Fraud happens in the workplace. A recent study indicated that occupational fraud went on for “18 months before being detected.” Churches and nonprofits are not insulated from occupational fraud. In fact, they may be more susceptible.
Criminologist Donald R. Cressey identified The Fraud Triangle in the 1950s. His research indicated the following three key reasons why people commit fraud.
- Pressure (motive) – A gambling problem or unforeseen expenses can be just the motivator to push an otherwise good employee or volunteer to commit fraud. There are also always predators out there who look for opportunities and feel entitled to take what is not theirs.
- Opportunity – This is an internal control weakness, no one will miss the funds. Usually the amounts start small and then the theft grows larger as missing funds go unnoticed.
- Rationalization – People have the capacity to talk themselves into anything. May employees who steal, rationalize the theft:
- I’m just borrowing the money
- I deserve more, they don’t pay me enough
- It would cost them three times as much to have someone else do my job
- It’s for a good cause
- They waste this much money on …
Sticking with the triangle angle, there are also three main forms of stealing cash from an organization.
- Larceny – Stealing money that is already accounted for. Larceny can be detected with bank reconciliations, timely accounting postings, segregation of duties, and analyzing your financial records on a consistent and frequent basis.
- Skimming – Stealing money that has not been recorded yet (the company doesn’t even know it’s missing because it never knew the was there to begin with). Skimming it more difficult to detect because there is no audit record. For example, cash may be donated and the donor doesn’t request a receipt or the receipts are not numbered so the volunteer or employee discards the duplicate receipt copies. Good internal controls prevent employees and volunteers from handling cash alone. Analyzing your financial statements can also detect skimming. For more on this, read “Skimming: The Achilles’ Heel of the Audit” in The CPA Journal Online.
- Fraudulent disbursements – Forged checks, fake invoices, overstated expense reports, overstated refunds, unauthorized use of credit cards, etc.
Prevention works! No church accounting software or nonprofit accounting software programs can protect your organization from fraud on their own. Good internal controls, proper oversight, and good management work to preventing fraud. Check out our series of blogs on internal controls (we are updating it weekly).
What do you do if you suspect an employee or volunteer is stealing? Business Management Daily has these suggestions.
Good luck and remember this blog is not meant to be a substitute for professional services, just a helpful resource. Always consult a CPA or trusted professional if you seek tax or accounting advice.