SOURCE: Marks Paneth LLP

Marks Paneth LLP

April 14, 2015 10:00 ET

Fraud Risk Is on the Rise for Nonprofits -- and the Impact Can Be Fatal

Nonprofit Leaders Need to Know the Danger, Probe for Weaknesses and Improve Controls, Says Marks Paneth LLP

NEW YORK, NY--(Marketwired - Apr 14, 2015) - Nonprofit fraud is on the rise, according to a number of sources, and may account for 10% of all fraud in the U.S.1 The implication is that many nonprofits are at risk, probably due to a deficit in financial controls.

"Financial control failures are common at nonprofits and can sometimes be fatal. Leaders of nonprofits would be well served to take steps to assess their risk, tighten controls and detect fraud as early as possible," said Eric Kreuter, Ph.D., CPA, Partner in the Litigation and Financial Advisory Services Group at New York accounting firm Marks Paneth LLP.

Dr. Kreuter and Hope Goldstein, CPA, Partner in Marks Paneth's Nonprofit and Government Service Practice make the following points about the risk of fraud at nonprofits and the best ways to address it:

  • The rising rate and growing impact of nonprofit fraud: Nonprofit fraud is happening more often and costing more money. According to the 2014 Report to the Nations by the Association of Certified Fraud Examiners, nonprofit fraud accounted for 10.8% of total frauds in 2013, up from 9.6% reported in 2010. Nonprofit organizations lost a median $108,000 per fraud in 2013, up from $90,000 reported in 2010. "Since many nonprofits are small, the financial impact is even greater than the dollar amount might make it seem," Ms. Goldstein says.

  • Why nonprofits are at risk: "All organizations are at risk for fraud," Dr. Kreuter says. "There are always fraudsters at work, and when the economy is difficult -- as this one is, in spite of employment numbers -- then there are more frustrated, underemployed people. That means there may be an increase in the number of people willing to commit fraud.

    "The problem for nonprofits is that their finances are often fragile to begin with, so that the impact of fraud and mishandling of finances can be severe. In addition, they are often short-staffed, with people doing multiple and sometimes conflicting jobs -- for example, one person issues the checks, does the receivables and handles the bank reconciliation. This means that controls are sometimes not tight and that opens the door to fraud."

  • Why fraud and control failures can kill a nonprofit organization while a for-profit business might survive: "While fraud is always harmful, nonprofits have to worry about the risk to their reputation. A perception that they're mishandling funds can have a severe impact on donations," Ms. Goldstein says. "Especially in the current economy, contributions are difficult to come by, and the fundraising environment is competitive. If donors lose confidence in the organization, they're likely to move their contributions elsewhere. These effects can be long-lasting. For-profit organizations can clean house, replace the Board, and customers seem to forgive them. In the nonprofit world that's not always the case. If you were to survey heads of nonprofits where fraud occurred, they probably would not deny that they are still feeling the aftereffects to their organizations' reputations many years later. A smaller nonprofit can be badly hurt or lose donations, be forced to merge, or worse, find themselves having to shut its doors.

    "Of course, some nonprofits address this by failing to report fraud -- trying to handle it quietly without going public. The result is that the fraudster leaves -- and goes on to work and commit fraud at some other organization. Nondisclosure is not an answer."

  • The new risk of cybercrime: "While much of fraud is still simple theft, that's not the whole story," Dr. Kreuter says. "Cybercrime is a new danger. Fraudsters break into a system, steal data and sell it. The risk environment is complex and there are many dangers."

  • Why safeguards probably won't work -- why it's better to tighten controls and catch fraud early: "Everyone likes to talk about fraud prevention, but in practice it's hard to prevent fraud -- fraudsters will often find new ways around safeguards," Dr. Kreuter says. "What's much more effective is deterrence. A combination of tighter controls, strong whistleblower policies and early detection is the best anti-fraud formula."

  • What organizations should do to improve controls and stop fraud: "There are several steps that nonprofit organizations can and should take," Dr. Kreuter says. "Some are mandatory -- whistleblower policies are required by law. Some are strongly advisable even if difficult -- budgets may be constrained, but it's important to staff appropriately, so that jobs are separated in a way that supports fiscal controls, and to pay a competitive wage that reduces the odds of dissatisfaction.

"The most important single step is to audit current controls, identify weak points and make changes as needed to both policies and staffing levels. Many of these changers are simple -- in one case we recommended mailing bank statements to the leader's home so he could examine the signatures on the backs of checks. Fraud deterrence can be that simple."

"Stealing is not going out of vogue," Ms. Goldstein said. "The answer is to be proactive, not passive. Being proactive can carry a price tag, but so does insurance. When fraud hits, organizations are likely to find it faster and come through better if they've taken the right steps and set up the right controls ahead of time."

For more information, to schedule an interview or request a bylined article, please contact Katarina Wenk-Bodenmiller of Sommerfield Communications at (212) 255-8386 or katarina@sommerfield.com.

About Marks Paneth

Marks Paneth LLP is an accounting firm with more than 550 people, including over 70 partners and principals. The firm provides public and private businesses with a full range of auditing, accounting, tax, consulting, trade remediation and valuation services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit and medical practice clients. The firm has a strong track record supporting emerging growth companies, entrepreneurs, business owners and investors as they navigate the business life cycle.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in Morison International, a leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world. Marks Paneth, whose origins date back to 1907, is the 35th largest accounting firm in the nation and the 9th largest in the mid-Atlantic region. In addition, readers of the New York Law Journal rank Marks Paneth as one of the area's top three forensic accounting firms for the fifth year in a row.

Its headquarters are in New York City. Additional offices are in Washington, DC, New Jersey, Long Island, Westchester and the Cayman Islands. For more information, please visit www.markspaneth.com.

1 Report to the Nations. Association of Certified Fraud Examiners. 2014.

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