Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection

According to public studies recently undertaken by the accounting firm Ernst & Young, LLC and the Association of Certified Fraud Examiners (ACFE), reports of fraud within nonprofits appear to be increasing at an alarming rate. More than 13% of total reported fraud cases in the American work force took place at nonprofits according to ACFE. And the Ernst & Young study found that one out of five workers personally knew of fraud in their workplace.

Scandal and fraud have dominated the headlines in recent years both at publicly traded companies and in the nonprofit sector. Author Gerald Zack, a certified public accountant and founder of the Nonprofit Resource Center, which works with external auditors of nonprofits, says that the potential damage to a nonprofit's reputation may be harder to reverse than it is for a for-profit organization. Today's public seems to be highly unforgiving of nonprofit institutions that breach their trust. In a climate of media-inflamed low public trust of charities, organizations must take action to prevent fraud and abuse before their reputations and financial support are irreparably damaged.

Fraud and Abuse in Nonprofit Organizations demonstrates how nonprofit organizations are vulnerable to fraud. Through examples and case studies, the author recommends best practices for avoiding controversial situations, and even the appearance of financial impropriety. The book describes the most common fraud and abuse schemes committed against nonprofits, and focuses on the creation of a comprehensive fraud awareness and deterrence system that goes beyond standard internal financial controls.

Over and above outright theft, the book also focuses on frauds committed on behalf of nonprofits, or otherwise attributed to the charity such as fundraising irregularities and improper financial reporting to donors. Divided into five sections, the book presents a model for detection and prevention, specific financial controls, the development of administrative systems, and the role of management and the Board of Directors in providing oversight and analysis. Examples of policies and checklists are also provided.

Gerald M. Zack is director of an accounting and consulting firm that specializes in working with nonprofit clients. He has more than 20 years of experience and is a well-known lecturer and trainer.

The philosophy underlying Fraud and Abuse is that you need to have systems in place to prevent fraud before even the hint of suspicion falls on your organization. Today's donors and the general public may have higher expectations of the nonprofits that serve our communities than they did in the past. Hence, resources like Fraud and Abuse in Nonprofit Organizations become an important addition to nonprofit managers' bookshelves.

For citations to other materials on this topic, refer to the Literature of the Nonprofit Sector Online, using the subject headings "Nonprofit organizations-accounting" or "Risk management."