Mitigating and Preventing Fraud and Corruption

Fraud and Corruption in Nonprofit Organizations
Recently, there has been a lot of media attention focused on cases of fraud and corruption in all the sectors of the economy. The nonprofit sector has been growing steadily and this offers a tantalizing target considering that the sector accounts for over $800 billion in revenues. The nonprofit sector employs almost 10 percent of all workers, and there are an estimated 70 million adults who provide volunteer services annually (Greenlee, Fischer, Gordon, & Keating, 2007). Therefore, there are many people who have the potential to access the nonprofit revenues and assets. The breadth of the problem might be unknown, but based on recent media reports it is estimated that the fraud might be extensive. For example, more than two thousand internet sites that were soliciting relief for victims of Hurricane Katrina were fraudulent, this is according to the FBI. There have been other major headlines that have indicated the level of fraud and this is not only external but internal as well. There is little empirical research that has been carried out to determine the impact of fraud and corruption within the nonprofit organizations, and whether there are less corruption and fraud within the nonprofit sector. It is vital to understand the extent of fraud and corruption in the nonprofit sectors because with every lost dollar there is reduced the ability to provide the required public service. Secondly, the sector has been faced with increased public scrutiny mainly due to the widespread availability of financial information. Lastly, with increased publicized fraud cases, donors might be unwilling to make contributions.
Fraud
The Association of Certified Fraud Examiners (ACFE) has defined occupational fraud as "The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets." It is noted that there are two main types of fraud that are perpetrated against the nonprofit organizations. These are internal and external fraud. As the names would suggest internal fraud is committed by individuals who are inside the organization like officers, employees, and directors. External fraud is committed by individuals who are outside the organization like vendors, grant applicants, sub-recipients, and program participants. Internal fraud is further broken down into two categories namely asset misappropriations and fraudulent financial reporting. The most common form of internal fraud is asset misappropriations and it might involve purchasing and cash disbursement schemes, revenue and cash receipt schemes, non-cash asset misappropriations, and payroll and employee expense reporting schemes (Holtfreter, 2005).
Purchasing and cash disbursement schemes involve the use of organization issued cards for their own personal use, and in some instances, there are individuals who have used the credit card numbers of their donors for their own personal gain. Another form of this scheme is where individuals’ set up a fictitious company that they use to submit fake invoices to the organization in order to receive payment. This mostly goes undetected because they usually collude with the finance department and the payments are approved even if there is no indication of work performed or goods delivered.
Revenue and cash receipt schemes involve skimming, which is defined as stealing of cash before the funds are recorded in the books. Skimming is mostly conducted by an individual who is charged with the initial collection of the funds, individual who opens incoming mail to the organization, individual who logs cash receipts, take a deposit to the bank, or prepares the deposit, or individuals who solicit for contributions. Since there is no record of the funds being received it is easy for an individual to pocket some of the funds and declare less. This would be hard to track and most individuals would get away with it for a considerable amount of time. It is also possible for checks to be skimmed, all an individual would do is open a bank account using the organization's name and appoint themselves as the signatories then proceed to deposit and withdraw the checks. It is also possible for individuals to steal donated merchandise. Although this is not as easy as theft of cash, it is still possible and all one would need to do is to misappropriate the received merchandise.
Non-cash asset misappropriations include the theft of property and equipment that belongs to the nonprofit organization (Holtfreter, 2008). Outright theft might include stealing of computers, parts of vehicles, office equipment, and other items. There is also the usage of the organization's assets for one's personal use. The usage of the organization’s computers, printers, and software for personal projects is considered to be fraud. This might be considered to be minimal, but it is possible for an individual to make huge demands on the organization's resources for their own personal projects resulting in other employees not being able to use the resources for their work-related duties.
