Fraud is a persistent issue for nonprofit organizations, threatening both their financial stability and public reputation. This is especially important because nonprofits often operate on lean budgets, with every dollar critical to advancing their mission. The loss of funds or donor trust from fraud can be devastating.

In 2025, nonprofits must confront two primary, fraud-related challenges: internal fraud perpetrated by employees and external fraud targeting systems and data. Proactive measures are key to protecting these organizations from a growing array of sophisticated threats.

Internal Fraud

Internal fraud is a notable risk for nonprofits, with 10 percent of all occupational fraud cases occurring within these organizations, according to the 2024 ACFE Report. With a median loss of $76,000, the financial damage can be substantial, but the broader impact on donor trust and organizational reputation may be even more severe. The report also highlights that for religious, charitable, and social service organizations, the median loss rises to $85,000, emphasizing their particular vulnerability.

Common Schemes

For nonprofits with fewer than 100 employees, the most common fraud schemes include corruption (44 percent), billing fraud (31 percent), and check or payment tampering (23 percent). Skimming, which accounts for 10 percent of cases, is another frequent yet often overlooked threat. While cash is a typical target, skimming schemes also involve checks and credit card payments, which fraudsters can easily convert into cash.

For example, in one case, a bookkeeper for a mid-sized nonprofit intercepted incoming checks made payable to the organization. Exploiting his position of trust, he opened a bank account in the name of the organization at a bank separate from the one the organization primarily used. Over time, he deposited the intercepted checks into the unauthorized account and withdrew the funds to support an extravagant lifestyle. This incident not only caused significant financial losses but also eroded donor confidence when the scheme was uncovered.

Smaller organizations, often reliant on trust-based operations and lacking robust oversight, are particularly vulnerable to these types of fraud. Strengthening internal controls, such as segregation of duties and regular independent audits, can mitigate these risks and protect organizational integrity.

Recognizing Red Flags

Fraud often leaves a trail of warning signs. Common behavioral red flags include employees living beyond their means (39 percent), experiencing financial difficulties (27 percent), or maintaining unusually close relationships with vendors (20 percent). Other signs, such as defensiveness, bullying, and unwillingness to share duties, are also worth noting.

In over half of fraud cases, multiple red flags are present. Recognizing these patterns can help nonprofits intervene before small issues escalate into significant losses.

Methods of Detection

Most internal fraud is uncovered through proactive measures. Whistleblower tips remain the most effective tool, accounting for 43 percent of all fraud detections. Recent trends show a growing reliance on online forms, which surpassed phone and email tips as the preferred reporting method in 2024. This shift highlights the importance of offering accessible and anonymous reporting systems to encourage employees to come forward.

Internal audits (14 percent) and management reviews (13 percent) are also critical in identifying fraud, providing a structured way to catch irregularities that might otherwise go unnoticed. Fraud awareness training further enhances detection efforts. Organizations that invest in training cut the average time to uncover fraud from 24 months to just nine months and report nearly 50 percent lower financial losses compared to those without such programs.

External Fraud

As nonprofits increasingly rely on digital tools to manage their operations, the risk of external fraud has become more sophisticated. Cybercriminals and scammers frequently target these organizations, exploiting outdated security systems and insufficiently trained staff.

In 2023, 27 percent of nonprofits worldwide reported falling victim to cyberattacks, according to a recent report. Many of these organizations remain vulnerable due to outdated security protocols, making them prime targets for phishing schemes, ransomware attacks, and other cyber threats.

Common Schemes

  • Cyberattacks: Ransomware and unauthorized data access can cripple nonprofit operations and expose sensitive donor information.
  • Phishing Scams: Fraudsters use deceptive emails to trick employees into sharing credentials or installing malware.
  • Vendor Fraud: Fake invoices and overbilling exploit nonprofit payment systems.
  • Grant Scams: Fraudsters pose as grant providers, luring nonprofits with promises of funding in exchange for fees or sensitive information.

Vulnerabilities and Trends

Nonprofits face significant cybersecurity challenges. Studies show 68 percent lack documented policies for responding to cyberattacks, and less than 50 percent have internal procedures or policies in place to manage how data is shared with external agencies. These gaps make nonprofits attractive targets for cybercriminals.

Phishing remains a particularly pervasive threat, with approximately one in three untrained employees susceptible to phishing attempts. Emerging technologies like AI and machine learning have enabled fraudsters to launch even more sophisticated attacks, including deepfake phishing,

Detection

Effective detection of external fraud begins with robust digital safeguards. Nonprofits can start by conducting regular penetration tests to uncover vulnerabilities in their systems. Phishing simulation tools can further strengthen defenses by training employees to recognize and respond to threats. Proactive data monitoring and periodic cybersecurity audits provide an additional layer of protection, helping to identify suspicious activity before it escalates.

Practical Strategies

To combat fraud effectively, nonprofits will want to focus on high-impact areas that address vulnerabilities and bolster organizational integrity. By combining internal controls, external safeguards, and cultural shifts, organizations can significantly reduce fraud risks while building trust with stakeholders. Regular risk assessments enhance these efforts by identifying potential threats and guiding resources to the areas of greatest need.

Internal Controls

  • Segregation of Duties: Even with limited staff, nonprofits can successfully implement segregation of duties by rotating roles or leveraging external accounting services.
  • Audits: Regular internal and external audits identify discrepancies early.
  • Fraud Awareness Training: Equip staff with the knowledge to spot and report fraud.
  • Policies: Clear anti-fraud policies establish expectations and consequences.
  • Positive Pay: An effective monitoring tool that matches issued checks against those presented for payment, helping to detect unauthorized or altered transactions before they clear.

External Safeguards

  • Cybersecurity: Implement multi-factor authentication and secure networks to protect sensitive data from external threats.
  • Incident Response Plans: Prepare for cyberattacks with documented recovery steps that can minimize downtime and losses.
  • Vendor Vetting: Conduct reference checks, review financial histories, and monitor transactions to verify vendor credentials and avoid fraudulent engagements.

Looking Forward

Fraud remains a formidable challenge for nonprofits, but organizations that prioritize prevention and detection will be better equipped to navigate the risks. By addressing internal and external threats, nonprofits can safeguard their missions and maintain donor trust. For assistance in assessing or strengthening your fraud prevention and detection strategy, contact PBMares Not-for-Profit Partner Bo Garner.