Give and take: The impact of fraud on non-profit organizations

All organizations and individuals are susceptible to fraud, and non-profit organizations (NPOs) are no exception. Roughly one in 10 reported frauds between 2016 and 2024 occurred at NPOs, with median losses of US$60,000 to US$100,000 per incident.

These amounts represent a significant loss to any organization and more particularly to NPOs. It’s also likely that these amounts are understated given that many instances of fraud may be handled by an organization internally and/or never reported. This may be due to fears that the organization’s reputation will be negatively impacted, resulting in less support from governments, private donors, or volunteers.

Why does it matter?

NPOs are focused on fulfilling their mission, often operating on shoestring budgets and relying on volunteers or part-time employees. As such, many NPOs do not have appropriate anti-fraud internal controls in place. Management, board members, and other employees may lack accounting and may have reduced financial reporting knowledge. In addition, there may be significant cash receipts (e.g., donations) and a base level of trust amongst management and volunteers coupled with a lack of segregation of duties. These characteristics make NPOs more susceptible to internal or external fraud. When frauds are made public, it can be detrimental to the NPO both from a financial and reputational standpoint.

What to look out for

Methods NPOs should be aware of to prevent and detect fraud:   

Skimming fraud:

• Skimming occurs when cash is stolen before it has been recorded in an organization’s accounting system, such as books and records. Cheques and credit card payments may also be skimmed. Given that many NPOs receive cash donations or process cash at events it is important to be aware of this type of fraud.

Purchasing/expense fraud:

• Employees or volunteers may make unapproved purchases or use the organization’s credit cards and expense reports to cover personal expenses. NPOs often must purchase items sporadically for events/fundraisers which could lead to a lack of consistent purchasing history for accounting staff to rely on when reviewing or approving purchases.

Financial reporting fraud:

• Financial statement fraud may involve overstating or understating income, assets, liabilities, or expenses. For NPOs, this can include misreporting fund usage to avoid reduced future funding.

Be proactive

More than 80 percent of NPOs that have experienced fraud between 2021 and 2024 reported taking steps to modify anti fraud controls. This suggests that NPOs may not have had appropriate preventive or detective anti-fraud controls in place to begin with.

Board members or management should re-assess or get appropriate assistance to further develop the anti-fraud controls in place at the NPO. A forensic accountant can perform a fraud risk assessment and help the NPO identify areas where they may be more susceptible to fraud. Focusing on fraud risks upfront will help the NPO prevent and detect fraud and ultimately contribute to its ability to achieve its mission.

Moreover, NPOs should not underestimate the value of fraud awareness and training. Employees are often the first line of defence against fraud, but a lack of awareness can leave an organization vulnerable. Still, only slightly more than half of executives, managers, and employees have received training. Proper training and awareness doesn't just reduce the likelihood of fraud, but it also reduces the time to uncover workplace misconduct, which tends to be more costly the longer it carries on.