Nonprofits depend on the trust of donors, grantmakers, employees and the communities they serve. When suspected employee fraud arises, that trust can be damaged quickly. A careful, coordinated response can help protect the organization, preserve evidence, reduce losses and identify steps to lower future risk.
Begin With a Clear Response Plan
Concerns about fraud may come through a whistleblower report, internal control review, financial discrepancy or other source. While it is important to respond promptly, leadership should avoid reacting too quickly without a plan. The priority should be to gather facts, protect records and involve the right people early.
Follow Established Policies
Your nonprofit’s fraud, whistleblower and internal control policies should guide the initial response. These policies may explain how concerns should be reported, who should be involved and how investigations should be handled.
Following established procedures helps ensure a consistent response and demonstrates that the organization is taking the matter seriously.
Involve the Board Appropriately
Senior leadership should notify the board or the appropriate board committee, such as the audit or finance committee. The board has oversight responsibilities and may need to help determine next steps, especially if the suspected fraud involves significant funds, sensitive issues or a member of leadership.
Consult Legal Counsel Early
Employee fraud concerns can involve legal, employment and confidentiality issues. Involving legal counsel early can help the organization make informed decisions about the investigation, employee rights, communication and any reporting obligations.
Preserve Relevant Evidence
Protecting records is critical. This may include accounting files, transaction records, emails, supporting documents and system access logs. In some cases, access to financial systems may need to be restricted.
Digital evidence should be handled carefully, preferably with guidance from qualified professionals, to avoid accidental deletion, alteration or loss.
Use Outside Specialists When Needed
Independent professionals, such as forensic accountants or certified fraud examiners, can help determine the scope of the issue and estimate potential losses. They can also identify weaknesses in internal controls that may have allowed the activity to occur.
Their findings can support decision-making by management, the board and legal counsel.
Evaluate Personnel and Reporting Decisions Carefully
Decisions about placing an employee on leave, taking disciplinary action or notifying outside authorities should be made carefully and with guidance from advisors. The appropriate response will depend on the evidence available, the individuals involved and the specific circumstances.
Some situations may also create reporting or disclosure obligations. For example, significant diversions of assets may need to be reported on Form 990. Insurance carriers may also require timely notice if the organization plans to file a claim.
Any communication with donors, grantors or other stakeholders should be handled thoughtfully and in coordination with legal counsel.
Conduct a Structured Investigation
The structure of the investigation will depend on the circumstances. In some cases, management may lead the process with board oversight. If senior leadership is involved, the board may need to take a more direct role.
Regardless of who leads the investigation, the process should be objective, well documented and supported by appropriate expertise.
Strengthen Controls Afterward
Once the immediate issue has been addressed, the organization should review how the suspected fraud occurred. Employee fraud often reveals weaknesses in oversight, segregation of duties, approval processes or monitoring.
A follow-up review can help identify control gaps, improve financial oversight and strengthen policies, training and internal reporting procedures.
Prepare Before Problems Arise
Even well-managed nonprofits can face fraud risk. Clear policies, strong internal controls and a practical response plan can help organizations respond more effectively when concerns arise.
By preparing in advance and responding carefully, nonprofits can protect their resources, reinforce accountability and preserve stakeholder trust. Contact us to learn more.
