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Monday, March 19, 2012

Protecting Your Tax-Exempt Organization Against Fraud

According to a recent report, it is estimated that five percent of annual revenue is lost by organizations to fraud. The potential for lost revenue could be devastating for any organization, especially those in the nonprofit sector. This lost revenue could lead to payroll cuts, adverse publicity, or more importantly, reduced dollars used to perform the organization’s role in the community. It is not enough for an organization to detect fraud; it must prevent fraud from occurring in the first place.

Internal Controls
The implementation and monitoring of proper internal controls is the first line of defense against fraud. One of the key aspects of internal controls is segregation of duties. The functions of authorization, recording, and custody should be segregated. When completing segregation of duties in smaller organizations, direct participation by the board of directors in the authorization and review process can be a suitable safeguard. It is important to remember that internal controls provide a reasonable, not absolute, assurance that fraud will be prevented.

An Understanding of Fraud
It is important that all organizations, large and small, have a very clear understanding of fraud and its effects. All members of the organization, including board, management, and staff, should have ongoing antifraud training. Members should understand what constitutes fraud, its effects on the organization, and the proper steps to take when they believe fraud is being committed.

Whistle Blower Policies
Organizations should implement an effective fraud reporting mechanism. Do employees within the organization trust that they can report suspicious activity anonymously and confidentially without fear of repercussions? Generally, a simple anonymous suggestion or complaint box may suffice.

Tone at the Top
Another key ingredient is a management team that sets an antifraud climate through both tone and action. A zero tolerance policy of fraudulent conduct will assure employees that fraud of any kind, big or small, will be dealt with swiftly and will not be tolerated.

For further questions or ideas on how you can protect your nonprofit organization, feel free to contact any one of CPAs with nonprofit expertise.

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