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Dear Friend of NEW,

The world is all a-Twitter, and a-Facebook, and a-YouTube, and a-Flickr!  It is LinkedIn too!  If your organization is not actively engaged in the world of social media, now is the time.

In a recent article, Mark Evans of ME Consulting says, "While it's left to be seen if social media is an advertising medium, it is becoming a powerful marketing medium that is already having a major impact on how consumers think and buy services and products."

Many organizations are uncertain, nervous or anxious about using social media tools for professional purposes.  But sometimes the best way to learn to swim is just to dive in!  If you prefer "swim lessons" there are a variety of options available including online articles, webinars and face-to-face training programs.  Don't let fear and uncertainty be a roadblock to your organization using social media. NEW currently offers social media training and will soon offer an online social media assessment tool.

So...dive into social media, or at least get your feet wet! But get all a-Twitter, or a-Facebook, or a-YouTube, or a-Flickr!  And get LinkedIn too!

Your Friends at NEW

LEAD STORY
Fraud and Other Misconduct in Nonprofits

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By Paul Larned

Fraud, theft, embezzlement and other wrongdoing is increasing dramatically in both business and nonprofit organizations. Fraud in nonprofits has been the focus recently in congressional hearings and news articles. In March 2009, The Ann Arbor News reported on several instances where trusted employees or volunteers stole amounts of up to nearly one million dollars from their nonprofit organizations or associations. Think it can't happen in your organization? Think again!

According to the Association of Certified Fraud Examiners (ACFE) in a 2008 report, U.S. organizations lose 7% of their annual revenue to fraudulent activity. In 959 cases of occupational fraud investigated, 13% of the fraud occurred in nonprofits. The median loss in nonprofits was $109,000, up from $40,000 in a similar study in 2002. The median duration of fraud schemes was 24 months before detection. However, in those organizations with proper controls in place, the losses were reduced significantly.

Unfortunately, the study indicated that the controls associated with the largest reduction in median losses — hotlines and management review of financial statements — were not commonly implemented by nonprofits. Implementation of an effective hotline alone resulted in a median loss of $50,000, as opposed to a loss of $124,000 where there was no hotline. Detection of the scheme with a hotline was a median of 12 months, but without a hotline the fraud existed for 30 months. The greatest reductions in median losses in all organizations came from conducting surprise audits, job rotation/mandatory vacation, hotline, employee support programs, and fraud awareness training.

The Ethics Resource Center’s 2007 National Nonprofit Ethics Survey found similar results, but was not limited to occupational fraud. The survey looked at ethics in the workplace, from the perspective of employees at all levels, to understand how they view ethics and compliance at work. The study also looked at ethics risk, defined as the incidence and reporting of misconduct.

The nonprofit sector provides the very best example of the difference that an effective ethics and compliance program, along with a strong culture, can make. Where present, levels of misconduct drop to nearly 0 percent, and when violations occur, 100 percent of employees report the situation to management. However, only about 32% of nonprofits have a program that is well-implemented.

Boards, while perceived to have more influence in shaping the perceptions of employees with regard to the workplace than in other sectors, are not taking advantage of their influence to set clear ethics standards. Where boards have heavy influence, high levels of misconduct are also seen. Employees are less positive about their boards’ ethics than in business or government.

Historically, misconduct in nonprofits has been lower than in the other sectors, but is now on a level with business and government. Observations of misconduct have risen from a low of 43% in 2003 to a high of 55% in 2007. The most prevalent types of misconduct observed are conflicts of interest, lying to employees, abusive behavior, and misreporting hours worked. Significantly, the study found that 38% of employees who saw some sort of misconduct failed to report their observations to management.

Nonprofit employees observe instances of fraud more than employees in business. Fraud here consists of alteration of documents, alteration of financial records, lying to external stakeholders and employees, and the misreporting of hours. Historically, nonprofits have been comparable to business in observations of financial fraud — approximately 5%. In 2007, observed financial fraud leaped to 8%, while business remained at 5%.

The vast majority of employees who commit fraud are first time offenders. Only about 7% have ever been previously convicted. Additionally, 83% had never been previously punished or terminated by an employer for fraud or abuse. It is probably one of your most trusted employees or volunteers who is the most likely to commit fraud or other wrongdoing. But there are certain behaviors or characteristics that may serve as warning signs.

The most frequent of these behavioral “red flags” displayed prior to discovery of the fraud involved the offender living beyond his or her financial means. This warning sign was present in 39% of the cases in the ACFE study. The next most frequent were the offender having financial difficulties, displaying a “wheeler-dealer” attitude, control issues and an unwillingness to share duties, divorce and/or family problems, unusually close association with vendors or customers, and irritability, suspiciousness, or defensiveness.

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*Paul Larned is an expert in organizational ethics and compliance programs and has consulted with over 100 organizations. He is presenting on Fraud Prevention at NEW's Get Connected program on Tuesday, June 30 in Detroit. Protect your organization! Come learn about an effective 7-step compliance and ethics program designed to prevent and detect these types of problems. Register now for just $10.