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Fraud Risk and Unethical Behaviour: 5 Tips for Not-for-Profits

10/01/2017


​​​​​After a rewarding couple of years of service, I am in the process of stepping back from the board of directors of a national not-for-profit organization (NPO). Like many NPOs, the organization is small, it has limited funding and relies heavily on volunteers; both at the operations level and at the board level. Without those volunteers, and the ongoing support of our two part-time staff, the NPO would not be as successful as it is today.

The reliance on volunteers, a small number of staff and limited funding comes with its challenges; while all involved are working in the same direction, ensuring the NPO meets its mission, the organization is small and most people have their own full-time jobs or have other commitments. And here lies the challenge – ensuring that the organization is fiscally responsible, appropriately managed and meeting its objectives. Due to their inherent nature, the opportunity for fraud or other unethical behaviour is high if not appropriately managed in many NPOs.

In the time that I have been a board member, and having worked with a number of NPOs in the last few years, five things jump to mind that an NPO should ensure it has in place to protect itself from fraud and unethical behaviour. I list five tips below, however it is important to remember that although they contribute to ensuring the organization is fiscally responsible and mitigate against fraud risk and unethical behaviour, they do not represent an exhaustive list. They are, however, a good place to start.

  1. Segregation of Duties

    This is a common challenge in any sort of organization; limited numbers of staff or volunteers leads to limited segregation of duties. All organizations should ensure that duties are segregated as much as possible – no organization should have only one person reconciling bank accounts, raising invoices, receiving and banking cheques and cash, recording purchase invoices and making payments.

    Where there are high levels of cash handling, ensure robust controls are in place with respect to cash handling and management. Segregate duties to lessen the risks for fraud and unethical behaviour.

  2. Finance Officer on the Board

    All boards should have at least one member who is an appropriately qualified finance officer. Many boards opt for a qualified accountant. Regardless of who is acting as the finance officer, this person should be well-versed in financial operations, controls, accounting procedures and ensuring that financial reporting to the board and stakeholders, is on a timely basis and accurately represent the transactions entered into by the NPO.

    Have at least one board member who is a qualified finance officer. Use their expertise to ensure timely and accurate financial reporting.

  3. Policies and Procedures

    Policies set out the tone and direction of the organization, for example how management (likely in this case to be the board) expect staff and volunteers to behave. Examples of policies include ethics statements, disciplinary policies and workplace safety policies.

    Procedures represent a series of steps setting out how things are done and who is responsible for doing them, or individual volunteer / staff responsibilities, e.g. how the month end financial statements are prepared and by whom.

    Write a Code of Responsibility for staff and volunteers. Make sure it is readily available for all. Write a Procedures Manual for all functions of your organization and keep it up-to-date.

  4. Employment Contracts and Hiring Policies

    Employment contracts protect both the organization and the employee. Commonly, these lay out roles and responsibilities as well as what happens in the event of termination or resignation. Speak to your legal counsel about employment contracts. An NPO does not want to be involved in costly legal proceedings with respect to an employee when these funds could be used elsewhere.

    With respect to hiring policies, ensure that prior to employment, background checks are undertaken and references are received. This acts as a barrier to entry for unsuitable staff members.

    Protect your organization and your employees. Adopt the use of employment contracts with the help of legal counsel. Do background checks. No one has ever regretted doing a background check.

  5. Other

    I know that the title of this piece is 5 Anti-Fraud Tips for Not-for-Profits, but I couldn’t resist adding a few more and calling tip number five “Other.” So here goes:

    • Ensure board authorization for all non-routine expenses. This way all board members are aware of what is happening outside of the ordinary course of business at all times;
      • Keep board members in the loop. Require their written authorization for all new and non-routine expenses.
    • Never, ever sign blank cheques. There is absolutely no circumstance when this is appropriate. Whatever the reason for believing that a blank cheque needs to be signed, it is wrong. There is an underlying reason why the organization is in that circumstance, e.g. lack of available signers, and it is that reason that needs to be fixed by the board rather than resorting to signing blank cheques;
      • Eliminate the use of blank cheques in the operation of your organization.
    • All CEO and board member expenses should be authorized by the board, before they are incurred. This ensures that the CEO and board members do not enter into unauthorized or inappropriate transactions on behalf of the organization. Where the total amount of expense is unknown at the time of authorization, ensure that the actual expense is authorized by the board prior to reimbursement.
      • Require board authorization for all CEO and board member expenses before they are incurred.

Finally, as I read back through this, although I’ve written this from the point of view of an NPO, in reality, these tips don’t just apply to NPOs; they can be applied to any organization. Have a look back through the above tips and consider which of these policies and best practices does your organization employ? Which would greatly improve the overall safety and security of your organization?

  • Where there are high levels of cash handling, ensure robust controls are in place with respect to cash handling and management. Segregate duties to lessen the risks for fraud and unethical behaviours.
  • Have at least one Board member who is a qualified finance officer. Use their expertise to ensure timely and accurate financial reporting.
  • Write a Code of Responsibility for staff and volunteers. Make sure it is readily available for all. Write a Procedures Manual for all functions of your organization and keep it up-to-date.
  • Protect your organization and your employees. Adopt the use of employment contracts with the help of legal counsel. Do background checks. No one has ever regretted doing a background check.
  • Keep Board members in the loop. Require their written authorization for all new and non-routine expenses.
  • Eliminate the use of blank cheques in the operation of your organization.
  • Require Board authorization for all CEO and Board member expenses before they are incurred.

For more information on how MNP can help, contact Mark Jordan, Senior Manager, Investigative & Forensic Services, at 778.374.2107 mark.jordan@mnp.ca. or Jacklyn Davies, CPA, CA, DIFA BC leader, Investigative & Forensic Services, at 604.685.8408 or jacklyn.davies@mnp.ca​.