How Fraud Could Impact Your Not-for-Profit Organization

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Understanding the Risks — and Three Ways to Strengthen Prevention

Fraud is a risk no not-for-profit organization can afford to underestimate. In addition to direct financial losses, a single incident can undermine years of credibility, strain donor relationships and trigger regulatory scrutiny. In many cases, the consequences extend well beyond financial results, creating lasting operational and reputational challenges.

What Is the True Cost of Fraud?

The most visible impact of fraud is often direct financial loss. Determining the cause and full scope of an incident is critical and should be addressed promptly. Even then, recovery of losses is often uncertain. Financial damage is frequently compounded by the cost of engaging outside professionals, including legal counsel, forensic accountants and other specialists, to investigate the fraud and limit further exposure. Organizations may also face increased premiums for financial liability insurance or difficulty obtaining coverage altogether.

Direct losses, however, are often only the beginning. Public disclosure of fraud, or even allegations of fraud, can result in reputational damage that is difficult to reverse. Donors may reduce or eliminate future contributions, while governmental funders may scale back support, withdraw funding for affected programs or seek repayment of misused funds.

Additional consequences may include investigations by government authorities, such as the state attorney general’s office or the Department of Justice. Financial records may be subject to heightened scrutiny by government auditors or grant-making oversight agencies.

These external investigations can uncover weaknesses in board oversight, potentially leading to mandated governance changes, extended third-party monitoring or leadership turnover. Fraud incidents may also result in the loss of staff, who may leave to avoid association with negative publicity.

Lastly, annual audits by an NFP’s CPA firm may become more intrusive and time-consuming, placing additional demands and stress on financial leaders and staff. These audits could also result in internal control deficiency comments and recommendations for improvements by your auditors.

How to Protect Your NFP Against Fraud

Given the wide-ranging impact of fraud, proactive oversight and strong internal controls are essential in fraud prevention. Management should regularly review their NFP’s existing compliance policies, internal controls and documentation practices. NFPs can take the following practical steps to help reduce fraud risk:

Controls that exist only on paper are ineffective. Organizations should routinely remind staff of established policies and communicate the importance of consistent compliance.

Limiting access to credit cards, checks and electronic payment systems to individuals with a clear business need can significantly reduce opportunities for fraud.

Whenever possible, reconciliations should be performed by someone independent of cash disbursement and receipt functions. In smaller organizations, an independent review (by a board member, for example) can help identify unusual or suspicious activity.

Research from the Association of Certified Fraud Examiners shows that low-cost anti-fraud measures like these can significantly reduce the duration of and losses from fraud. 

We Can Help

The PKF O’Connor Davies Not-For-Profit and Forensic Services teams bring deep industry experience to help organizations strengthen internal controls, address compliance challenges and assess fraud risk.

Contact Us

To learn how our professionals can evaluate your existing controls and recommend improvements, please contact your PKF O’Connor Davies client service team or:

Mark J. Piszko, CPA, CGMA
Partner-in-Charge
Not-for-Profit Services
mpiszko@pkfod.com | 646.449.6316

Brian McDonough, CPA, CFE 
Director
bmcdonough@pkfod.com | 781.937.5362