5 steps to prevent fraud

October 26, 2021 3:00 PM

While no one wants to believe fraud is occurring at their organization or nonprofit, unfortunately, it can and does happen. Typically, fraud is a crime of opportunity, which means that putting preventative fraud measures in place can help you reduce fraud before it starts.

Here are five steps you can put in place no matter what size your organization is to decrease your risk of fraud. Remember, when you have formal reporting mechanisms in place for fraud, you are setting the foundation of fraud reduction.

Whistleblower policy

Sean Gladwell/Getty Images/Hemera

Create a clear fraud whistleblower policy for your organization and its employees. Make sure this fraud policy is part of employee onboarding, and part of your employee handbook. Conduct background checks during the hiring process. Post the fraud policy in your office as well as on your internal website. Establish different ways any employee can report fraud, including a tip hotline, anonymous email and an internal fraud website reporting link.

Note: Make sure your whistleblower policy includes a no-retaliation clause, a reporting procedure and confidentiality protection for the whistleblower. For a sample whistleblower policy for nonprofits, see

these resources from the Council of Nonprofits

Tips

Encourage employees to submit a tip or concern of fraud at any time and make sure they can do so via email, phone or in an anonymous tip box onsite. Help employees understand that they are part of the fraud protection team.

Note: The latest

Report to the Nations from the Association of Certified Fraud Examiners

found 43% of occupational fraud was reported through tips.

Internal controls

Ensure that you have internal controls to protect the security of your data, assets and any proprietary information in place, and that you update them on a regular schedule.

One of the most important controls you can implement is the segregation of transactions. Fraud is more difficult to pull off if you need to get multiple people involved. Typically, fraud is only perpetrated by one person alone, so if you have more people involved, the more you can deter fraud.

Don’t have a single employee handling the entire cash processing cycle. By assigning more than one staff member or employee to handle the processing and accounting for cash from beginning to end, organizations can lessen the opportunity for fraud. These multiple staff processing systems provide a benefit not only in fraud reduction but also in the security of the cash received and proper reconciliation for the donations.

Organizations should also avoid a single employee having sole responsibility over reconciling cash or asset activities. Putting checks and balances in place for any transactions processed will reduce the opportunity for fraud. Using a fund accounting software solution can help you to have internal controls in place that will flag entries or variances of a budget that would be otherwise undetected.

Keep in mind as well that fraud can be as simple as one employee printing out duplicate checks, or forging signatures on checks, so you want to keep all company checks locked up. Many companies also employ a two-signature check system so any check larger than $500 must be signed by two different people on the financial team.

Make sure you have your organization’s financial tasks segregated when it comes to processing cash and checks or reconciling cash, checks and payments. It is much easier to cover up fraudulent activities if the person committing the fraud is the only person with access to the full accounting system.

Fraud can be committed at any level of the organization so it’s important that all internal controls for fraud apply to every role at your organization.

Note: Internal accounting controls might include user role restrictions, protected access to proprietary asset information or funds, and alerts for budget variances.

Audits

Make sure you’re not waiting for a yearly audit to detect any fraud that might be occurring. While fraud is sometimes detected through an audit, don’t depend on or wait for a yearly audit to find fraud.

Note: Financial statement fraud is one kind of fraud that can occur. This includes net worth overstatements or understatements, misstating or overstating assets, false revenues or understated revenues, as well as improper disclosures. These are items an auditor will be looking for throughout an audit.

Internal fraud assessments

Build internal fraud assessments into your yearly organizational calendar, and make sure your managers and employees know your company conducts fraud assessments regularly.

Just as you do yearly reporting to your stakeholders, think about conducting yearly fraud awareness training. Research shows that more tips on fraud come through organizations that have standard fraud awareness training in place, in addition to a fraud policy.

If fraud is committed at your organization, once it’s resolved, use the opportunity to discuss how the fraud occurred, what was lost and how it happened as part of your fraud awareness training. When you have fraud awareness training, the more you can use real-world specific fraud events that correlate with your type of organization or nonprofit, the easier it will be for everyone to understand how to detect fraud.