Preventing Internal Fraud: 3 Things Your Non-profit Should be Doing

The recent news that the Salvation Army was the victim of an alleged $2M toy theft, was shocking and probably has a lot of non-profits thinking about how they can prevent something like this from happening in their organization.

According to Edward Nagel, forensic accountant and principal of nagel + associates there are a few simple things non-profits can do to increase their ability to prevent and detect fraud. He shared these ideas on CBC’s Morning Show with Matt Galloway:

1. Maintain a Strong Anti-Fraud Tone

It’s very important, Nagel says, to have a strong tone at the top of the organization that fraud simply will not be tolerated. It should start at the board and go right down to the volunteers.

2. Train Staff to Identify Warning Signs

It’s also important, Nagel says, to provide staff and volunteers with proper training so they know the warning signs and red flags, and are better able to identify fraud.

3. Implement Strong Internal Controls

Lastly, Nagel says, it’s important to have strong internal controls in place. One of the most basic internal controls is segregation of duties. So, for instance, the person receiving donations is not also the person depositing those funds.

Other internal controls he mentions: Doing proper due diligence in advance of hiring individuals to ensure everyone is there for the right reason, and implementing dual signing authority, so that a cheque cannot go out the door with only one signature.

In general, he says “non-profit organizations don’t have as sophisticated a system of internal controls in place to prevent and detect fraud.” It’s usually just a matter of resources, he says. Non-profit organizations usually have a lean staff that relies on volunteers. So, in many cases, a duty that should be divided, is performed by the same individual.

In the case of the Salvation Army, the culprit saw weakness in internal controls and was able to circumvent those controls and get the toys out the door, he says.

Listen to the full interview here.

Start thinking about things you can do to prevent and detect fraud in your non-profit. Depending on the size and activities of your organization, you can determine what kind of training and internal controls are appropriate and realistic. The main thing is to start thinking about it and start moving towards better protection, so that something like this never happens to you!

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