A Comparative Case Study of Internal Controls and the Impact of Fraud on Nonprofit Organizations

Abstract

Internal controls are critical for the operations of nonprofit organizations, and they are also essential to guide against fraudulent activities. The problem addressed in this study is that internal controls protect organizational property and promote efficiency, but internal controls are lacking in nonprofit organizations. This qualitative case study focused on the lack of internal control systems in nonprofit organizations in the Chicago Metropolitan Area. Nonprofit organization leaders need to understand that internal controls can be a useful tool to prevent fraudulent activities and make the requisite investment in internal control systems. The methodology used was a qualitative multiple-case study and a holistic approach. Data were collected using face-to-face, open-ended semi-structured interviews, and seven participants selected using purposive sampling. Participants list came from Illinois State Attorney General and TaxExemptWorld website. The data were analyzed using qualitative content analysis and Nvivo software to ascertain the themes—a total of ten themes emanated from the data analysis, which formed the basis of the findings. The study results indicated that nonprofit leaders must strive to institute adequate internal controls to protect the organization's assets from fraud. Additionally, board members are to engage in training to equip them to be effective in the discharge of their fiduciary responsibilities. Recommendations for practical application encompasses providing training for board members, using fiscal agents to augment internal controls, and making an investment in internal controls. Future studies should focus on the nonprofit leaders' perception of the fraud effects on the nonprofit organization, which will shed more light on how the organization's objectives are impeded by fraud. The study was limited to the Chicago Metropolitan Area. The study could be replicated in different geographic areas in the United States and beyond, and also to increase the sample size. Future studies should be conducted to determine the efficacy of using an external organization as a fiscal agent for nonprofit organizations. Finally, future studies could be conducted using quantitative studies such as survey and correlational research.