Significant Fraud Schemes in Nonprofits
- Skimming
When an entity receives cash, it must record (recognize) it in its accounting system. Skimming occurs when an employee steals cash or checks BEFORE recording it in the entity’s accounting system. Skimming schemes are usually called “off-books” schemes. Because cash theft happens before cash is recorded in the accounting records, it is tough to detect such a scheme: there is no audit trail.
For example, when a cashier of a supermarket receives cash from a customer, does not issue a cash sales invoice, and pocket the money into his wallet, we call this skimming. When a nonprofit volunteer collects a donation from a donor where she did not issue him a cash receipt and pocketed the donated money for personal use, we call this skimming.
“A recent case illustrates the ease with which funds can be skimmed when both of these characteristics are present. The president of an organization personally solicited and collected contributions from donors. He skimmed more than $4 million of contribution income over a 15-year period before being detected. He was only detected once his successor solicited one of the donors who had contributed, under the impression that the individual had never made a contribution to the organization. When the donor indicated he had been a significant supporter of the organization for several years, the fraud was then uncovered.”
Who may commit skimming schemes? Any employee who receives cash or checks from donors may skim funds. Therefore, cashiers, employees receiving payments/donations through the mail, or volunteers who collect funds from remote locations are a great skimming risk.
Therefore, nonprofit management should focus on preventing and deterring skimming schemes as detection is difficult. A proper design and implementation of specific internal control processes for cash receipts would significantly help lower skimming schemes risks. For example, a deficiency in any of the following controls would constitute a “red flag” that management should handle in a special care and professional skepticism.
- The employee who opens the mail should be independent of the cashier and accounts receivable staff.
- Unopened business mail should be kept away from employees having access to accounting records.
- The employee who receives mail should
- Stamp (“For Deposit Only”) on all checks received?
- Prepare a list of the money, checks, and other receipts?
- Forward all remittances to the person responsible for preparing and making the daily bank deposit?
- Forward the total of all remittances to the person responsible for comparing it to the authenticated deposit ticket and amount recorded?
- Cash receipts should be prenumbered and independently be checked daily and reconciled with cash collections.
- Nonprofit should bond employees or volunteers handing cash.
The following schemes and topics are discussed thoroughly in Part 2: Corruption Prevention, Deterrence, and Detection - Nonprofit Organizations.
- Check Tampering
- Expense Reimbursements
- Payroll Schemes
Fraud and Corruption Risk Assessment
The Minimum a Nonprofit Can Do to Prevent and Deter Fraud and Corruption
Download the associated PDF document.
Check more free resources at the Anti-Corruption Library
Download the associated PDF document.
Check more free resources at the Anti-Corruption Library
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