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Why Assessing Fraud Risk is Crucial for Nonprofits?
Published on: January 22, 2024

Auditors frequently inquire about the protocols nonprofit employees have in place for recognizing, addressing, and tracking the potential for fraud. It is commonplace for the answer to consist of an informal procedure highlighting the segregation of responsibilities and the review processes currently implemented.

Impact of Fraud on Nonprofit

As fraudulent activities that target nonprofits show no signs of slowing down, organizations must establish a practical and effective process for assessing the risk of fraud and acting against it.

The most damaging effect of any fraudulent act, especially in a non-profit organization is a ruined reputation. Sure enough, there are immediate financial implications that arise from fraud emanating from an employee taking money, forging vendors, and making unapproved purchases. Nonetheless, the stain created on the nonprofit’s image as a result could have far-reaching consequences than the monetary value of what had been stolen.

Significance of Fraud Risk Assessment

Fraud risk assessment is crucial and is also significant to identify and fix weaknesses along with the gaps in control systems that could expose an organization to financial and reputational loss. An effective fraud risk assessment requires participation from all those involved in managing the entity’s money, whether these are the board of directors, the accountant or the staff.

Strengthening Internal Control Procedures

An organization that wants to strengthen its internal control can adopt procedures that will eventually reduce the risk of fraud. But still, it is impossible to fully eliminate such risks because once a new control measure is in place, someone out there will come up with a way through.

To conclude, one should not expect this comprehensive review to be a one-time effort. As an organization experiences changes in systems, processes, positions, and responsibilities so does its assessment of fraud risk. Periodic and regular assessments like these must be carried out. Just because there have not been any changes in the systems, processes, positions, or responsibilities does not mean that someone was not busy figuring out how to perpetrate fraud by bypassing them