Not for Profit, Not for Fraud

We trust our staff.

We are a values based organisation.

We don’t have any fraud here.

Let’s clear this up once and for all. It is likely that you do have some form of fraud or corruption happening in your organisation; you just don’t know about it yet. More often than not some of your staff will be either involved, or at the very least, aware of its existence. Any questions?

J. Edgar Hoover famously stated: “At any given moment there is a certain percentage of the population that is up to no good”. Given that he himself demonstrated highly questionable ethics, the poignancy of his quote should not be underestimated.

The fifth BDO Not-For-Profit Fraud Survey, released in early 2014, found that 10% of responding organisations had suffered fraud in the preceding two years, with the average amount lost to fraud being just over $22,000. Specifically concerning was of those respondents who had experienced fraud, 70% had previously suffered fraud. Given that this survey involves self-disclosure from its participants, one would expect those reported occurrences and amounts to actually be higher.

It is important to note that these survey findings were not sourced from profitable industries such as banking, mining or construction. All responses came from the not-for-profit sector representing such areas as health, religious groups and social services. And that, quite frankly, should make us collectively mad.

I get disappointed every time I read about yet another for-profit company losing money to fraudulent acts. However, I am beyond livid when I hear about funds being stolen from not-for-profit groups that support the most marginalised and disadvantaged of our society.

Well, what about your organisation? Surely nobody there would jeopardise the positive outcomes you are trying to achieve for your stakeholders and communities?

Sadly, those who perpetrate fraud or dishonest acts consciously disregard your mission or objectives; it is only ever about their needs and wants. As you conscientiously try to balance the precarious interplay of mission and margin, these selfish employees actively undermine your efforts whilst gratifying their own immediate needs.

So, why do fraud, corruption and dishonesty continue to happen? Donald Cressey is credited with introducing the “Fraud Triangle” concept, in which there are three elements that must be present for fraud to occur. These critical elements include motivation, rationalisation and opportunity.

Motivation – Their needs are always more important than yours

The fraudster has to have a reason for which to do the fraud. It could be that they have family pressures or personal debts, or perhaps compulsive habits to satisfy. Often times, it is just plain greed.

Rationalisation –Their actions are always justified; just ask them

The fraudster has to trick their brain into thinking that what they are doing is somehow justified. They know what they are doing is wrong, so they rationalise their criminal activities by telling themselves “It’s only a loan”, “I’m underpaid”, or (my personal favourite) “Everybody does it”.

Opportunity – We make it too easy for them

The opportunity has to be present for the fraudster to commit the fraudulent or dishonest act. They systematically exploit or bypass ineffective internal controls and take advantage of poor monitoring and management’s failure to investigate allegations of fraud and other serious misconduct.

Therefore, since we have little control or influence over the elements of motivation and rationalisation, we must instead focus our attention and resources on eliminating the opportunities to commit fraud or corruption. So, what can you and your Board do about it?

Start talking about fraud and corruption

Put the topic of fraud and corruption on the Board agenda and see what people have to say about it within your organisation. The more Board members talk about this insidious behaviour, the quicker you can implement suitable risk management strategies to prevent, or minimise, fraud related events.

Endorse a suitable Fraud and Corruption Framework

Introduce Board endorsed fraud related policies and procedures that include:

• An externally hosted fraud reporting hotline.
• Regular fraud awareness training sessions to staff.
• Segregation of key financial duties.
• Development of a financial delegation matrix.
• Informing suppliers and vendors of your organisation’s fraud and corruption framework, and how they can report any identified concerns.
• A conflict of interest policy.
• A gift declaration policy.
• Documentation of fraud risks within your organisational risk register, and risk management consequence table.
• Conducting regular fraud-related audits of:
  • payroll processes and reports.
  • credit card statements.
  • mobile phone usage.
  • petty cash.
  • leave usage.
  • travel and accommodation expenses.
• Investigation processes include:
  • internal and external resources are available to conduct forensic investigation whenever a fraud related event is reported or identified.
  • clearly documented references to HR principles (e.g. natural justice /due process).

Zero tolerance – no exceptions

Have a clearly visible Board position that ensures any substantiated claims of fraud or corruption will be formally addressed, including industrial or criminal action. Whilst each case of identified fraud will be different, the management response should be consistent each time. The moment you make an allowance due to the provision of grace or mercy, you have effectively said: “we tolerate fraud here”.

Whilst fraud is not the greatest risk facing an organisation its effects cannot be underestimated; extending well beyond financial loss e.g. staff morale and reputation. Therefore, you should be very clear with your staff and stakeholders that whilst you are not-for-profit, you are definitely not-for-fraud.

And remember, if you haven’t found any evidence of fraud in your organisation then you haven’t looked hard enough.