Preventing Fraud in Nonprofit Organizations by Edward J. McMillan, CPA, CAE, is described on the book’s back cover as "the proactive manual your organization needs to detect fraud and prevent it from affecting your organization’s bottom line and name." McMillan, an experienced association executive, delivers the goods with dozens of plausible examples of fraud and embezzlement that might affect a nonprofit and a 74-page form for conducting an internal control analysis and documentation. Wiley, the publisher, has made the form available for download in Word format here.
The book is largely written from the perspective of larger organizations and business leagues, but even smaller charitable nonprofits will benefit by learning how to recognize potential areas of vulnerability and how to minimize such risks. With increasing media coverage of fraud in the nonprofit sector and heightened government scrutiny, the book addresses an area that requires more coverage. No longer can nonprofit boards simply deny the possibility of fraud within the organizations under their watch.
Among the examples of fraud and embezzlement offered:
- Diverting checks made out to the organization to a private account using the same acronym (e.g., a check intended for the "American Medical Association" but made out to "AMA" could easily be diverted to an account for the otherwise fictitious "Association for Modern Artists").
- Making payments to "ghost vendors."
Perhaps in recognition that the book’s primary audience would likely consist of CPAs, CFOs and financial consultants of larger organizations and business leagues, McMillan proclaims that the following four areas "are of paramount importance when evaluating the risk associated with a typical not-for-profit" –
- Checks mailed to the organization’s offices from members, advertisers, and the like;
- Printing expenses;
- Postage expenses; and
- Personnel-related expenses including wages, payroll taxes, and employee fringe benefits.
He bases this list on, among other things, the faulty assumption that "[i]n most not-for-profit organizations, the primary product is the printed word (magazines, newsletters, books, brochures, etc.) and printing expense is typically a substantial portion of the overall budget, and in that respect, susceptible to fraud." Printing and postage may not be areas of great exposure to many smaller charitable nonprofits. However, the point is made that large line items in the budget may be particularly susceptible to fraud.
Overall, the book provides a good starting point for understanding how fraud and embezzlement may occur in nonprofit organizations, and offers good suggestions and useful forms (but you must be careful about using any of the legal forms without the review of appropriate legal counsel for applicability in your jurisdiction and currency). McMillan’s writing style is accessible to non-financial experts with fiduciary duties, and an evening browsing through the materials could make a big difference to an organization and its leaders. Well worth the $45.00 cover price.