According to the 2020 global fraud study by the Association of Certified Fraud Examiners, nonprofit organizations suffer a median loss of $75,000 due to fraud, with an average loss of $639,000.
Even worse, while fraud can affect any business, it has an outsized impact on a nonprofit organization because of its potential for damaging the reputation of the organization among donors. Fraud affects not only the current bottom line of a nonprofit but can reduce its future donation stream if donors and the media view the organization as careless stewards of scarce financial resources. This ‘blame the victim’ mindset can affect even those organizations that are hyper-diligent in mitigating the risk of fraud. As a consequence, the shrewd fraudster counts on a nonprofit stepping back from a criminal prosecution for fear the notoriety will damage its reputation and jeopardize future donations.
Fraudsters consider nonprofits as uniquely vulnerable targets. Despite the fact that operating a nonprofit can be every bit as challenging as running a commercial enterprise, criminals assume—with some justification—that nonprofits are run by those whose passion for the mission exceeds their financial acumen.
Fraudsters also assume that nonprofit executives are more trusting of their employees and volunteers, especially those of small nonprofits that suffer from higher staff and volunteer turnover and where meager staffing degrades separation of duties and other internal controls. As any embezzler will tell you, overextended trust presents attractive opportunities. Overextended trust can exist on both sides of a nonprofit’s operations: trust toward employees and volunteers, and trust toward applicants and recipients of assistance by the nonprofit.
As with commercial enterprises, most fraudsters fit a common profile: they’ve been with the organization between one and five years, are college educated, and are employed in the accounting or finance departments. Women are more likely to embezzle than men, but men steal more when they do embezzle. In short, perpetrators are usually highly trusted, respected employees. They often steal when opportunity, motivation, and rationalization converge.
Opportunity, for example, might consist of unsupervised access to information, passwords, register tills, or blank checks. This explains why fraudsters often occupy positions in the accounting or bookkeeping departments.
Motivation is best understood as an incentive or pressure compelling the employee to steal. Examples might be a gambling addiction, compulsive spending, onerous child support obligations, or large medical bills or other insurmountable family expenses.
Rationalization is the justification a fraudster will make when he attempts to harmonize his illegal act with his personal code of ethics. Red flags can include comments or actions by the employee that project an ends-justify-the-means attitude, or where the employee has a heightened or misplaced sense of entitlement.
We can help
If you suspect your nonprofit organization may have fallen victim to an embezzlement or theft, we can help. We can conduct a confidential fraud investigation that will determine the extent of the fraud, document and preserve evidence of wrongdoing, and issue a report to trusted key personnel for either internal action or referral to law enforcement.