6 fraud red flags

June 4, 2014       The NonProfit Times      

Every case of fraud in the nonprofit sector raises anguished cries of “We should have seen that.” Well, yes, someone should have, but sometimes the daily responsibilities of helping people take up too much time, and other times people are not aware of a potential danger.

There are many red flags that should catch the attention of a nonprofit manager, and here are just a few of them, some of which are small and subtle and other of which are huge and loud.

  • Bank reconciliations that aren’t being done in a timely manner, said Nidhi Rao, a director in the Greater Washington, D.C. office of BDO Consulting.
  • One person having control over disbursements with no oversight is another red flag, according to Rao.
  • The “fraud triangle” of opportunity, rationalization and pressure, said Mark Oster of Grant Thornton’s Not-for-Profit and Higher Education practice. Opportunity: weak internal controls; pressure: personal financial problems or unrealistic performance compensation demands; rationalization: “I’m not being rewarded in a fair manner.”
  • A culture of fear created by a high-level executive, in which people are afraid to challenge a big chief, Oster said.
  • Old or “stale” accounts receivable balances should set off alarms, says Kelly Frank, a partner in CohnReznick and its Not-for-Profit and Education Industry practice leader.
  • If donors are not getting receipts and acknowledgements, it could mean donations are being misdirected, Frank said. Periodic review of gift-acceptance policy can help detect or prevent this.