Your phone rings. Your nonprofit’s auditors discovered a payment for thousands of dollars that was recently paid out to a vendor that your organization has never worked with. You’re told the accounts payable clerk received a legitimate-looking invoice by email, prepared the payment, and transferred the funds. Before the error was discovered, the money was gone.

The clerk fell victim to a classic case of a billing scheme, a form of financial fraud where individuals send out invoices and W-9s in a mass mailing fraud and wait to see who treats the invoice as valid and pays them.

Could this erroneous payment have been prevented? Yes, through the adoption of internal controls — formal policies, systems, and procedures designed to prevent the misuse and misappropriation of assets.

“[I]nternal controls are written policies that describe what procedures the organization will follow and who’s responsible at each stage.”

In a nutshell, internal controls are written policies that describe what procedures the organization will follow and who’s responsible at each stage. These policies are then translated in workflows, system access and rights, and even additional technologies. The goal is to provide checks and balances that:

  • Minimize opportunities for errors and omissions.
  • Identify small issues before they become bigger problems.
  • Reduce the risk of intentional fraud.

There are many controls to reduce financial risk in nonprofits, but an important one that every organization should consider is the segregation of duties (also called separation of duties).

Read the full article about mitigating fraud by Christina Hardy and Rachel Sweeney at Dorothy A. Johnson Center.