Fraud Prevention and How to Report Suspected Fraud

When fraudulent behavior — perceived or real — is disregarded or left unchecked, it not only undermines the forward mobility of the organization in question, but also negatively impacts other nonprofits, and the nonprofit sector as a whole. This “guilt by association” allows for the actions of one bad actor to hinder the important, impactful work of the vast majority of mission-driven organizations in communities everywhere.

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Preparation and Prevention

Nonprofit Management and Leadership

Nonprofits should create a financial procedures manual that outlines clear separation of duties around financial processes, as well as the regular production of financial reports that are analyzed by leadership and reviewed by the board. If applicable, it is vital to complete an independent internal audit and 990 and submit them to the appropriate entities by stated deadlines.

Nonprofit Staff

It is highly recommended that all charitable nonprofits with paid staff craft and approve a whistleblower policy in order to prevent retaliation against employees or others who report suspicions of illegal or dishonest practices to the proper authorities.

Staff should become familiar with the policy in order to understand reporting processes, rights and protections, and types of activities covered by the policy. Any questions regarding the policy itself should be directed to the appropriate management or board representative for clarification.

By adopting a whistleblower protection policy, nonprofits signal to employees, board members, and the donating public that your organization is open to hearing concerns or complaints about its practices, demonstrating that it values transparency and accountability practices.

Nonprofits’ Board of Directors

A nonprofit’s board of directors should regularly review, update, and approve its whistleblower policy, financial procedures manual, other relevant organizational policies, and the organization’s financials.

If applicable, the board should also review and approve any independent internal audits and the organization’s annual 990 filing with the IRS. It is important to ask critical questions, particularly relating to significant variances from a historical “normal” (e.g. – rapid revenue growth in a small window of time).

Funders and the General Public

If fraud is suspected within an organization, individuals should immediately report concerns to the appropriate authorities within the organization, such as the board of directors or internal audit team, and document all evidence thoroughly. Depending on the severity and nature of the suspected fraud, law enforcement or regulatory agencies (such as the Office of the Minnesota Attorney General) may need to be contacted, depending on local laws and the circumstances.

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Key Steps to Take When Suspecting Fraud at a Nonprofit

• Gather evidence: Collect any documents, emails, or other supporting information that indicates potential fraudulent activity, including dates, names, and details of suspicious transactions.
• Contact the board or internal audit team: Inform the board members or internal audit team about your concerns, providing detailed information about the suspected fraud and the evidence you have gathered.
• Maintain confidentiality: Be cautious about discussing the suspected fraud with others outside the organization to avoid jeopardizing the investigation or prematurely casting an undue negative light upon an organization and staff prior to confirmation of suspicions.
• Follow reporting procedures: Check the nonprofit’s internal policies and procedures for reporting suspected fraud and follow the outlined steps carefully.
• Consider external review: If the internal investigation is not sufficient, consider seeking an independent auditor or legal counsel to review the situation. 

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When to Report Suspected Fraud to External Authorities

• Significant financial losses: If the suspected fraud involves large sums of money or could significantly impact the nonprofit’s operations. 
• Potential criminal activity: If the suspected fraud appears to be a crime, such as embezzlement or identity theft, individuals should contact the appropriate law enforcement agencies. 
• Failure to address internally: If the nonprofit’s board or internal investigation does not address the concerns adequately, consider contacting regulatory agencies or relevant oversight bodies. This includes possibly filing a complaint with the Minnesota Attorney General’s office and/or reporting tax fraud to the IRS.

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Additional Resources

• Whistleblower Protections for Nonprofits (National Council for Nonprofits)
• The Guide to Your Nonprofit Whistleblower Policy (BoardEffect)

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