Average losses resulting from different types of fraud range from two-hundred thousand dollars to one million dollars per case. Protect your organization from potential losses by learning about the most common fraud schemes that affect nonprofit organizations.
Financial fraud can be divided into three main categories that commonly overlap: asset misappropriation, corruption, and financial reporting fraud.
Asset misappropriation is the theft of assets. Below are the most common asset misappropriation schemes that affect nonprofits:
- Skimming: The act of stealing cash before it is inputted into the accounting system. This “off-book technique can involve unrecorded contributions, understated contributions, theft of incoming checks, and swapping checks for cash. This fraud scheme is pertinent for organizations with a large-volunteer base that may collect funds on the organization’s behalf.
- Lapping: A method of concealing cash theft by an employee by diverting cash from one customer or donor, in the case of nonprofit organizations, to cover the receipt from another donor. Often called “robbing Peter to pay Paul,” this process repeats numerous times, covering each account with a subsequent payment. Lapping methods are often found as cover-ups of skimming schemes.
- Expense Reimbursement Fraud: Most generally involves employees submitting inflated expenses for reimbursement. This is commonly seen in relation to travel and entertainment expenses.
- Fictitious Disbursements: Sham disbursement schemes include, but are not limited to the following: multiple payments to the same payee, ghost employees on payroll, inflated invoices, shell companies and/or fictitious persons, and bogus claims.
- Checking Tampering: The act of creating phony checks to make fraudulent disbursements from an organization. Common check tampering schemes include altered payee, forged endorser, and forged maker fraud.
- Paper Hanging: A type of checking tampering fraud in which the perpetrator deliberately uses a closed account to write fraudulent checks.
- Data Breaches: A method of stealing intangible assets, such as personnel information, from an organization through a multitude of approaches, such as computer viruses, computer worms, trojan horses, backdoors, and malware.
Corruption is the misuse of a position for personal gain. The most common examples of corruption are conflicts of interests involving contributions and distributions, bribery, illegal gratuities, and economic extortion.
Financial reporting fraud results in the highest median losses as it usually involves executive-level members of an organization who have access to the organization’s funds and resources. Financial statement fraud can be defined by “the three M’s”:
- Manipulation and falsification of accounting records
- Misrepresentation or intentional omission in the financial statements
- Misapplication of the accounting principles in an intentional manner
Organizations fall victim to fraud most commonly due to the lack of a strong internal control system in place to prevent or detect such instances from occurring. For assistance in fraud prevention or detection, please contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team.