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December 16, 2018

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Fraud in Nonprofit Organizations

by David S Roberts

It is unthinkable that a church member or leader would defraud the church of its finances. And yet, it happens every day. Nonprofit institutions are frequent targets for fraud, presumably because the controls on collecting, spending and recording the finances are so much more casual than those of the business community. Lax controls lead to others taking advantage of the situation and stealing.

Who Would Do This?

Believe it or not, the average fraudster is a faithful church going individual who sincerely intends on paying back the funds he confiscates 'some day'. Unfortunately, that day never comes and soon, he has taken far more than he can ever re-pay. As a Certified Fraud Examiner, I see stories of ministers, elders, deacons and the recent case with two priests who bilked their diocese for hundreds of thousands of dollars.

The point is that anyone presented with the opportunity, the perceived 'need' for extra cash, can succumb to the temptation to steal. And too often, they do. This happens with churches, government funded institutions, hospitals and more.


The simple answer to prevention of fraud at a nonprofit is the same one as the prevention of fraud at a for profit business, internal controls. Internal controls is an accounting term that refers to how careful an organization is with the receiving, depositing and payouts of finances.

Too often, there is one or two people, (and if two, usually it is husband and wife) in a nonprofit organization who are in charge of this task. They usually do this in a locked room counting the cash and checks, filling out the deposit slips and taking the deposits to the bank.

To have the same person handling all three tasks is like taping a bulls-eye on your nonprofit funds and inviting fraud. There should be one person who counts the cash and checks and notates the totals on paper. A second person should verify the totals and fill out the deposit slip, while a third person watches the whole process and places the slip and the cash and checks into the bank bag and locking it.

If there is any issue, there should be a copy of the deposit slip available to verify amounts along with the paper used by the first person to compare to bank statements each month in reconciling the account. The third person keeps the key to the bag and may either deposit it himself or delegate that job to a trusted fourth person.

Prevention on the Other End

In each nonprofit organization there should be a requirement for two signatures on each check for funds going out. Too often, the requirement is there but the second signatory has a stamp that is used to stamp his signature ahead of time for convenience sake. Anyone with signatory authority on a nonprofit bank account should not have connection to the individuals counting, recording or making deposits. This reduces the chance of there being an opportunity to steal.

This is not an all purpose salve to the prevention of fraud, but it has been found time and time again that if a person who has the inclination to defraud someone feels it is likely that they will be caught, they are far less likely to commit the actual fraud. Vigilance is the key to the prevention of fraud, strong internal controls will go a long way toward prevention, but there should be some kind of watchful eye being kept on the finances of any institution whether it is for profit or not.

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About the Author:

David Roberts, CFE, CQBPA, MBA, lives in Kissimmee, Florida with his four girls, three dogs, two snakes and one wife. He has been a member of the Association of Certified Fraud Examiners for five years and has been studying fraud for longer than that. He is the owner of Homesoon Accounting Services which specializes in Quickbooks Consultations and Fraud Prevention and Detection.

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