Nonprofits are built on trust — from donors, grantors and the communities they serve. When concerns about possible fraud by an employee arise, trust can be shaken quickly. How leadership responds can restore and preserve trust. It can also help reduce and recover potential losses and provide insights that can lower future employee fraud risk.
Start with a coordinated response
Suspicions of employee fraud, whether raised through a whistleblower hotline, internal control procedures or another way, can be unsettling. Acting quickly is important, but don’t act impulsively. Leadership should focus on gathering facts, preserving evidence and involving the appropriate parties early in the process. Consider taking these key steps:
Refer to established policies and procedures. Your organization’s fraud, whistleblower and internal control policies should serve as the starting point. These documents often outline reporting protocols, investigation procedures, and roles and responsibilities. Following established policies helps ensure consistency and demonstrates good governance.
Engage the board at the appropriate level. The executive director or other senior leadership should promptly involve the board or a designated committee, such as the audit or finance committee. The board has fiduciary oversight responsibilities and will typically play a role in determining how the organization proceeds, particularly in more significant or sensitive matters, such as if the potential fraud involves a large amount of money or a member of the leadership team.
Coordinate with legal counsel early. Because employee fraud investigations have legal and employment implications, it’s important to involve legal counsel early in the process. An attorney can help guide decisions around investigative steps, employee rights, confidentiality and potential reporting obligations.
Preserve evidence. Maintaining the integrity of records is critical. This may include securing accounting data, transaction histories, emails and supporting documentation. Access to systems may need to be limited in certain cases. Digital evidence is best handled with input from qualified specialists to avoid unintentional alteration or loss.
Consider engaging financial and forensic specialists. Independent professionals — such as forensic accountants or certified fraud examiners — can help assess the scope of the issue, quantify potential losses and analyze internal control breakdowns. Their work can also support decision-making by management and the board.
Evaluate next steps in consultation with advisors. Decisions such as whether to place an employee on leave, initiate disciplinary action or involve external authorities should be made carefully and typically in consultation with legal counsel and other advisors. These decisions often depend on the strength of available evidence and the specific circumstances involved.
Conduct a structured investigation. Responsibility for the investigation will vary. In many cases, management leads the process with oversight from the board or a committee. If senior leadership is implicated, the board may take a more direct role. Regardless of structure, the investigation should be documented, objective and guided by appropriate expertise.
Address reporting and compliance considerations. Certain situations may trigger reporting or disclosure requirements. For example, significant diversions of assets may need to be disclosed on Form 990, and insurance carriers may require timely notification to support potential claims. Communication with stakeholders — such as donors or grantors — should be handled thoughtfully and in coordination with legal counsel.
Strengthen controls and governance going forward
Once the immediate situation has been addressed, it’s important to step back and evaluate how the fraudulent activity was able to occur. In many cases, employee fraud reveals gaps in internal controls, such as oversight and segregation of duties.
A structured review can help identify:
- Control weaknesses or process breakdowns,
- Opportunities to strengthen financial oversight, and
- Enhancements to policies, training and monitoring.
Addressing these areas not only helps reduce future risk but also reinforces accountability and confidence among stakeholders.
Prepare, protect, respond
Even well-run nonprofits can face employee fraud risk. Having clear policies, strong internal controls and a response plan in place can help reduce this risk and enhance your organization’s handling of a fraud incident should one still occur. If your nonprofit suspects an employee of fraud or wants to proactively strengthen internal controls, contact our team. We can help assess risk, support investigations and implement safeguards.
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