Mitigating and Preventing Fraud and Corruption Essay

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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.

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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….....

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