Use Vigilance To Prevent Workplace Fraud

Workplace fraud is rampant in today’s business world — and unfortunately even in the nonprofit sector. According to a recent study sponsored by Ernst & Young, employers lose approximately 20% of every earned dollar to workplace fraud. 

When fraud occurs at a nonprofit, it is often a high-profile story that attracts significant negative publicity. This can severely damage your organization’s reputation. Take these steps to help you prevent workplace fraud.

Identify Fraud

Most instances of fraud occur because of a combination of opportunistic employees and weak internal controls. And large fraud often begins on a small scale. Workplace fraud occurs in a variety of ways, but the most common types are:

bullet Stealing office supplies,
bullet Falsely claiming extra hours worked,
bullet Inflating expense accounts,
bullet Taking kickbacks from suppliers, and
bullet Using company credit cards for personal use and depositing credit card “refunds” to personal bank accounts.


As fraudsters grow gradually more confident that they won’t be caught, they escalate their activities and take more. The only way to stop this is by reducing your exposure as much as possible.

Reduce Risk

You must exercise vigilance and persistence to reduce your exposure to fraud. This is no easy task, but you can curtail opportunistic employees through a combination of these strategies:

Thoroughly screen employees. To gain a better sense of comfort that new employees will be ethical and trustworthy, run background checks before hiring them. This can help you select the right employees, and help lessen the possibility of fraudulent activity. According to a recent report by the Association of Certified Fraud Examiners, approximately 7% of employees who commit fraud did so at previous jobs. Investigating potential employees’ backgrounds before hiring can help to ensure that your nonprofit isn’t hiring those who have previously defrauded others. Background checks are relatively inexpensive and simple to implement, so be sure to take advantage of them.

 Impose sanctions. To show your staff you mean business, develop and implement tough penalties for employees not complying with basic internal control policies and especially those caught committing fraud. Too often, organizations are reluctant to take the appropriate action because they don’t want to “rock the boat” and risk losing otherwise valuable employees for seemingly minor internal control violations. And organizations that uncover fraud often do not pursue legal action to avoid excessive legal fees and negative media attention. However your nonprofit must send a strong message to your staff and the community. Tough sanctions can be a strong deterrent and will reduce the likelihood that existing employees will violate their fiduciary duty to members and contributors.

 Revise internal controls.  Many nonprofit managers mistakenly assume that the annual audit process is designed to detect fraud. Although auditors will review your internal controls, an audit isn’t specifically designed to detect fraud. That’s why you must implement a formal fraud-detection policy. Some basic internal controls you can integrate into your policy include:

bullet Requiring multiple signatures on checks over a predetermined amount,
bullet Bonding all employees handling cash,
bullet Segregating financial and accounting duties as much as possible,
bullet Requiring an executive to receive the bank and credit card statements unopened and review the contents,
bullet Using a lockbox for cash receipts,
bullet Restrictively endorsing all checks as soon as received,
bullet Cutting manual checks only in emergencies,
bullet Never signing checks without thoroughly examining supporting documentation,
bullet Timely reviewing expense reports,
bullet Limiting employee loans and cash advances,
bullet Requiring a board member to review CEO expense reports, and
bullet Requiring all personnel to take vacations.

 Frequently review and update these controls to make sure they remain effective. Assign someone within the organization — but outside the accounting department — to monitor and see that employees abide by these controls.


Take Action

As you can see, workplace fraud is an important issue that every nonprofit should address. You may never be able to completely eliminate it, but these above steps can take you in the right direction. We can help you minimize the risk of fraud. Call us today.


(c)2001-06 Fraser CPA - Last Updated 05/01/2006

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