CAP Fraud Detection & Prevention 3 — Questions and Answers
Question 1: A nonprofit's executive director approves vendor invoices, signs checks, and reconciles bank statements. Which best practice is violated?
- Conflict of interest policy
- Segregation of duties (Correct answer)
- Whistleblower protection policy
- Document retention policy
Correct answer: Segregation of duties
Allowing one person to authorize, execute, and reconcile transactions removes essential checks and creates a high fraud risk.
Question 2: Which type of charity scam involves fraudsters collecting donations but never distributing them to intended beneficiaries?
- Phantom charity fraud (Correct answer)
- Quid pro quo contribution scheme
- Donor-advised fund abuse
- Grant laundering
Correct answer: Phantom charity fraud
Phantom charities appear legitimate but exist solely to collect donations without providing any charitable benefit.
Question 3: When evaluating a charity for a major gift recommendation, a CAP advisor should prioritize reviewing which document?
- The charity's marketing brochure
- Form 990 and audited financial statements (Correct answer)
- The CEO's biography
- The charity's social media engagement metrics
Correct answer: Form 990 and audited financial statements
Form 990 and audited financials provide objective data on revenue, expenses, executive compensation, and governance practices.
Question 4: A fundraiser asks a donor to make a check payable to the fundraiser personally rather than the organization. This is:
- Standard practice for small community fundraisers
- A major fraud red flag indicating possible misappropriation (Correct answer)
- Acceptable if the fundraiser provides a receipt
- Required when the charity lacks a bank account
Correct answer: A major fraud red flag indicating possible misappropriation
Legitimate charities always direct donations to the organization itself; requests to pay individuals are a clear fraud warning sign.
Question 5: What is 'ghost employee' fraud in a nonprofit context?
- Misclassifying employees as independent contractors
- Paying salaries to fictitious or former employees to divert payroll funds (Correct answer)
- Hiring volunteers who later claim unpaid wages
- Overstating employee headcount in grant reports
Correct answer: Paying salaries to fictitious or former employees to divert payroll funds
Ghost employee schemes involve adding nonexistent people to payroll and redirecting their wages to the perpetrator.
Question 6: Which organization provides a charity ratings system that CAP advisors can use to vet potential grantees?
- Federal Election Commission
- Charity Navigator (Correct answer)
- FINRA BrokerCheck
- Securities and Exchange Commission
Correct answer: Charity Navigator
Charity Navigator rates nonprofits on financial health, accountability, and transparency, making it a key due diligence resource.
Question 7: A donor-advised fund (DAF) sponsor discovers that a donor recommended a grant to a charity that benefits the donor personally. This violates:
- The gift annuity disclosure rules
- The prohibition on private benefit and self-dealing under IRC Section 4941 (Correct answer)
- The unrelated business income tax rules
- State sales tax exemption requirements
Correct answer: The prohibition on private benefit and self-dealing under IRC Section 4941
Grants from DAFs that confer personal benefit on the donor constitute self-dealing prohibited under the private foundation excise tax rules.
CAP Fraud Detection & Prevention 3
A nonprofit's executive director approves vendor invoices, signs checks, and reconciles bank statements.
Which best practice is violated?