Payroll and employee expense reporting schemes include having host employees, overstatement of hours worked, and fictitious expenditures. Ghost employees are fake employees who are included in the payroll for an individual’s personal gain. The fake employees will be issued with checks, which the perpetrator collects and cashes. Ghost employees could also include employees who have been terminated and are left on the payroll in order for an individual to pocket their salaries. Overstatement of the hours worked has been shown to be prevalent in a majority of industries and there is evidence to show that is also happening in the nonprofit sector. Workers will increase the hours they claim to have worked in order to receive extra payment. Fictitious expenditures have been noted to be a significant problem. This is because there are numerous software’s that employees can use to create fake receipts and lay claims for a refund using these receipts. The software used requires minimal effort and knowledge thus making it easy for employees to forge the receipts. Many employees, especially in the nonprofit sector, use this method whenever they have gone for field work and they will claim more than they actually spent.
External Fraud
External fraud is not as common as internal fraud, but it still can occur especially within the nonprofit sector. The effects of any fraud are detrimental. Some of the external fraud that can take place within a nonprofit organization is fraudulent billings by vendors, which refers to vendors charging for services or goods that they have not delivered (Holtfreter, 2008). vendors could also inflate their prices thereby overcharging for the services or goods they deliver. Another method would be adding extra charges on the invoices. Another example of external fraud is the fraud that is committed by a service organization that they nonprofit organization has outsourced vital internal functions. The outsourced organization could use the funds received for other purposes before it remits the funds to the organization if it is outsourced to be the collecting agent. It is also possible for the outsourced to charge for false transactions. This would increase the amounts payable to the organization and could result in the nonprofit losing huge amounts. Corruption could also take place with the outsourced organization demanding kickbacks from other vendors in order to subcontract services. Fraud by sub-recipients is another form of external fraud where the program receiving the funds reports fraudulent data and costs to the nonprofit organization that awarded them the grant (Archambeault, Webber, & Greenlee, 2015). This is not so easy, but there have been cases where individuals have managed to report wrongly in order to pocket the extra cash. Financial assistance fraud is also an external fraud where students or other individuals falsely apply and receive financial aid and they do not use the grants for the intended purposes.
Perpetrators of Fraud and Corruption
A majority of frauds are mostly committed by trusted employees or ordinary individuals who no one would think they would engage in such illegal activities. However, there are cases of perpetrators being perpetual criminals who normally continue performing their actions mostly because they have never been prosecuted or the background checks conducted were not adequate. The three elements referred to as the fraud triangle are perceived pressures, opportunity, and rationalization (Archambeault et al., 2015). In everyday work life employees are faced with rationalizations and pressures, therefore, combining the right amount of pressure and rationalization with a perceived opportunity would result in the individual committing a fraud. Perceived pressure denotes the pressures that an individual is faced with like financial pressures, drug addiction, gambling, or believe they are underpaid. There are individuals who believe they are only borrowing the money and they will repay while others might have the incentive to steal in order to see if they could get away with fraud. Perceived opportunity refers to the circumstances that would make it easy for an individual to commit the fraud. Some of the circumstances are the absence of controls, the ability of management to override controls, or ineffective controls. These would offer the individual ample opportunities to commit a fraud. Rationalization is where the individual who is committing the fraud is able to justify their actions to themselves as adhering to the code of ethics. With such justifications, the individuals would not feel like they have done anything wrong and they would get comfortable with continuing to commit the fraud or corruption.
Controlling Fraud Within the Organization
As has been shown corruption and fraud are significant potential problems for a nonprofit organization. If the organization is not able to attract donors because of its fraudulent reputation, then the organization would not be able to meet its objectives. It has been shown that organizations that have taken proactive steps to detect and prevent fraud have managed to reduce the levels of misappropriation of organization assets and there are less prone to any fraudulent reporting. The nonprofit organizations that have seriously considered the risk of fraud and undertake proactive steps for creating the right kind of climate for reducing the occurrence of fraud that will be successful in preventing fraud.
