Matt Engle is a commercial property and casualty insurance broker with Insurance Office of America in the Las Vegas, Nevada office.
Because of a steady influx of dues and donations, associations and other nonprofits are prime targets for theft by employees. Taking fiscal precautions and obtaining dishonesty insurance can help associations avoid financial loss.
Nonprofit organizations, including associations, often don’t have an abundance of resources to devote to fraud prevention measures, which leaves them vulnerable to incidences of employee dishonesty.
While most associations make good hiring decisions and have a staff made up of employees who are honest and hardworking, there are some bad actors that can harm an organization. Incidences of employee dishonesty can have a significant financial impact and even cause damage to an association’s reputation.
According to the Association of Certified Fraud Examiners’ (ACFE) Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse, not-for-profit entities were the victims of 9 percent of all fraud, with a median loss of $75,000. For many organizations with limited financial resources, a loss of that amount can be devastating.
Associations sometimes overlook the need to protect themselves from fraud and neglect to obtain employee dishonesty insurance policies. However, nonprofits are at significant risk. A majority of the more than 1.5 million nonprofit organizations in the U.S. raise funds, accept donations, and, in the case of associations, collect membership dues or fees. All of this makes them attractive targets for employee theft.
In its report, ACFE defines some of the most common fraud schemes:
Billing: An employee submits invoices for nonexistent goods or services, inflated invoices, or invoices for personal purchases.
Expense reimbursement: An employee makes a claim for fake or inflated business expenses.
Check or payment tampering: An employee steals funds by intercepting, forging, or modifying a check or electronic payment drawn on the employer’s bank account.
Cash larceny: An incoming payment is stolen from an organization after it has been recorded in the organization’s books.
Incidences of employee dishonesty can have a significant financial impact and even cause damage to an association’s reputation.
Fraud schemes can strain an association’s resources and diminish its ability to take care of employees and volunteers, deliver much-needed services, and fulfill its mission. It’s important for associations to recognize the risks and take steps to limit their exposure to employee theft. These steps may include requiring multiple signatures on checking accounts for checks written above a certain amount, designating someone who is not authorized to sign checks to reconcile all monthly bank statements, limiting the need for employees to handle cash, requiring preapproval of expenses, and requiring reimbursement requests to include receipts and other documentation.
In addition to taking these precautionary steps, associations should consider securing an employee dishonesty insurance policy. Also referred to as crime coverage or a fidelity bond, this type of insurance protects an organization from financial losses resulting from fraudulent acts by employees. This coverage helps replace stolen funds and provides the added benefit of requiring nonprofits to implement risk management policies designed to help prevent employee fraud from occurring.
Employee dishonesty policies can be purchased with property insurance or as a separate fidelity bond. These policies are designed to cover such things as employee theft, computer and funds transfer fraud, depositor forgery or alteration, credit card fraud, and unauthorized electronic funds transfers.
As with any insurance policy, one size does not fit all. For example, if an association works with volunteers, there is the risk of a volunteer misusing the organization’s property or assets for personal use. To be protected from this risk exposure, organizations should ask their insurance advisor about extending employee dishonesty policies to cover volunteers. It is also a good idea for associations to create a risk management plan and review it annually to protect themselves from all types of risk exposure, including employee dishonesty. Organizations should then consult with their insurance advisor to review this plan and determine the level of coverage they need for their unique exposures, whether policy language covers volunteers, and whether there are any exclusions for volunteer activities.
In addition, a credible commercial insurance broker or CPA firm can be an excellent resource through their Risk Services divisions to assist with internal controls and procedures to minimize employee theft.