financial management, with degrees in finance and accounting

and more than 10 years of nonprofit accounting experience.

THE PERFECT STORM: PROTECTING YOUR NONPROFIT FROM THE DEVASTATION OF FRAUD

Maxwell Locke & Ritter is the largest local accounting, tax, and consulting firm in Central Texas. The nonprofit community is at the heart of ML&R’s core values, and with a nonprofit niche team of three partners and 11 associates, it provides high-level expertise on nonprofit accounting and tax issues, shares industry best practices, and offers other recommendations for improvement. The firm also serves a large number of nonprofit organizations, and its people are connected to more than 200 different organizations through volunteering, serving on boards and committees, and sponsoring community events.

About Maxwell Locke & Ritter LLP

Abila is the leading provider of software and services to nonprofit organizations and associations that help them improve decision making, execute with greater precision, increase engagement, and generate more revenue. Abila combines decades of industry insight with technology know-how to serve nearly 8,000 clients across North America. For more information, please visit abila.com. To subscribe to our blog, visit Forward Together at blog.abila.com.

About Abila

©2016 Abila, Inc. All rights reserved. Abila, the Abila logos, and the Abila product and service names mentioned herein are registered trademarks or trademarks of Abila, Inc., or its affiliated entities. All other trademarks are the property of their respective owners. 08022016.

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