Before any effective fraud and corruption prevention can take place, there is need to have effective policies and the management should set the tone from the top (Ashforth, Gioia, Robinson, & Trevino, 2008). The organization should also be ethically led by having the management taking up the role of being ethical champions and promoting ethical behavior within the organization. The management of the organization needs to show its employees through actions and words that the organization will not tolerate any unethical and dishonest behavior. There should be no compromise in this because even if the unethical behavior could be beneficial to the organization. This will let the employees know and understand that the organization is strictly being run ethically and there is no room for dishonest behavior. All employees should also be treated equally when it comes to fraud and corruption and no preference should be made based on an individual’s position (Timofeyev, 2015). This sends out a clear message that the management will not condone fraud or corruption no matter the position of the employee. Many nonprofit organizations have the tendency to be lenient to the top managers or some employees and this encourages the unethical behavior within the organization.
Nonprofit organizations should ensure that they have in place effective strategies that are aimed at eliminating and preventing fraud or corruption within the organization. The organization should be able to identify and measure fraud risk, take steps to mitigate the identified risks and implement and monitor appropriate detective and preventative internal controls. Using these methods, the organization would be able to curb fraud. The employees would also be discouraged from taking part in any fraudulent behaviors since there are numerous measures that are aimed at detecting and preventing fraud. The measures implemented by the organization would ensure that no single individual is charged with the authority to approve payments or suppliers without consulting with other employees. Reducing the opportunities for fraud should be the main target for the organization (Ashforth et al., 2008).
The organization should also have financial and non-financial systems in place to control, detect, and prevent fraud. The financial systems will assist the management of the organization to reconcile accounts, perform ratio analysis, review ledger adjustments, and conduct surprise audits. Using these methods, the management of the organization is able to determine that all the funds being received from donors are used for the needed requirements and there is no wastage (Gibelman & Gelman, 2004). Implementing financial systems will also prevent the occurrence of corruption since it would be hard to issue or receive a kickback for services or contract to award. With a tight control on the organization's finances and other assets, the management can be sure that employees will find it hard to participate in any fraudulent activities.
Conclusion
There are numerous new articles that are demonstrating how prevalent that fraud and corruption is spreading especially in the nonprofit sector, If the nonprofit organizations do not do something urgently it might result in donors being unwilling to support the organization and they would find it hard to carry out their services to the community. This problem is compounded by the fact that most nonprofit organizations rely on the goodwill of employees, which is sometimes abused for personal gain. There is need to ensure that there are proper systems in place to ensure that fraud and corruption are prevented within the organization. Internal fraud has been shown to be the most prevalent and has the highest impact on the organization. This means that employees who are an organization’s greatest assets could also be its hugest liability. However, with proper mechanisms in place, it is possible for an organization to curb and prevent fraud and corruption. The management of the organization should be in the forefront to lead its employees on this ethical journey.


References
Archambeault, D. S., Webber, S., & Greenlee, J. (2015). Fraud and Corruption in US Nonprofit Entities: A Summary of Press Reports 2008-2011. Nonprofit and Voluntary Sector Quarterly, 44(6), 1194-1224.
Ashforth, B. E., Gioia, D. A., Robinson, S. L., & Trevino, L. K. (2008). Re-viewing organizational corruption. Academy of Management Review, 33(3), 670-684.
Gibelman, M., & Gelman, S. R. (2004). A loss of credibility: Patterns of wrongdoing among nongovernmental organizations. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 15(4), 355-381.
Greenlee, J., Fischer, M., Gordon, T., & Keating, E. (2007). An investigation of fraud in nonprofit organizations: Occurrences and deterrents. Nonprofit and Voluntary Sector Quarterly, 36(4), 676-694.
Holtfreter, K. (2005). Is occupational fraud “typical” white-collar crime? A comparison of individual and organizational characteristics. Journal of Criminal Justice, 33(4), 353-365.
Holtfreter, K. (2008). Determinants of fraud losses in nonprofit organizations. Nonprofit Management and Leadership, 19(1), 45-63.
Timofeyev, Y. (2015). Analysis of predictors of organizational losses due to occupational corruption. International Business Review, 24(4), 630-641.