Running head: FRAUD PREVENTION 1

Fraud Prevention in Nonprofit Organizations in the United States

Noura Almazrouei

G01348963

Administration in Public and Nonprofit Organization

PUAD 502

11/21/2023
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FRAUD PREVENTION

Fraud Prevention in Nonprofit Organizations in the United States

Table of Contents
I. Introduction........................................................................................................................................3
II. Background.......................................................................................................................................4
III. Regulatory Framework....................................................................................................................6
IV. Challenges in Fraud Prevention.......................................................................................................7
V. Fraud Prevention Strategies.............................................................................................................7
1) Technology and Innovation.......................................................................................................8
2) Training and Education..............................................................................................................9
3) Collaboration and Partnerships................................................................................................10
 Benefits of Collaboration in Fraud Prevention.........................................................................10
 Leveraging Collaborative Networks........................................................................................11
VI. Conclusion.....................................................................................................................................11
Bibliography........................................................................................................................................12
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Fraud Prevention in Nonprofit Organizations in the United States

I. Introduction

Fraudulence within nonprofit organizations is a grave concern in the country. It poses

a significant threat to the financial integrity and ethical standing of entities that are otherwise

used for the betterment of society. With more coverage by the media, fraud cases continue to

rise every single day. This negates the missions and the visions that some of these nonprofit

organizations have sworn by. What is even concerning is that employees and staff of these

organizations are the center of these cases. They are aware of the system, thus can easily be

tempted to partake in fraud activities. For that, some nonprofit experts have emphasized the

importance of empowering employees as a frontline defense against fraud in nonprofit

organizations. This also sheds light on the dynamic role of individuals in preventing

deceptive practices (Bradley, 2014). With that reason, this research aims to provide a better

understanding of the concept of fraud in nonprofits, more so in the human sector. Also, it will

not only highlight the role of fraud prevention in upholding organizational integrity, but it

will also offer modern insights of prevention strategies into the nonprofit sector in the United

States.

Fraud in nonprofit organizations spans a spectrum of deceitful activities, from

financial mismanagement to the manipulation of records. These deceptive practices can

compromise the very foundations of organizations committed to social and environmental

causes. It is not easy to create a fraud-free system within nonprofit organizations. That is why

a comprehensive understanding of fraud is essential for devising effective prevention

strategies within the nonprofit sector (Bradley, 2014). Aside from understanding the instances

of fraud in any organization, maintaining the integrity of nonprofits is also contingent upon

robust fraud prevention measures. Organizations, nonprofits included, have to maintain

integrity, because in installing in fraud prevention measures into their systems, the interests

of stakeholders are safeguarded and public trust in the not-for-profit sector is preserved

(Uygur & Napier, 2023). This is why the moral imperative of preventing fraud goes beyond

financial considerations, thus it extends to the ethical responsibility organizations bear

towards their donors, beneficiaries, and the wider community.

To further contextualize the discussion, it is imperative to provide a brief background

of the nonprofit sector in the United States. With its vast array of charitable foundations,

advocacy groups, and educational institutions, the nonprofit sector has a stake in addressing

societal challenges in the country. It is often seen that a stakeholder perspective can enrich

the understanding of fraud within this sector, acknowledging the various dynamics that shape

vulnerabilities in not-for-profit organizations (Uygur & Napier, 2023). Therefore, it is

important to unravel the complexities surrounding fraud in nonprofit organizations and

contribute to the development of effective preventive measures, ensuring the sustained impact

of organizations dedicated to positive social change.

II. Background

Since the 1800s, nonprofit organizations, often referred to as the backbone of civil

society, have played a pivotal role in addressing societal needs and fostering positive change.

