A nonprofit’s #1 currency is trust. Any fraudulent activity by a nonprofit agency negates this trust. The Board has a role and responsibility to minimize the risk of fraud. This week, we discuss 10 tips for nonprofit boards to help mitigate fraud in their organizations.
Timestamps:
00:00 How nonprofit boards can mitigate fraud risk
01:40 #1-3 – Establish a Strong Ethical Culture, Implement Clear Policies and Procedures, Segregation of Duties
03:05 #4-6 – Regular Financial Oversight and Reporting, Board Oversight and Involvement, Independent Audit Committee
04:20 #7-10 – Whistleblower Policies, Regular Training and Education, Monitoring and Evaluation, Lead by Example
Transcript:
All right. On this week’s episode, I 501CYou the podcast for nonprofit more members. And I want to talk a little bit about what boards can do to help prevent or maybe mitigate fraud within the nonprofit organization. You know, every now and then we hear about a nonprofit that money was embezzled from. Something was happening. And I often question asked the question, where was the board when all of this was going on?
There was one just even a couple months ago, $100 million gone. You’re like, oh, good lord, that doesn’t happen overnight. So there’s something systemic there. So as a board member, what can we do to ensure. Well, you can’t always ensure but to limit the exposure, the the opportunity for fraud within an organization. And so with the help of my good buddy ChatGPT, read help me identify the ten things that we would have said otherwise if asked the question.
And actually, it really makes it nice and concise. So just let everybody know. I’m usually, I out there trying to be trendy and trying to figure it out. But anyway, it’s actually came up with some very good answers and it makes a lot of sense. So hey, I want to jump in real quick. Somebody asked me other day, what does the quarterly company do?
Well, we do three things for nonprofits. One, we facilitate meetings. Yes, like board retreats where we discuss governance and strategy with all the members of the board. Number two advise CEOs and help them as they make decisions and implement actions to drive their mission. And then finally, we produce podcasts such as this one, but also for a number of nonprofits to help you get the word out, get your message out.
So if you’re interested in any of these services, please feel free to reach out to Michael@thecorleycompany.com. Now back to the podcast. Number one. First and foremost, you got to establish a strong ethical culture. And of course that starts at the top including the board, but certainly the CEO. Do you have a strong ethics in place with honesty and transparency?
Are people open? Do they communicate or they are limited silos. So as a board member, we need to ask about that from a cultural perspective. Observe, listen and make sure we lead by example even at the boardroom that we are open and transparent and Austin candid and direct with each other. Number two, and this makes a lot of sense.
Implement clear policies and procedures. Boy, so many organizations don’t have clear policies and procedures because, well, because we hate writing them and we hate confining ourselves to those. But boy, they’re they’re really important. and we include things like that conflict of interest procurement policies, especially procurement, depending on the size of the organization, clear policies and procedures in place so that people know what to follow and they know when somebody is not following them, which could lead to an unfortunate situations.
Number three, segregation of duties, which is a nice continuation of the previous one. To separate those duties, any account knows we want to have separation of duties. The person who’s writing the checks is not the person who’s reconciling the bank account. For example, more people that are involved in things, less likely for all of them to be in cahoots and commit fraud does happen, but it limits that number for regular financial oversight and reporting.
Of course, as a board member, you should be getting the financials. There should be audits by, independent auditors. The internal controls should be reviewed. And that’s something that the board can do to ask to see those policies, those internal control policies and review the financials, ask questions. That’s all right. number five, board oversight and involvement. You want to have an actively and engaged board, particularly, as I just mentioned, the financial statements, but in budgets, in reports, ask questions, seek clarification in a board meeting.
Feel free to play them and ask those questions just to make sure the answers make sense and add up. You want to be inquisitive because over time you if there’s something going on, you’ll start to get a feeling or things just won’t. The dots won’t connect. So be sure to ask a lot of questions. Here we are at six.
Depending on the size of your organization, you’re probably going to have an independent audit committee. You should. And this is separate from the finance committee. So this is the audit committee. We’re really the members should understand audit and have some financial expertise. This is the group that’s going to examine the internal controls and work with the outside auditors.
Really, really important. Seven make sure you have whistle policy blower policies in place. This gives any employee the opportunity if they see something that’s not right to report, there’s no retribution. If that’s the case and it’s, you know, typically a phone number that’s established that they call or some type of anonymity, of course you’d want to investigate anything and use some common sense, but make sure there is an outlet for somebody who may be observing something.
Number eight, of course, regular training and education of board members, volunteers of everybody, just about what is fraud prevention? What is ethical conduct. Now, look, we should all know that I understand that. But in those organizations, I’ve experienced that type of fraud. I guess they weren’t doing this type of thing. And so we should lead by example at the board level and at the CEO of just be proactive in having this type of training.
Number nine, of course, you want to always continually monitor and evaluate, look at your internal controls. Do they need to be changed and they need to be to evolve? What risks are there as you grow in size? As you get an additional grant, maybe a federal grant, or also when you get a large sum of money, do you have the policies and procedures and practices in place to manage that kind of money and a report on it in me?
hold it to account. You know, everybody thinks, boy, it’s a blessing when you get this big humungus grant. But I can tell you, it takes a lot of work to ensure that those funds are used to how they’re supposed to be used, in that you have those controls in place. It doesn’t happen just overnight. And then I’m to go on number ten.
I’m gonna go back to really what we talked about at number one. As board members, we should lead by example in terms of ethical behavior, financial stewardship. Ask those questions, follow policies, set the tone for integrity. And when you’re working at the board level and then throughout the organization, that really does begin to make a difference in. That leads me to one thing.
Maybe number 11 is be visible board members should be be it should be visible. You should go to events. You should ask questions of staff when you’re at events. You know, some of it’s just friendly conversation, but you never know what you’re going to uncover and just be invisible. And just kind of that that old adage, you can expect what you inspect.
And if you’re not inspecting something, well, you don’t know what to expect type of thing. So as a board member, why you can’t totally eliminate the opportunity or the risk of fraud, you certainly can be proactive in creating an environment where fraud is less likely to happen, and you’ve got the controls in place to observe it, understand it when it does happen.
So there you go. Ten things you can do as a board member to help helpfully mitigate the opportunity for fraud in a nonprofit organization. And I’m sure I’m going to talk more on this later as this continues to, unfortunately, rears its ugly head. So this is Michael Corley, this week’s episode of I 501C You and I will.
I have 501C You next week.
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