Good article put out by Blue Avocado nonprofit magazine (http://www.blueavocado.org/content/our-executive-director-embezzling) on an issue that is all too prevalent in the nonprofit sector. In our experience with hundreds of nonprofits throughout the country, we estimate that at least 5% have experience with some level of fraud or embezzlement. We see everything from fraud in how expenses have been disclosed to outright missing funds. There are simple steps that any sized nonprofit can and should take to help prevent this.
In almost all cases of fraud, the following things exist: perceived need, justification, and opportunity. Folks who are struggling to pay bills, or Bernie Madoff who wants a million dollar home, both have perceived need. Folks who feel mistreated at work, underpaid, or overworked can all justify fraud in their minds. "I'm just getting what I should be being paid anyway." There are things that can be done in employee and volunteer screening - like credit checks - that can help identify risk associated with need. There are things that can be done in leadership and morale related to justification. But the biggest area where small and mid-sized nonprofits can improve is around "opportunity." Simple checks-and-balances should be employed in even the smallest nonprofit to limit the opportunity for fraud. If people know no one is looking and no one ever looks, the door of opportunity is opened. Once need and justification enters someone's head, fraud can follow.
Simple checks-and-balances include things like segregating duties and enforcing simple policies. For example, the person handling donations shouldn't be the person cutting checks. Also, have a separate person or company process the bank reconciliations. This provides a very simple - few hours a month - way to discover if what happened in the bank is what is recorded in your accounting system.
Fraud can't be eliminated, but it can be reduced. Be prepared and smart out there! We serve a great variety of needs, the more we can focus and channel to productive activities and to our missions, the better.
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Comments
I'm chair of a small, volunteer non-profit board. We are in the midst of dealing with a paid employee of the board being investigated for embezzling funds. This individual was serving as the group's accountant, working on our finances in her spare time, for which we paid her hourly. We discovered that she had been routinely writing checks to herself and cashing them. These were in and amount below that requiring two signatures, but written frequently over the course of several months. We were able to collect enough information to hand over to investigators, allowing them to question her. She immediately confessed, and the case is now in the hands of the town attorney. I'm looking for resources to learn more about two different aspects of this situation.
How do we come out of this unfortunate set of circumstances a stronger and better organized group, and what are the various outcomes we can expect from the legal/financial side of things?
Thanks, anything you can recommend would be greatly appreciated.
Each legal and financial situation varies greatly, so I can't much comment on that.
As for coming out stronger, what I can say is that there are simple things that small organizations can do such as ensuring that the person cutting the checks or handling the donations is different than the person doing the bank reconciliation. It doesn't prevent fraud, it just guarantees they will be caught within 4 weeks. And when people KNOW they will be caught, they are much less likely to do it.
Small organizations struggle with this because there simply aren't enough hands to split up the work properly. That's why we recommend this simple step (which you can do for $120 / month with Easy Office, or for free with a 2nd volunteer) to really help ensure some basic checks and balances are in place.