Page 284 - Washington Nonprofit Handbook 2018 Edition

PART 13. FINANCIAL

CHAPTER 75. Internal Controls

Nonprofit board members have a duty to assure the effective, responsible
use of a nonprofit’s resources. This financial oversight includes understanding
organizational risks and setting the policies and procedures designed to prevent
fraud and assure accurate reporting to the Internal Revenue Service (IRS) and
Secretary of State.

a. What is Fraud?

Understanding what fraud is and how to avoid it is crucial to the nonprofit’s
status, reputation, and longevity. Fraud is the wrongful or criminal deception
intended to result in financial or personal gain. With respect to organizational

finances, there are three basic types of fraud:

• Outright asset theft (fraud against the organization)

• Deceptive financial reporting (fraud by the organization)

• Improper use of the organization’s name, reputation or confidential
information (fraud through the organization)

b. What Factors Allow Fraud to Occur?

Understanding the factors that lead to fraud, is critical to preventing fraud
from occurring. The three most common factors that contribute to fraud are:

• Motivation: An individual who commits fraud is motivated by
personal economic reasons. Typical motivations include financial
distress, substance abuse, gambling, overspending, or other
destructive behaviors.

• Rationalization: The person committing fraud usually has a reason
or rationalization to justify the fraud. Typical rationalizations include

perceived injustice in compensation or appreciation or ‘value’ of
volunteer services; the idea that the fraudulent act is equivalent to
“borrowing” from the organization; or the belief that the organization
does not ‘need’ the assets nor will it miss them.)

WASHINGTON NONPROFIT HANDBOOK -273- 2018