Just like their for-profit counterparts, nonprofits are not immune to financial fraud. In fact, due to limited resources, decentralized operations, and a high level of trust in staff and volunteers, nonprofits can be particularly vulnerable. According to the Association of Certified Fraud Examiners (ACFE), the average organization loses 5% of revenue to fraud each year, and nonprofits are no exception.

Below are several steps nonprofits can take to help prevent, detect, and respond to financial fraud.  

• Protect your cash 

Contact your organization’s bank and have additional security measures implemented on your account to prevent fraudulent transactions and unauthorized deductions.  These security measures can include:

• ACH and debit control.  This will prevent random deductions from your account without you approval.  
• Check block.  As more and more organization move towards electronic payments, consider having a check block on your account if your organization does not issue paper checks.
• Positive pay.  If you do issue paper checks, consider having your bank implement positive pay on your account.  This will prevent fraudulent checks from being cashed. 

• Establish a Strong Internal Control System

Internal controls are processes and procedures designed to prevent and detect errors or fraud. They may seem burdensome, especially for small nonprofits, but they are essential.

Key internal controls that every nonprofit should implement include:

• Segregation of duties: No single individual should control all aspects of a financial transaction. For example, the person who writes checks should not be the same person who approves them.
• Dual signatures: Require two signatures on checks above a certain threshold.
• Bank reconciliations: Ensure monthly reconciliations are done by someone who is not handling receipts or disbursements.
• Restricted access: Limit access to financial systems and data based on job roles.

• Develop and Enforce Financial Policies

A well-documented financial policy manual is a nonprofit’s first line of defense against fraud. This manual should, at a minimum, include procedures on the following:

• Expense approval processes
• Reimbursement procedures
• Petty cash policies
• Conflict of interest policy
• Whistleblower policy

Enforcing these policies consistently creates a culture of accountability and minimizes opportunities for misuse.

• Train Staff and Volunteers on Fraud Awareness

Often times fraud is committed by people within the organization who are trusted and familiar with an organization’s systems and controls (or lack thereof). Regular fraud awareness training should be held to ensure that all staff and volunteers:

• Recognize red flags, such as unusual transactions or resistance to oversight.
  
• Understand the ethical expectations of their roles.
  
• Know how and where to report suspected fraud (ideally via a confidential channel).
  

• Leverage Technology Wisely

Financial software can streamline operations, but it must be configured properly to prevent fraud. Features like audit trails, access controls, and automated alerts can detect anomalies early.  When selecting financial software, nonprofits should consider software that meets these criteria: 

• Cloud-based accounting platforms with role-based access.
• Expense tracking apps that integrate with your accounting system.
• Data analytics tools to monitor for unusual trends.

• Conduct Regular and Independent Audits

Audits aren’t just for compliance; they’re a critical fraud prevention tool. An external audit by an independent firm provides objective insights into financial practices and can uncover vulnerabilities.

In addition to annual audits, nonprofits should: 1) perform surprise internal reviews or spot-checks, 2) rotate audit committee members to bring fresh perspective, and 3) review management letters carefully and act on recommendations.

 

• Strengthen Governance and Oversight

Strong governance begins with an engaged and informed board. The board (or a separate board committee) should be responsible for the following tasks:

• Oversee financial reporting and budgeting
• Review audit results and financial statements regularly
• Have a dedicated finance or audit committee

Board members should not blindly trust management. They must ask tough questions and demand transparency to protect the organization’s integrity.

• Foster a Culture of Ethics and Transparency

Perhaps the most powerful deterrent to fraud is a culture that values integrity. Nonprofits should foster an environment whereby those at the top lead by example and promote open communication and ethical behavior. When fraud does occur, how an organization responds says a lot about its values. Timely disclosure, corrective action, and accountability can preserve donor trust and prevent recurrence.

With the right mix of internal controls, vigilant oversight, staff training, and a culture of integrity, nonprofits can reduce their risk and ensure that every dollar supports the cause it was intended to serve.  By investing in these safeguards, nonprofits not only protect their bottom line—they protect their reputation, their people, and ultimately, their purpose.