Nonprofit Fraud Trends

Fraud is a persistent threat every organization must face. Although most are honest and do not commit illegal activities, all it takes is one bad actor to have a significant and negative impact. The risk is especially high for nonprofit organizations that have limited resources to implement the training and controls necessary for optimal risk management. According to the Association of Certified Fraud Examiners’ (ACFE) Occupational Fraud Report 2022: Report to the Nations, there were 188 cases of nonprofit fraud reported with a median loss of $60,000 during the period examined. It was also reported that religious, charitable, and social service organizations experienced a median loss of $78,000. While the loss amounts may not seem high, news of fraud can harm an organization’s reputation and be detrimental to fundraising.  Staying updated on the latest fraud trends can help an organization to design the most effective fraud controls. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.

• Behavioral Red Flags – There are several behavioral changes which are often a warning sign that fraud may be occurring. According to the study, 39% of perpetrators were living beyond their means, 25% faced financial difficulties, 20% had unusually close association with vendors/customers, 13% were unwilling to share duties, 12% engaged in bullying and intimidation, and 11% were going through a divorce or had other family problems. It is interesting to note that living beyond one’s means has been the most common red flag in every study since 2008.
• Common Anti–Fraud Controls – Implementing a mix of fraud controls makes it more difficult for bad actors to steal from an organization and can reduce the loss sustained by an organization. According to the report, 82% of victim organizations underwent an external audit, 82% had a code of conduct, 70% had a fraud reporting hotline, 61% implemented employee fraud training, 60% had an anti-fraud policy, 56% conducted employee support programs, and 46% engaged in formal fraud risk assessments. When implemented, organizations saw a decrease in median loss of 39%. Honorable mentions include proactive data monitoring, surprise audits, and rewards for whistleblowers.
• Average Length of Fraud – There are many ways to commit fraud and depending on the complexity and sophistication, the length of each scheme varies. According to the report, billing schemes, check tampering, expense reimbursement, payroll, and financial statement fraud lasted 18 months. Skimming schemes last 16 months while cash on hand, corruption, non-cash and register disbursement schemes last only 12 months.
• Median Loss Per Month – Some schemes result in a greater loss per month than others. According to the report, financial statement fraud resulted in a $32,000 per month loss, corruption $12,500, noncash $6,500, billing $5,600, skimming $3,100, and payroll $2,100. Nonprofits need to pay careful attention to the velocity of fraud loss when designing fraud prevention measures to ensure the greatest areas of risk are addressed.
• Fraud Concealment Methods – Bad actors need to carefully conceal their acts to avoid detection and it was found a variety of methods are used. According to the report, the top fraud concealment methods included: 39% created false physical documents, 32% altered physical documents, 28% created false electronic documents, 25% altered electronic documents, and 23% withheld or destroyed physical documents. Surprisingly, 12% of cases did not involve any attempts at fraud concealment.
• Common Fraud Detection – How fraud is detected is important to understand, especially for organizations seeking to allocate limited resources in the most effective way. According to the report, 42% were detected by a tip, 16% internal audit, 12% management review, 6% document examination, 5% accident, 5% account reconciliation, 4% data monitoring, and 3% surveillance.

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The insights uncovered in the report provide important information for nonprofits when evaluating and implementing anti-fraud controls. The last thing any nonprofit needs is to fall victim to fraud that could have been prevented. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.