The Most Common Ways Nonprofits Experience Fraud

Fraud is uncomfortable to talk about especially in the nonprofit world. Missions are noble, staff are passionate, and trust runs deep. Unfortunately, that same culture of trust is often what makes nonprofits vulnerable. In the audit world, we say: "Trust, but verify."

The reality is that nonprofits of all sizes are susceptible to fraud; not because they are careless or unethical, but because limited resources, lean staffing, and informal processes can create the perfect storm.

Below are some of the most common ways fraud occurs in nonprofit organizations and practical steps to reduce the risk.

1. Check Tampering and Expense Reimbursement Abuse

This is one of the most frequent and least detected forms of fraud.

What it looks like:

• Checks written to fake vendors or altered payees
• Employees being reimbursed for personal expenses
• Unauthorized kickbacks or rewards from vendors

How to reduce risk:

• Require detailed supporting receipts for all reimbursements
• Separate check preparation from check signing responsibilities
• Regularly review disbursement and vendor activity reports
• Understand who is the recipient of vendor reward programs

2. Payroll Fraud

Payroll fraud often goes unnoticed because it is recurring, and payroll activity is rarely reviewed in detail.

What it looks like:

• Fictitious or "ghost" employees
• Inflated hours or unauthorized overtime
• Excessive or unapproved PTO taken

How to reduce risk:

• Perform regular reviews of payroll journals
• Reconcile payroll to approved pay rates and employee rosters
• Periodically review PTO balances and usage

3. Credit Card and Purchasing Card Abuse

Organizational credit cards are convenient, but without controls, they pose significant risk.

What it looks like:

• Personal purchases charged to the organization
• Missing, vague, or late receipts
• Purchases made outside approved spending limits

How to reduce risk:

• Adopt a written credit card or purchasing card policy
• Insist on supporting documentation for all purchases
• Require monthly statement reviews by someone independent
• Implement card limits and restrict allowable purchase types

4. Vendor and Procurement Fraud

When people think of fraud, they often picture a dishonest employee. In reality, many nonprofit fraud cases originate outside the organization or involve outsiders working with insiders who have access or influence.

What it looks like:

• Fake or shell vendors
• Vendor overbilling or duplicate invoices
• Conflicts of interest or related-party transactions
• Kickback schemes
• Overpayment of executives through related entities

How to reduce risk:

• Maintain an approved vendor list
• Require annual conflict-of-interest disclosures
• Periodically review vendor payments and related-party activity
• Review all expenditure activity

5. Abuse of the Organization's Credit

This type of fraud is less common but can be costly and damaging.

What it looks like:

• Debt taken out in the organization's name without authorization
• Rolling personal debt into organizational vehicle purchases
• Unauthorized financing arrangements

How to reduce risk:

• Have someone independent of accounting open and review all mail
• Monitor all large or unusual expenditures and financing activity
• Be alert to warning signs, such as employees living beyond their means

Final Thought

While it may be an auditor's "dream" to uncover fraud, the truth is that fraud should be detected and prevented long before an audit begins. An organization's policies, procedures, and internal controls are the first line of defense.

Strong controls don't signal a lack of trust. They protect your mission, your donors, your staff, and the communities you serve.

About SFC LLP

SFC is a full-service CPA firm that has been serving the DFW area for more than 40 years through offices in Arlington and Fort Worth. The firm works with privately and publicly held businesses in construction, manufacturing, insurance, distribution and technology industries, as well as nonprofit organizations and employee benefit plans. SFC is an independent member of the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting and service firms with similar client service goals.