Be it reducing the number of street homeless children, youths, and elderlies. Be it feeding the

hungry among the poorly kept communities. The country can truly say that the betterment of

the society has been partially fostered by the nonprofit organizations. True to it all, the

diverse benefits and functions of these organizations continue to emerge. They range from

charitable foundations to advocacy groups, collectively contributing to the well-being of

communities (Archambeault, Webber, & Greenlee, 2015). These entities operate with a
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mission-driven focus, striving to fulfill social, educational, and humanitarian objectives

without the primary goal of financial profit.

Despite their altruistic missions, nonprofits are not immune to the scourge of fraud.

Just like the for-profit organizations, different fraud cases continue to emerge within and in

the organizations. In a comparative case study, by Buabeng, it is seen that the study has

delved into the internal controls employed by nonprofit organizations and their impact on

preventing fraud (Buabeng, 2020). Common forms of fraud within nonprofits, as illustrated

by the study, include but are not limited to misappropriation of funds, fraudulent financial

reporting, and conflicts of interest. Understanding these forms has been an ongoing task over

the years with the goals of developing targeted prevention strategies tailored to the unique

challenges faced by nonprofits. The fact that technology takes the appearance of fraud cases

to another level does not begin to cover the alarming rate of these cases.

To comprehend the gravity of fraud in nonprofit organizations, insights into its

prevalence are crucial. An analysis of press reports spanning 2008-2011 has suggested that

fraud and corruption incidents within US nonprofit entities during that period was extremely

high (Archambeault, Webber, & Greenlee, 2015). The study also sheds light on the frequency

and nature of reported cases, offering valuable context to the challenges faced by nonprofits

in maintaining financial integrity. For instance, one major reason that sent more employees to

prison due to fraud cases, was the global financial crisis that the country was undergoing

during that time. Statistics from this analysis reveal a far from subtle state of affairs where

nonprofits grapple with various fraud-related challenges, prompting the need for proactive

measures to fortify their financial and ethical foundations (Archambeault, Webber, &

Greenlee, 2015). By delving into the past and present landscape of nonprofit organizations,

their susceptibility to fraud, and the prevalence of such incidents, it is important to provide a
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comprehensive understanding of the challenges these entities face, setting the stage for

effective fraud prevention strategies into the present going to the future.

III. Regulatory Framework

The accountability and integrity of nonprofit organizations in the United States are

elaborately woven into a complex web of regulations and legal frameworks. There are legal

underpinnings that define the accountability of nonprofit organizations and those who control

them, providing valuable insights into the intricate legal landscape shaping these entities

(Chisolm, 1995). Nonprofits are subject to a myriad of federal and state laws that dictate their

formation, operation, and reporting obligations. So, government agencies play a pivotal role

in ensuring the adherence of nonprofits to established legal standards. The Internal Revenue

Service (IRS), in particular, plays a central role in granting and monitoring tax-exempt status,

imposing regulations on financial reporting, and scrutinizing compliance with nonprofit laws

(Fremont-Smith, 2008). These legal frameworks and government interventions are designed

to foster transparency, accountability, and the ethical conduct of nonprofit organizations.

They encompass a range of issues, from organizational structure to financial disclosure, with

the aim of ensuring that nonprofits operate in the public interest and fulfill their intended

missions.

While regulations provide a necessary foundation for governance, challenges do arise.

Compliance with these regulations can be intricate, and the oversight process may encounter

limitations. Additionally, the regulatory landscape is subject to change. Understanding these

challenges and staying abreast of regulatory developments are essential for nonprofit

organizations aiming to fortify their fraud prevention measures. By navigating the intricate

legal frameworks governing nonprofits and exploring the role of government agencies in
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oversight, it is possible to elucidate the regulatory foundations that shape the operating

environment of nonprofit organizations in the United States.

IV. Challenges in Fraud Prevention

Nonprofit organizations, driven by their altruistic missions, are not immune to the

challenges posed by fraudulent activities. Several common challenges emerge, hindering

effective fraud prevention within the nonprofit sector. Internal factors, such as organizational

size, resource constraints, and the complexity of operations, contribute to the intricate

landscape nonprofits navigate in their efforts to combat fraud (Buabeng, 2020). Still in his

research, he underscores internal factors that render nonprofits susceptible to fraud,

emphasizing the importance of understanding internal dynamics for effective prevention

(Buabeng, 2020). Resource limitations, insufficient internal controls, and a lack of awareness

among staff and leadership create an environment conducive to fraudulent activities.

