Useful Advice for Businesses and Nonprofit Organizations

By John Cohen 

The most common characteristic of employee fraud is the sudden realization that “yes, it can happen here”.  It’s a crime that no one in the organization ever expects, and in which the perpetrator’s honesty has never been a question.  The resulting disruption to the organization and the newspaper headlines can be fairly devastating.

 A Whistleblower Hotline is one of the most effective but underutilized controls for any type of business or nonprofit entity.  According to the AICPA, employee fraud is detected 40 percent of the time by tips, and a whistleblower control is the leading method of detecting fraud.  Nonprofits are not immune, either.  The Association of Certified Fraud Examiners reports that approximately 10% of all employee fraud occurs within nonprofit organizations, with an average annual total loss of $90,000.

Implementing a simple but effective whistleblower procedure is one of the most important services a Board of Directors or Senior Management can perform.  

Like any internal control, a whistleblower hotline is not foolproof, of course.  It needs one person who has enough motivation (monetary or ethically) to actually pick up the phone and make an anonymous report; and someone at the receiving end who is independent, honest, and won’t be part of a cover-up.  At Enron, the Board hired its corporate law firm to investigate.  Unfortunately, the law firm had been making millions of dollars per year from its relationship with Enron’s senior management and quickly became part of the cover-up.  

Nonprofits are too often populated by Board members who are themselves friends of – and appointed by – the CEO/Chairman, who is likewise too often the center of fraud because of his/her ability to override the organization’s internal control.  This was the case in multiple scandals which made headlines in Massachusetts in the past year.  However, the whistleblower control can be set up to overcome these kinds of conflicts of interest. 

So if you are a member of a Board of Directors or Senior Management, should your organization implement a whistleblower control?  Fraud can exist in any size organization, but as a rough rule of thumb, if your organization has reached 50 employees or more – and whether it is a for-profit or nonprofit entity – it’s definitely time to at least hold an initial discussion with your auditors and legal advisors.

NPA Consultants are interim CFO/Controllers and Process Improvement Specialists in Policies, Procedures, Internal Controls and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements fulfill their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.