A nonprofit organization faces many of the very same risks as a for-profit business. Financial concerns, reputation, and liability issues are high priorities for both types of entities. However, nonprofits must work within tight budget constraints while trying to honor the donors’ intentions. These restraints can make a nonprofit’s effort to avoid risks even trickier. Here’s a list of 6 risks facing nonprofit organizations every day.
When a theft occurs at an organization, it is devastating, demoralizing, and damaging. It can be a financial blow and can hurt the organization’s reputation. Theft takes several forms.
- Burglary – the act of physical breaking and entering a building and stealing items of value
- Swindling – the act of forcing someone within the organization to give or entrust property belonging to the nonprofit to someone else using deceitful measures
- Forgery – the act of applying an unauthorized signature or writing that looks to be authorized
- Embezzlement – the act of taking property or money that is lawfully entrusted and then converting it to personal use
Questions: Does your nonprofit have internal controls to monitor for possible fraud/theft activity inside your organization? How well do you vet and train your employees against fraud? How secure is your physical building? Do you monitor your office equipment and valuable inventory regularly?
Fundraising is at the heart of many nonprofits’ missions (and budget statements!) Organizations depend on successful fundraising campaigns to sustain not only their foundational ideals, but often their day-to-day operations. When fundraising goes wrong, it can be especially harmful to the organization.
One type of fundraising fraud occurs when a fictitious group steals the nonprofit’s logo and improperly uses its name to stage a fundraising event. They pocket any money raised, often without detection. Unfortunately, in the wake of online campaigns and blatant identity theft, this type of fraud has trickled into the nonprofit sector.
A second kind of damage, though not fraud, can occur during sponsorship fundraising. To avoid potential reputation damage later, nonprofits need to evaluate and vet each event sponsor that they partner with to ensure mission alignment and similar values. To discover a flaw or problem later that will only cause embarrassment to the organization or other donors. This can be a tricky juggling act.
Question: Has your board created a standard of event sponsors that they would not pursue because these businesses/donors do not align with your nonprofit’s mission? Have you taken measures to consult with an IT cybersecurity professional, if you don’t have an in-house IT staff person, to make sure your nonprofit’s data is as secure as possible?
Fundraising fraud is something that someone outside the organization does to hurt a nonprofit’s reputation. What about internal actions that a nonprofit may be taking that is affecting its own reputation? Here are five important actions that can place an organization’s reputation at risk:
- Not taking responsibility for mistakes – Covering up mistakes or not taking ownership never bodes well in the eyes of the organization’s donors. Acknowledging and offering to research a problem or issue will go a long way in maintaining a positive reputation.
- Lacking transparency – Transparency is especially important to nonprofit donors, as they are naturally curious about how funds are being used together with who is leading the organization.
- Lack of clarity – Being clear about the intent behind each fundraising campaign or sponsorship program is vital to keeping a strong reputation.
- Failing to comply with Charitable Registration laws – Nonprofits need to know their state’s Charitable Registration law. Currently, 39 states plus the District of Columbia require charities to register before asking residents for contributions, although some exemptions apply. (source)
- Ignoring donor wishes – Understanding any restrictions that accompany a donor’s gift is essential. If the organization cannot fulfill all the requirements attached to the gift, they cannot accept the gift or risk hurting their reputation.
Questions: Does your nonprofit have a designated staff person tracking use of donation gifts and notifying donors? Does your nonprofit have a system in place to demonstrate to donors that their condition for their gift has been met? Has your nonprofit registered with your state’s Charitable Registration, if applicable?
Special events can be an excellent way for a nonprofit to raise money and promote their message to a wider community. 5k runs, After Hour get together at a local brewery, and Annual Galas do come with risks to consider. A nonprofit must plan for the safety of the participants, potential property damage, and even legal liabilities.
Another risk to think about when planning a special event is the possibility of losing money if the attendance is low. Low turnout could be due to poor advertising or simply too many events scheduled on the same day.
Questions: When planning for an event, have you incorporated training for every contingency, including emergency preparedness? Is your organization part of a larger nonprofit network where you can coordinate event dates to avoid over saturation of similar fundraising events?
Volunteer Staff Vulnerability
Volunteers are the lifeblood of any nonprofit organization. For this reason, some Volunteer Coordinators have been known to cut corners when recruiting volunteers. Unfortunately, an unvetted volunteer team can be a huge liability to a nonprofit.
Some risks include volunteers who are unreliable, steal from the nonprofit, and damage the organization’s reputation during events due to inappropriate conduct. The best way to prevent these types of risks caused by volunteers is to take preventive measures during the application process.
Be sure to keep a completed application on file for every volunteer working with your organization. Some nonprofits feel this step is too invasive or formal, but it is essential. The application needs to include all vital contact information including name, home address, phone, and emergency contact. Consider asking for references and follow up by actually checking them. Criminal background checks are a must. An additional consideration might include a signed agreement such as a waiver for photo releases, code of conduct (if applicable), and/or proof of reading the volunteer handbook (if applicable).
Questions: Does your organization have a policy for vetting volunteers? Does your application form for volunteers include core components such as skills, interests, and scheduling preferences so that volunteers are matched appropriately? Have you incorporated Criminal Background Checks? Do you require references for your volunteers? Does your organization have a Volunteer Handbook and/or a Code of Conduct for volunteers? Would you consider creating either of these documents for your organization?
It is the nonprofit’s board’s responsibility to ensure that the proper financial and accounting procedures are in place. Often a certified public accountant is used in addition to an outside independent audit. If the organization cannot afford an audit, it should at least have an outside party review its financial reports and accounting records.
Proper documentation is also essential, for example, leaving a “paper trail” to justify and confirm financial transactions. Incorporating accounting controls is a proactive way to prevent risk. These types of accounting and bookkeeping activities are often outsourced to professionals who excel in providing these services, especially for nonprofit organizations.
Of all the nonprofit accounting changes seen in 2022, the most notable is that virtual operations are here to stay! With more employees working remotely, fundraising conducted virtually, and technology-generated reporting shared online, it’s more important than ever that nonprofits apply accounting “best practices” to avoid risks.
Question: Is your nonprofit doing all it can to apply “best practices” to avoid accounting risks?
Call us for a consultation
The experts at Temple Management are available to help your nonprofit organization assess risk and maintain growth. We excel in providing financial management in a timely and accurate manner. Our professionals are up-to-date on accounting and bookkeeping practices and software tools that can organize your finances and provide the reporting you need.
If you need an expert in nonprofit organization issues, especially accounting or bookkeeping, reach out to us today at (770) 892-2087 for a consultation. We are happy to assist you!