How to protect against fraud

People are often surprised and saddened to find out how frequently nonprofits are subject to fraud. After all, they are held to a higher standard and are expected to be squeaky clean.

But whether fraud lurks quietly behind the scenes, or hides in plain sight, its exposure provides us all a learning opportunity.

Healing Arts Initiative (HAI), a nonprofit based in New York City, shuttered its doors after a three-year battle with embezzlement accusations. According to The New York Times, the case had all the usual drama and then some: Hints of accounting irregularities because one employee had too much authority and too little oversight. A new executive director brought in to clean up the mess. Chemicals thrown in the face of an executive. A lawsuit against the board for letting the situation happen on their watch. The logic behind the suit was simple: If the board knew, they were culpable. If they didn’t know, they should have.

Two other New York-based nonprofits, Queens-based Tender Care Human Services and Long Island-based Human First, Inc., were caught up in embezzlement cases. Their former executive directors were accused of using the organization’s funds to pay for home upgrades, nannies, spa treatments, and cosmetic surgery.

At the Wounded Warrior Project, whose New York office handles all of the organization’s program planning, two top executives were fired shortly after a scandal surfaced alleging that a large portion of donations were being spent on lavish salaries and events rather than on the veterans the organization is dedicated to honoring. 

How do you make sure this doesn’t happen at your organization? Here are some actions you can start taking immediately.

Increase or tighten procedures and controls. No controls in place? Get on this right away. Even if your budget is small, you need to make sure that no one person holds or is given too much authority. That can be a recipe for abuse. Instead, require two signatures on checks, split payable and receivable duties between two people, require supporting documentation such as receipts and invoices for reimbursements or expenses, and generate monthly reports for review. Make sure the same person does not generate the report and sign off on it. If you already have controls in place, great. Test them. Tighten them where needed.

Speak up. If you sense something is off, it’s your responsibility to let those in authority know. If you are a person in authority, take action. It’s not enough to simply mention it casually over coffee. Employees are often afraid to speak up because they fear retaliation. It’s important to create an environment that fosters openness. The New York Attorney General has set up where you can find a treasure trove of resources for building your nonprofit’s success or file a complaint.

Be suspicious. If you do start poking around and get stonewalled, you’re probably on the right track. The same is true if the person who has control over the funds suddenly becomes defensive and takes time off. The board should hire an independent forensic accountant to do an audit.

Get out. If you voice your concerns and are met with varying forms of “don’t worry about it,” it may be time to leave. Put your concerns in writing to protect yourself. If you don’t, you might be facing a lawsuit, or be put on the chopping block for letting misconduct happen on your watch –  or both.

Eden Gillott Bowe is the author of A Board Member’s Guide to Crisis PR: How to Protect You and Your Organization’s Reputation and leads a group of nonprofit executives. She’s also an alum of CUNY Baruch and NYU.