Five Fraud Vulnerabilities for Nonprofits and Associations — and How to Fight Them
While fraud affects businesses and consumers alike, and is pervasive across industries, there are a few ways that nonprofit organizations and associations may be at a higher risk of exposure to certain types of fraud.
Nonprofits and associations should review their fraud prevention plans on an annual basis. Apart from organizational leaders, any employee or volunteer who is involved in administrative tasks or has access to sensitive information plays an important role and can help spot opportunities to prevent fraudulent attacks from overshadowing your worthy cause.
Here are five fraud vulnerabilities that nonprofits and associations particularly need to look out for:
1. Board Member/Treasurer Turnover
When your board of directors and leadership team have access to organization funds, reviewing the signers on your accounts on a regular basis and ensuring the group with this permission is always up to date is crucial to the safety of your nonprofit’s or association’s finances. Work this review into your offboarding process.
2. Fundraising Scams
Fraudsters are increasingly creative and well-versed when it comes to making phony fundraising requests that are difficult for donors to spot. When possible, educate your donors or members on how legitimate requests for funds are made and provide examples of how you will and will not ask for payments or donations. Your newsletter or social media channels can be great places to regularly and proactively share this type of information and also a place to reactively alert your audience of any specific scams they need to be aware of.
3. Relying on Volunteers
Inherent to your organizational model, many nonprofits and associations depend on volunteers to reach your goals and stay on budget. Depending on your area of focus, you may already run background checks on volunteers as part of the application process, but unfortunately this does not protect your organization from the continued risk of internal (insider) fraud or vendor fraud. Internal fraud occurs when an employee, or a volunteer with a high level of access, uses illegal or deceptive behavior to gain money or other benefits. Similarly, vendor fraud entails the creation of false vendors or invoices to direct payments to an outside party.
When bringing new volunteers or vendors on board, consider asking for a professional recommendation or referral from another organization that the individual has worked with in the past. Appropriate internal controls and review processes, discussed further below, also help mitigate risk of misappropriation of funds or financial data.
4. Lack of Treasury Management Tools
Tools such as remote deposit capture and corporate credit cards, in addition to specific fraud prevention solutions like positive pay and ACH positive pay, allow your organization to partner with your bank to prevent and detect potential fraud in time to protect or recover funds. These fraud prevention technologies may seem like an investment outside of your organization’s reach, but many banks offer product bundles or suites that fit nonprofits’ needs and make these tools affordable.
Another item in your toolbox is your fraud and cyber insurance. Work with your insurance company or broker to ensure your coverage is up to date and that fraud — including cyber incidents — are included.
5. Insufficient Internal Controls and Management Review
According to the Association of Certified Fraud Examiners (ACFE), the most common nonprofit fraud scheme is corruption. Such corruption stems from a lack of internal controls and management review.
The 2024 ACFE Report to the Nations reported that nonprofit organizations have the lowest implementation rate of fraud awareness training compared to public, government and private organizations. The nonprofits that provided fraud awareness training uncovered frauds in an average of 9 months, compared to 24 months for those that did not provide training. This is a significant amount of time to remain vulnerable and continue to take on financial loss.
Make sure that your training outlines a clear checks and balances system within your organization that applies to check writing and payment origination via wires and ACH. The individual(s) responsible for cutting checks and making payments should not be the same individual that balances the account.
In addition to providing ongoing training for your staff and any volunteers who have access to financial information, instill review processes like dual authorization, requiring two individuals to approve a change in vendor account information or authorize a transaction. A Treasury Management professional at your bank can partner with you to make additional recommendations related to these processes.
With a trusted banking partner, such as a business banker or treasury management professional, on your side, you can take measures to protect your nonprofit or association from fraud risks and help ensure the safety of your organization’s funds, data and mission.
