A 15-year employee of the Red Cross was sentenced to six months in jail and five years of probation earlier this year for embezzlement. Kathleen Caneda, a 62-year-old accounts payables clerk at the Red Cross in Hawaii, stole more than $52,000 from the Red Cross over a seven year period, by writing checks to herself and then deleting the transactions from the accounting records.

It may seem implausible that a simple accounts payables fraud could last for seven years without detection, but that’s exactly what happened. How it happened is a story to which all non-profits should pay attention.

“Non-profits are susceptible to the attitude that because of the purpose of the organization (frequently some form of public service or common good) that fraudsters will ‘respect’ the organization and not victimize the non-profit organization,” says Marc Courey, Director - Risk Advisory and Forensic Services at Wipfli LLP. “The reality is that fraudsters will, and do, take advantage of every type of organization and individual.”

Limited Staff Increases Risk

Another reason non-profits may be more susceptible to fraud than other organizations is that, by nature, they operate on limited funds. Staffing is generally minimal to avoid waste and also to maintain the appearance that goes along with the term ‘non-profit’.

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Most non-profits are careful to avoid giving the public the impression that a significant amount of donations go toward administration. Public perception is important to maintain funding. And during tough times, cuts are common, which can exacerbate the problem.

“Budget cuts have had a dramatic impact on non-profits,” says Frank S. Venezia, Director of Marvin and Company, P.C. “Many non-profits who have had their funds cut are forced to fire and lay off employees who may be in a position that helps mitigate the risk of a potential fraud. This turnover leaves many non-profits with one employee in charge of many different aspects of their organization’s finances and without the proper checks and balances in place that once were there when the department was completely staffed, thereby increasing the risk of fraud.”

And while fraud may not necessarily happen more often in non-profits, it seems to take us by surprise when it does.

“Much of the surprise that comes from any fraud is that people wonder why others would steal,” says Calvin Harris Jr, CPA, President - Change Management at Harvin Consulting LLC. “This is especially noticeable at non-profits, where their missions and purposes are to help others in the community. The thought that someone would steal from an organization that is trying to help others is appalling.”

Anti-Fraud Environment

While it’s impossible to eliminate the risk of fraud entirely, there are several measures a non-profit can take to lower the risk and create an environment where fraud won’t go undetected for years, as it did in the case above.

“The first thing is the ‘tone at the top’,” says Harris. “Management cannot condone fraud. Finance departments must ensure they have strong internal controls, including monthly reconciliations and review of transactions. Larger companies should ensure the Internal Audit department performs periodic reviews within all departments. And, if a fraud occurs, management must act quickly to maintain the trust of the public, and respect of the (not guilty) employees,” he says.

Trust is Not a Control

“Recognizing the risk exists and operating appropriately is a necessary first step in not being victimized,” says Courey. “Close behind this in importance is that non-profits frequently over-rely on trust as an internal control, which it's not. Again, because of how many non-profits frequently operate, including reliance on volunteers and providing a service to constituency, I frequently see that over reliance is placed on trusting staff to do the right thing coupled with a lack of formal policies and procedures, or a belief that verifying that staff are performing appropriately is somehow not supportive of the nonprofit culture.

Non-profits with limited staff or budget limitations can still implement anti-fraud controls. They just need to be a bit more creative to compensate for fewer resources.

“A perfect example deals with the controls over cash,” says Venezia. “If one single person now has control over check writing, bank reconciliations and posting to the general ledger, you need to add someone else into the process to confirm that the activity is that of the organization’s and not the individual. A simple way to do this would be to have someone on the board or someone not in the accounting function, but who understands the organization well, review the unopened bank statement with the returned checks to make sure that all the payees appear reasonable to the organization’s mission,” he says.

“When it comes to fraud, the most important thing a non-profit organization can do is mitigate opportunity,” says Venezia. “By developing compensating controls and reviewing terminations the board and the organization will have a much better idea of their strengths and weaknesses. Knowledge is a major part of the fraud battle.”