July 30, 2025

Financial statement fraud can damage your nonprofit’s reputation, erode donor trust, and put future funding at risk. Even if you are not an accountant, understanding basic warning signs and asking the right questions can help you protect your mission

This article highlights common nonprofit financial statement fraud risks, explains how they occur, and outlines what to look for so that board members and leadership can identify warning signs early and ask the right questions.

Common Financial Statement Fraud Risks for Nonprofits

1. Inflated Contributions or Grants

Red Flag: Revenue spikes at year-end without matching cash deposits

How it Happens: Counting pledges that aren’t guaranteed or recognizing conditional grants as income before conditions are met.

What to Watch For:

  • Receivables for pledges with no signed agreements
  • Conditional grants listed as unrestricted revenue
  • Large last-minute journal entries increasing revenue

Questions to Ask:

  • Do we have signed agreements for major pledges?
  • Are conditional grants disclosed properly in the financial statements?
  • Do we compare budget-to-actual contributions monthly and investigate large year-end variances?

2. Fictitious Donations or Membership Dues

Red Flag: Reported donor activity doesn’t match actual acknowledgments or donor database

How it Happens: Creating fake donors or inflating contributions to impress funders or the board

What to Watch For:

  • Donor records missing contact details
  • No acknowledgment letters for reported donations
  • Discrepancies between donor system and accounting records

Questions to Ask:

  • Does the donor list match acknowledgment letters sent?
  • Are donor databases reconciled to the accounting records regularly?

3. Misuse of Restricted Funds

Red Flag: Programs appear underfunded despite restricted gifts received

How it Happens: Spending restricted gifts on general expenses and hiding it by reclassifying expenses

What to Watch For:

  • Unusual journal entries moving costs between funds
  • Missing reports on restricted fund usage
  • Indirect cost allocations inconsistent with policies

Questions to Ask:

  • Are restricted funds tracked separately?
  • Do reports show how restricted funds were actually used?

4. Overstating Program Expenses

Red Flag: Program expenses increase, but program activity doesn’t

How it Happens: Charging “admin” or “fundraising costs” to programs to make ratios look better

What to Watch For:

  • Large or vague program expense accounts
  • Shared costs disproportionately allocated to programs
  • Missing timesheets for employees working across functions

Questions to Ask:

  • Are shared costs allocated between programs and administrative charges?
  • Do we have proper documentation like timesheets for staff charged to programs?
  • Do we review functional expense allocations and ensure they align with policy and activity levels?

Concerned About Financial Red Flags in Your Nonprofit?

At Rubino, we specialize in nonprofit audit and assurance services that go beyond compliance. Our experienced team understands the unique challenges nonprofits face and provides clear, actionable insights to strengthen internal controls, ensure transparency, and protect your mission.

Protect your organization’s reputation and future funding.

Connect with our nonprofit audit team today!

5. Concealed Liabilities

Red Flag: Liabilities seem too low compared to the size of operations

How it Happens: Leaving out unpaid bills, taxes, or grant refunds to make finances look stronger

What to Watch For:

  • Delayed invoice posting
  • No record of accrued payroll taxes or benefits
  • Liabilities on Form 990 don’t match audited statements

Questions to Ask:

  • Do we review all outstanding obligations regularly?
  • Are payroll taxes, vacation, and other liabilities recorded on time?

6. Inflated Asset Values

Red Flag: Assets reported at unrealistic values compared to market or donor documentation

How it Happens: Overstating the value of donated assets or ignoring depreciation on property and equipment

What to Watch For:

  • No depreciation on older assets
  • Overvalued donated property with no appraisal
  • Endowment balances unsupported by investment statements

Questions to Ask:

  • Are fixed asset values supported by appraisals or documentation?
  • Is depreciation applied consistently?

7. Delaying Expense Recognition

Red Flag: Expenses look unusually low during the reporting period

How it Happens: Postponing invoice entry or capitalizing routine maintenance as an asset

What to Watch For:

  • Significant adjusting entries at year-end
  • Repairs listed as capital improvements
  • Bank activities don’t match recorded expenses

Questions to Ask:

  • Do we review adjusting entries before year-end close?
  • Are repairs and maintenance expenses properly classified?

8. Missing or Inadequate Disclosures

Red Flag: Footnotes are vague or missing key information on restrictions or related parties

How it Happens: Hiding grant conditions, lawsuits, or related-party deals to avoid donor concern

What to Watch For:

  • No details on conditional promises or matching grants
  • Missing related-party transactions disclosure
  • Missing liquidity disclosure

Questions to Ask:

  • Do financial statements disclose all restrictions and conditions?
  • Are related-party transactions documented and disclosed?

Key Takeaway

You don’t need to be a CPA to help prevent fraud. Ask these questions, review financial reports carefully, and pay attention to red flags to protect your nonprofit’s mission and donor trust.

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