In addition to internal challenges, external factors also foster the vulnerability of

nonprofit organizations to fraud. These may include regulatory changes, economic

conditions, and the evolving landscape of technology (Holloway, 2023). Nonprofit leaders

face obstacles in implementing robust internal controls due to external pressures, highlighting

the need for adaptability and proactive strategies in the face of changing circumstances

(Holloway, 2023). By dissecting the challenges nonprofits encounter in preventing fraud,

both internally and externally, recognizing these challenges is a crucial step toward

formulating targeted and effective fraud prevention strategies within the nonprofit sector.

V. Fraud Prevention Strategies

Developing and implementing robust fraud prevention strategies is imperative for

safeguarding the integrity and mission of nonprofit organizations. To foster a comprehensive

approach, Biegelman and Bartow's (2012) "Executive Roadmap to Fraud Prevention and
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Internal Control" provides a roadmap for creating a culture of compliance within

organizations (Biegelman & Bartow, 2012). Internal controls, well-defined policies, and a

commitment to ethical considerations form the cornerstone of effective fraud prevention in

nonprofits. The authors have emphasized the pivotal role of internal controls in creating a

robust framework for preventing and detecting fraudulent activities (Biegelman & Bartow,

2012). Clear policies regarding financial transactions, conflict of interest, and ethical

behavior serve as preventative measures by establishing guidelines for staff and leadership.

Examining real-world instances of successful fraud prevention provides valuable

insights for nonprofits. Illustrative case studies can showcase the practical application of

prevention strategies. Incorporating lessons from Marchetti's (2020) research on small

nonprofit fraud and Biegelman and Bartow's (2012) executive roadmap, they have

highlighted instances where nonprofits successfully thwarted fraud, showcased the

effectiveness of the outlined strategies in diverse organizational settings. These case studies

serve as tangible examples, demonstrating that a proactive and comprehensive approach to

fraud prevention can yield success within the nonprofit sector. By synthesizing insights from

risk mitigation strategies and executive roadmap, there is more than a possibility to equip

nonprofits with actionable best practices for preventing fraud such as integration of

technology, organizations collaboration, and employee training. All in emphasizing the

importance of internal controls, well-defined policies, and a commitment to ethical

considerations.

1) Technology and Innovation

In the ever-evolving landscape of fraud prevention, nonprofits are increasingly

turning to technology as a formidable ally, and with good reasons. Some have utilized

artificial intelligence (AI), machine learning, as well as data analytics. Speaking of data

analytics, the application of data analytics in detecting and preventing fraud is quite
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promising. This sheds light on the transformative role of technology in this context

(Bănărescu, 2015). The integration of innovative technological solutions has the potential to

fortify the defenses of nonprofits against fraudulent activities. For instance, predictive and

prescriptive data analytics in systems of nonprofits can track unknown transactions that is

outside the normal system operations.

It is true that data analytics and artificial intelligence (AI) stand at the forefront of

technological tools that can be harnessed for effective fraud prevention. Aside from the

predictive and prescriptive data analytics, there also the application of unstructured data

analytics, emphasizing its impact on customer acquisition, retention, and fraud detection and

prevention (Isson, 2018). The ability of these tools to process vast datasets, identify patterns,

and detect anomalies provides nonprofits with a proactive approach to fraud prevention.

From these instances of technology, it is seen that data analytics can empower

nonprofits by enabling them to detect irregularities in financial transactions, identify potential

fraudulent activities, and strengthen overall risk management strategies. In addition to data

analytics and AI, nonprofits can explore other innovative technological solutions to enhance

their security measures. Incorporating secure payment gateways, biometric authentication,

and encryption technologies can further fortify financial transactions and protect sensitive

donor information. By embracing technology and innovation, nonprofits can not only detect

and prevent fraud but also streamline their operations, enhance efficiency, and build a robust

framework for future challenges.

