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A Breakdown of Non-profit Fraud: A Few Bad Apples or a Systemic Malaise?
Posted in: Blog, Non-Profits by Anand Chandrasekhar on November 18, 2009
Non-profit fraud has been the proverbial elephant in the room in the charity sector. Everyone within the sector knows it is happening on some level but most dismiss it as a case of a ‘few bad apples’. Ironically, charities could risk negative publicity for revealing internal fraud. Many prefer to avoid discussing fraud for fear it could damage their reputation instead of earning accolades from donors. Weak internal controls, lack of financial expertise and heavy reliance of volunteer boards make non-profits more vulnerable to fraud than businesses. Employees guilty of fraud are seldom punished severely and are usually encouraged to resign instead of being dismissed outright. This fraud indifference is harming the non-profit sector as credibility takes a beating when blatant incidences of fraud do become public knowledge.
A report published in the Nonprofit and Voluntary Sector Quarterly aims to shed light on the extent of fraud in the charity sector. Titled ‘An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents’, the report uses empirical research approaches to study the nature and extent of fraud in the non-profit sector. Unlike previous empirical studies that relied only on newspaper articles on fraud for statistics, this report uses data from 508 cases of occupational fraud obtained from the Association of Certified Fraud Examiners (ACFE).
Extent of Fraud
- Non-profits accounted for 58 cases (12.2%) of the fraud in the 508 cases studied (lowest $200 and highest $17 million)
- Average loss from fraud for non-profits amounted to $ 100,000 per case (as opposed to $ 37,500 for government agencies and $123,000 for private companies)
- Total loss from fraud for the NGO sector amounted to $30 million
Perpetrators & Victims of Fraud
- Larger frauds were usually associated with multiple perpetrators, higher salaries, longer tenure, higher education level and to some extent men
- The most costly frauds were committed by male managers/executives earning between $100,000 to $149,000 per year
- The typical fraud case was committed by a woman with no criminal record who had been with the organisation for at least 3 years and earned less than $50,000 per year
- The greatest losses from fraud could be attributed to employees with tenures over 10 years and who were between the ages of 51 and 60
- Although only 18.6% of the frauds involved multiple employees, the median loss was almost 4 times that of those perpetrated by a single individual
Types of Fraud
- Asset misappropriation was the most common type of fraud in non-profits
- Fraud related to falsification of financial statements was least common at 5% of cases but resulted in a median loss of 30 times higher than asset misappropriation
- Fraudulent billing was the most common category of asset misappropriation
- Median loss from cash register fraud was most costly ($ 350,000) while expenses reimbursement fraud was least costly ($ 83,373)
- Non-profits that reported corruption fraud experienced a median loss of $ 189,400
Fraud Detection
- More than 43% of frauds were detected by tips (over half from employess) while only a quarter were detected by internal audit departments
- More than 22% of the reported frauds were caught by accident while only 12% were detected by external auditors
- 72% of non-profit fraud cases resulted in termination of employment (88% in for-profits) while 7% resulted in no punishment.
- 72% of large frauds were referred to law enforcement agencies
Fraud Prevention
- Mandatory background checks on employees with access to cash or liquid funds
- Consider insurance or bonding for employees with access to cash or assets
- Make it easier for employees and others to report fraud or abuses
- Periodically review internal controls as senior employees can usually bypass them
- Require independent directors to serve on the board
- Create a financially savvy audit committee
- Invest in employee orientation on fraud issues
