Fraud Complacency Hurting Not-for-Profit Sector

21 February 2012

With reported fraud at 12% in the not-for-profit sector and significant increases in amounts stolen online, there is a need for stronger control strategies, says chartered accounting firm, BDO.

Responding to the 2012 BDO Not-For-Profit (NFP) Fraud Survey released today, BDO NFP Sector Leader Bernard Lamusse says that while overall reported fraud has decreased since the survey’s inception in 2006, down from 19% to 12%, it is likely some fraud is still going undetected.

“We are definitely seeing an ‘it won’t happen to us’ attitude within the NFP sector,” says Mr Lamusse.

The biennial survey involved 645 respondents from Australian and New Zealand NFP sectors. A total of 58% were from the New Zealand NFP sector, valued at 14.2 billion with 25785 registered charities as of Feb 2011 in the Charities Commission snapshot.

“While the majority of respondents (86%) agree that fraud is a problem for the sector as a whole, only 8% believe it’s a problem for their individual organisation. This could also explain why 72% of respondents still don’t see a great importance in fraud prevention.”

A major concern is the significant rise in amounts stolen via electronic funds transfer and online banking – on average costing an organisation $370,000, which accounts for nearly half of the total value of fraud committed.

“Even though what we call cash theft, or misappropriation of cash by deception, is still the most common type of fraud [40%], it is online fraud that is now proving to be the most devastating,“says Mr Lamusse.

“Given the prevalence of online banking, perpetrators can transfer large amounts of funds online very quickly and easily.”

He says fraud is an issue that affects every organisation, whether corporate, government or not-for-profit. But for an NFP organisation in particular, the potential impact is severe.

“We are seeing nearly half [>46%] the respondents indicating that even a ‘small fraud’ of less than $10,000 would have a major impact."

“Generally, the funds that are removed by a perpetrator come directly from an organisation’s bottom line. Most of these stolen funds are never recovered. So it is crucial that appropriate internal controls are in place to minimise the risk of fraud.”

The survey also found the average duration of each fraud was 14.5 months, with the majority of fraud committed by paid employees. Methods of discovering fraud included tips from employees, volunteers and other parties – accounting for approximately 34% of the total number of frauds discovered.

“Fraud poses a significant risk to not-for-profit organisations, but this risk can be mitigated by implementing policies and procedures to prevent, detect and respond to fraud,” says Mr Lamusse.

“With the average fraud taking over a year to complete, it is absolutely crucial to implement effective whistleblower services and policies to help detect fraud internally.”

Trevor Garrett, head of the New Zealand Charities Commission, believes the survey is very important and adds valuable insight to a resource-strained sector.

“Non-profit organisations are doing ‘good’ in our communities; they shouldn’t have to worry about fraud. For me there is nothing worse than seeing an organisation crippled as a result of fraud because ultimately it is the community that is most affected,” says Mr Garrett.

“The significant amount of cash fraud reflects the nature of many non-profits where there is a high level of trust instilled in staff. In addition to preventative measures being put in place, I would encourage fraud victims to report the offending so other organisations become aware of offenders and their methods to reduce similar actions further down the line.”

Key findings from this year’s survey include:

• 12% of respondent organisations suffered fraud
• 25% of respondents who experienced fraud believe it is still undetected
• 40% of all fraud reported within the sector was cash theft
• Only 9% of frauds were committed by volunteers
• The average online payment fraud was $370,000
• The average duration of each fraud was 14.5 months
• A typical fraudster was a female aged in her forties, and was a paid employee in a non-accounting role
• Tip offs (34%) and internal controls (33%) were the most effective ways of discovering fraud.

The BDO Not-For-Profit fraud survey provides a benchmark for not-for-profit organisations revealing the perception and level of fraud in the sector, examining specific incidences of fraud and what the sector is doing to prevent fraud occurring.

To download the BDO Not-For-Profit Fraud Survey 2012 complete the form below:

Even if you have not experienced a fraud in your organisation, please take the time to read the survey and understand how the information it presents can help protect your organisation and its mission. It must be remembered that no organisation is immune to fraud and its consequences.

Past NFP Fraud Surveys