December 28, 2004 -- We have all heard the latest headlines about fraud in the workplace.  The highly publicized cases have focused mainly on fraud in publicly traded companies, such as Enron.  However, as we know, fraud can occur within any business, including nonprofit organizations.  To combat fraud, nonprofit organizations and their auditors need to understand the warning signs of fraudulent activity. 

In most known cases of fraud, the perpetrator, or fraudster as they are sometimes termed, is a well-liked, highly-competent employee who is familiar with internal controls and can identify and capitalize on control deficiencies. The individual who commits the fraud is often the “last person” anyone would suspect, therefore, professional skepticism must be maintained when detecting fraud.

In terms of specific warning signs of fraud within a nonprofit organization, the following are the most common:

·         Budget cutbacks – As a result of reduced funding, a nonprofit organization may reduce its workforce.  Reduction in staffing can lead to a lack of segregation of duties and decline in overall financial controls.   Also, because remaining employees must pick up the workload, budget cutbacks can lead to lower morale and increase the likelihood of fraud among unhappy employees.

·         High turnover – Employees who are involved in fraud may chose to leave the organization due to a guilty conscience or fear of being caught.  Employees witnessing fraud may also leave since most honest people do not want to work in a dishonest environment.

·         Lifestyle or behavior changes – Employees committing fraud may appear to be living beyond their means or complain of financial problems.  If an employee’s behavior changes suddenly, that individual may be under stress to keep their fraudulent activities covered up. 

·         Inattention to details – When bank reconciliations and other financial reviews are not performed on a timely basis, there is a greater opportunity for fraudulent activity to occur within an organization. 

Awareness of the warning signs of fraud can help nonprofit organizations and their auditors to combat fraud.  For more information on other warning signs and fraud prevention resources, visit the AICPA’s website at www.aicpa.org/antifraud, or contact Debbie Quarry or Rachel Winslow at 215-564-1900 .

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