Yikes— Nonprofit fraud again….

It’s too common to hear that a trusted person has taken money from a nonprofit illegally. Even a little bit makes my blood boil. Stealing from any business is bad, but from a nonprofit that provides goods and services to a community is just despicable. The problem is that the organization staff and managers may not aware that something is amiss or odd. People are busy with their own jobs and day-to-day activities to focus on situations that may point to internal fraud. Ghost employees and unauthorized overtime pay come to mind…

Ghost Employee

A ghost employee situation happens when someone is hired and paid, but he or she doesn’t really exist and, not surprisingly, never shows up for work. But nobody notices it. I have this happening with a nonprofit program for youth where a manager hired this new person, Mary, who filled out timesheets and was very, very quiet.  This manager was an old-timer with the organization and could control many aspects of the program, which was located in a different building. When asked, she would give glowing reviews of Mary, a great find.

This situation went on for a few months. Mary was too busy to show up at the HR office to sign papers and the manager would take all to her, as to not inconvenience the HR dept. that was busy with other activities. Paychecks and other stuff were always picked up by the manager as well. Things were going well for Mary, until someone in HR had to talk to her about benefits. And she was nowhere to be found. Actually, Mary never existed.

The manager used a relative’s name and social security to “hire” Mary.  In fact, the manager was cashing all payroll checks after Mary would endorse them to a “business checking account” the manager had.

This ruse may not have worked with a smaller nonprofit, where everybody knows everybody, but it can happen with large ones that operate in various locations and have many employees in various programs. What can be done to avoid this situation?

1- HR should meet every employee and match the face with a drivers’ license or other identification. If one cannot meet personally, then at least a video talk can be utilized.

2- Run background checks on all employees. In the case of Mary, for example, the last job the real one had was in the seventies, so a background check would have helped to identify strange jobs or situations that may raise suspicion.

3- If a nonprofit is large enough to have an internal audit department, auditors should always check on new hires to make sure they are working where they are supposed to be.  They also could personally meet all employees.

4- Payroll should distribute checks or check stubs to employees personally at least once every quarter or year. The point is to meet new employees.

5- Watch out for employees who claim very little or nothing to be withheld in taxes. They could be just fake employees used for someone else to cash in.

Unauthorized Overtime Pay

This type of theft happens when someone gives him or herself a bump in pay by showing overtime that wasn’t authorized and never happened. While many organizations have policies regarding payment of overtime, this fraud keeps going on in government, for-profit and nonprofit sectors. Take Amtrak, for instance, that paid $200 million in overtime in 2014. Unfortunately, a lot has been deemed as fraudulent according to the Amtrak’s Office of Inspector General  (Dailysignal.com).

The fake overtime bid can be perpetrated by staff, managers and payroll personnel  Actually, I have seen this happening when finance managers and others were not paying attention, didn’t supervise the guy running payroll, and didn’t know much about controls. He paid himself overtime running into the 5 figures, which was material for the nonprofit. Since overtime pay can be time and a half or even more, the nonprofit lost quite a lot of money with this fraud.

Sometimes employees fake a supervisor approval signature or may change a time sheet after it’s approved. This problem is minimized with online or electronic time sheets, but odd things can still happen, as the authorization may be automatic and not reviewed carefully by a supervisor.

Like the ghost employee fraud, this one is harder to identify with larger organizations, where details may get lost and certain people may work in more than one department, making payroll a bit complex and allowing the fraud to happen.

What can nonprofits do to minimize the problem of unauthorized overtime pay?

1- Any overtime claimed by managers should be scrutinized since managers are usually exempt from overtime.

2- Be sure managers, especially the ones supervising payroll, have the time and focus to reviewing payroll reports. Oftentimes, managers, especially in the administrative area, wear too many hats, are spread too thinly to don’t a good job in paying attention to payroll issues, including overtime and exceptions reports.

3- Department leaders should sign off on payroll reports at least once every quarter to document that they looked at the information.  The act of manually sign off usually make people pay a bit more attention to such reports.

4-Know the total payroll amount for each department and if totals on payroll reports are very different, inquire about it.  Usually, this is done using budget numbers related to wages and benefits.

It’s a shame that people are willing to take advantage of nonprofits to enrich themselves. But it does happen and organizations should do whatever they can to minimize this problem or they may lose funds and credibility, which could spell disaster for any business.  Don’t wait until something happens to take action to prevent these types of fraud.
Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

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