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Preventing Fraud in Nonprofit Organizations

ISBN: 978-0-471-73343-0
240 pages
April 2006
Preventing Fraud in Nonprofit Organizations (0471733431) cover image



Fraud or embezzlement discovered within a major corporation ultimately leads to front-page scandals and a few raised eyebrows. But the mere suggestion or evidence of fraud within a nonprofit can cause irreversible damage to its reputation, its support base, and, eventually, its very existence. Preventing Fraud in Nonprofit Organizations is the proactive manual your organization needs to detect fraud and prevent it from affecting your organization's bottom line and name. Brimming with details of hundreds of actual fraud and embezzlement schemes, it provides specific, practical advice on strengthening the areas in which your nonprofit may be most vulnerable.

This hands-on guide shows nonprofit accountants, CFOs, financial consultants, board members, and managers how to:
* Know the four consistent areas of high risk
* Thoroughly evaluate their organization's system of internal controls
* Assemble a fraud examination team
* Document a fraud action plan
* Expose weaknesses that could lead to fraud
* Take corrective action to reduce the possibility of victimization

Fraud deterrence is not exclusive to large corporations. Recommended reading for nonprofit professionals, Preventing Fraud in Nonprofit Organizations will motivate executives to take a fresh and intensive look at their organization's practices and act to protect from financial dishonesty.
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Table of Contents

About the Author ix

Acknowledgments xi

Preface xiii

Disclaimer xv

About the Companion Website xvii

Section 1 Not-For-Profit Organizations: Four Consistent Areas of High Risk Embezzlement: Who Does It and When 1

Not-For-Profit Specific Issues 1

Summary 4

The Perpetrators: Who They Are, Why They Do It, and How They Are Caught 4

The Embezzler’s “Window of Opportunity” 9

Section 2 Statement of Auditing Standard No. 99 “Consideration of Fraud in a Financial Statement Audit” 13

Statement of Auditing Standard No. 99

“Consideration of Fraud in a Financial Statement Audit” 13

Section 3 Essential Internal Control and Administrative Procedures to Avoid Embezzlement 23

The Background Check 23

Conditions of Employment Agreement 28

Conflicts of Interest 34

Nepotism 37

Whistleblowers 39

Noncompete Agreements 41

Confidentiality of Information 43

Bonding Issues 45

Signers on Bank Accounts 46

Two-Signature Checks 46

Lockbox 48

Positive Pay 49

Deposit Security and Restrictive Endorsements 50

Check Stock 52

Cash Transactions 53

Cash Register Issues 54

Insurance Committees 54

Computer File Backups 55

Check and Wire Transfer Signatures 56

Inventory Issues 58

Company Credit Cards 58

Lines of Credit 59

Bad Debt Policy 61

Internal Audits 63

Stop Payment Orders 64

Voiding Checks 66

Numbered Check Request Forms 68

Expense Accounts 70

CPA Management Letters 71

Random Disbursement Checks 73

CHECK 21 74

Section 4 Clever Examples of Embezzlement 77

Payroll Tax Deposits 77

Check Switching 82

Ghosts on the Payroll and Ghost Vendors 88

The Danger of Acronyms 94

Bank Account Reconciliations 95

Wire Transfers 96

Postage Issues 98

Kiting 100

Manual Checks (Handwritten and Typed) 101

Auditing Receipts 104

Section 5 Steps to Take If You Have Been Victimized by Fraud 105

Documenting a Fraud Action Plan 105

Fraud Examinations and Assembling the Fraud Team 109

The Basics of Forensic Accounting 113

Section 6 Internal Control Analysis, Documentation, and Recommendations for Improvement 121

Internal Control Analysis, Documentation, and Recommendations for Improvement 121

Fraud Glossary 197

Index 217

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Author Information

Edward J. McMillan, CPA, CAE, is an experienced fraud examiner and teaches fraud prevention courses to organizations such as the American Institute of CPAs, the Maryland Association of CPAs, other state societies of CPAs, the U.S. Chamber of Commerce, and the American Bar Association, among others. Ed also speaks regularly on the subject of fraud prevention at business conventions of all types and can be reached at (410)893-2308 or contacted via email at emcmillan@sprintmail.com.
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New to This Edition

  • Ed McMillan is a nationally recognized speaker on not-for-profit financial and management topics for more than a decade; more specifically, McMillan is a frequent lecturer on the subject of fraud and embezzlement.
  • Filled with hundreds of useful tips, practical advice, and real-world examples.
  • Includes invaluable forms and exhibits, such as Background Check Permission Slip, Stop Payment Request Form, Letter of Credit Activation Form, Confidentiality Agreement, and a Policy on Checks and Wire Transfer Signatures.
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Web Content

Welcome to the Preventing Fraud in Nonprofit Organizations Website!

We've included all the policies and procedures found in Section 6 of the book in Word format here on this website. If you do not have Microsoft Word, you can download Word Viewer

Once you open the file, you can search for the specific policy or procedure you are interested in--these policies can then be customized to reflect the specific needs of your organization. The policies and procedures fall under the following broad categories:

  • Accounting and financial management
  • Internal control
  • Risk reduction
  • Office administration

For further reference: Wiley's e-mail service is a convenient way to receive exclusive news about all of our nonprofit products and events, as well as special discount offers. Once you've signed up for the service, you'll hear from us once or twice a month. To join, please click on the link above and complete the form. And we will ALWAYS respect your e-mail privacy and NEVER sell, rent, or exchange your e-mail address to any outside company. For complete details, review our Privacy Policy.

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