2) Training and Education

To fortify the defenses against fraud, it is paramount to emphasize the importance of

training and educating nonprofit staff and board members. Employees and staff are the

backbone to an organization’s system. And in nonprofit, no less. It is often said that

employees are the weakest link to an organization’s security. This is not further from the truth

when it comes to fraud prevention. In few cases, it is seen that ignorance organization’s

regulatory frameworks can make employees susceptible to fraud charges. Either they did it

knowingly or unknowingly. By equipping individuals with the knowledge and skills to

recognize and address fraudulent activities, nonprofits can create a proactive line of defense

against potential threats as well as maintain their reputation.

Professional development plays a crucial role in cultivating a culture of integrity

within nonprofit organizations. It is significant to ensure professional development in creating

a culture of compliance, where ethical standards and fraud prevention become ingrained in

the organizational ethos (Biegelman & Bartow, 2012). Training initiatives, workshops, and

ongoing education contribute to the continuous improvement of skills and awareness

necessary for effective fraud prevention. All in all, it is crucial to emphasize the

transformative impact of education and professional development in instilling a culture of

vigilance and ethical conduct within nonprofit organizations (Trinkle, 2023).

3) Collaboration and Partnerships

 Benefits of Collaboration in Fraud Prevention

In the fight against fraud, nonprofits can amplify their impact through collaboration

with other nonprofits, government agencies, and private entities. Even though there are

challenges when it comes to collaboration, strategic alliances can definitely lead to success

for both nonprofits and businesses (Austin, 2010). Whether it be nonprofit and a nonprofit, a

nonprofit and a for-profit, or even a nonprofit with a government agency. The success of a

collaboration can only be so if there was insightful choosing and use of collaborative

networks effectively (Milward & Provan, 2023). Collaborative efforts facilitate the pooling of

resources, sharing of expertise, and the establishment of collective strategies to prevent and

address fraudulent activities.

 Leveraging Collaborative Networks

Collaborative networks are valuable tools for nonprofits to enhance their capacity in

addressing complex issues, including fraud prevention (Milward & Provan, 2023). By

leveraging the strengths and resources of various partners, nonprofits can create a more

comprehensive and resilient approach to fraud prevention. Training and education, coupled

with collaborative efforts, serve as powerful pillars in the endeavor to prevent fraud within

nonprofit organizations.
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Austin, J. E. (2010). The collaboration challenge: How nonprofits and businesses succeed

through strategic alliances. John Wiley & Sons.

Biegelman, M. T. (2012). A fraud prevention culture that works. Executive Roadmap to

Fraud Prevention and Internal Control, 371-

390. https://doi.org/10.1002/9781119202356.ch17

Bradley, J. M. (2014). Empowering employees to prevent fraud in nonprofit

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Buabeng, A. A. (2020). A Comparative Case Study of Internal Controls and the Impact of

Fraud on Nonprofit Organizations [Doctoral dissertation]. Northcentral University

Bănărescu, A. (2015). Detecting and preventing fraud with data analytics. Procedia

economics and finance, 32, 1827-1836.

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Faced by Nonprofit Leaders [Doctoral dissertation]. Walden University

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customer retention, and fraud detection and prevention. John Wiley &

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Marchetti, A. M. (2020). Small Nonprofit Fraud: Risk Mitigation Strategies [Doctoral

dissertation]. Walden University

Trinkle, G. W. (2023). Exploring Strategies to Protect Nonprofit Organizations’ Assets

From Fraud [Doctoral dissertation]. Walden University

Uygur, S. A., & Napier, C. J. (2023). Understanding fraud in the not-for-Profit sector: A

stakeholder perspective for charities. Journal of Business Ethics, 1-

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