Fraud: How to reduce the risk for your NFP

Unfortunately, fraud occurs in not for profit organisations far too often. Many studies have demonstrated that fraud is real and devastating to those affected. Fraud can occur in any NFP organisation with the perpetrator being undetected for quite some time. Often the fraud is only detected following either a financial abnormality being identified, OR the perpetrator being careless through their own complacency.

Fraud can take many guises with the perpetrator often being the most innocuous person associated with the organisation. Yes, these are generalisations – but the point is that anyone could be committing a fraud within your organisation.

What can fraud look like?

Well, it could be represented by any of these examples:

  • Poor cash collection processes and cash control points leading to an opportunity to take cash.
  • Expenditure approval and management of the payment process is undertaken by the same person.
  • The creation of false creditors that are linked, ultimately, to the perpetrator.
  • Transferring funds deceptively into private bank accounts.
  • Using the identity of other people to gain financial benefits for oneself.
  • Poor recording and reporting processes within the account and ledger management functions of the organisation.
  • A staff member often reporting that the accounting system is in need of repair because the ledgers are out of balance or there are journal adjustments needed to correct minor issues.
  • Withholding, manipulating and misreporting financial information to deceive or hide fraudulent activity.
  • A reluctance to complete reconciliations on a regular basis.

Minimising fraud is a function of good governance and effective risk management. Both should be directed by the organisation’s Constitution, which in turn informs the organisation’s board of their duty of care to ensure there are effective controls, risk management and risk mitigation processes in place to deter the fraudster from this behaviour. Whilst the perpetrator will eventually be dealt with by relevant authorities, the governing body can also be exposed to legal challenges as a result of poor practices and risk management. If the board has been found to not be diligent in ensuring that controls and risk practices are a focus of attention, then any aggrieved person may hold the board accountable and seek legal recourse.

How to minimise the risk of fraud

The risk exposure of the board can be alleviated by implementing the following four steps:

  1. Identify and assess areas of risk

A risk management system that includes identifying all types of risk in the organisation and then developing plans to mitigate the risk, is a very sound starting point. As fraud can be significant and can come in many forms, the board should ensure that it is aware of how fraud can occur in their organisation.

  1. Ensure that there are specific and relevant policies and procedures in place

Policies and procedures should be in place to prevent and/or detect the range of risks that could occur. In regards to fraud, there should be clear financial management controls and separation between who manages payment, who authorised payments, and who records the transactions in the organisation’s financial recording and reporting systems.

  1. Advise staff and other relevant stakeholders of the policies and procedures

An effective communication program should be put into place to ensure staff and suppliers understand the organisation’s fraud and risk management policies and procedures.

  1. Apply a continuous review

The board should encourage continuous review and regular monitoring of your organisation’s policies and processes.  Relevant external third party audits will ensure that there is veracity and strength in the controls put in place to identify and/or prevent fraud being perpetrated within your organisation.

Do you have any concerns about unusual activities within your organisation, or do you seek more effective risk management outcomes? Get in touch with our team via:

Email: consulting@cbb.com.au
Phone: 1300 284 364

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