Another Nonprofit Exec in Jail

Not to be too paranoid here, but I just read an article about the Simi Valley Community Foundation whose former executive director stole over $45,000. According to the news, she forged a second signature on the checks used to pay her own mortgage.  Sadly, this embezzlement cost the organization its reputation as it had to stop operations, at least for now.  A total disaster.

It’s not clear how exactly the theft was discovered, but board members noted something odd, hired a forensic accountant to review the records, and went to the police with evidence of embezzlement. So, I give credit to the board for finding this out, but this theft had been going on for awhile.

So, what can a board do to prevent or identify financial fraud faster?

1- Knowledge –Get people on the board who understand financial matters and can ask the right questions. The board cannot have the obligation to fundraise and provide oversight only. Board members should have different backgrounds with least one person having the education and experience to really understand the information provided and ask good questions. Had this person been on the board of this Simi Valley nonprofit, the fraud may have been identified earlier.

2- Online Access –Have someone from the board check on the bank accounts of the organization online. He or she should review checks and deposits, looking for checks that don’t look right. Just having a policy about this review may deter fraud. Employees may think twice before forging signatures or doing something odd when they know that someone would be looking at the bank transactions regularly.

3- Pay attention –Listen to complaints from staff, donor, and vendors. Oftentimes, information that could be construed as gossip can be useful in pointing you in the right direction. People talk. Even though it’s not clear how the board of the nonprofit became aware of something wrong, my bet is that someone saw something and talked about it. Some nonprofits have started using hotlines for people to report possible fraud anonymously, a very good idea.

4- Variances –Pay attention to the actual vs. budget reports. Looking at this fraud, one may wonder how the $45,000 theft was classified and shown on the financial reports. The amount didn’t show up all at once, but it was likely classified as a budget item. So, if an overage is noted, the board should ask for back up documentations, such as bills.Talk only doesn’t explain financial issues.

5- System reports –Review new vendor/change vendor reports once a month to question any odd new vendor or changes. In this situation, the bank where the mortgage was paid to would have been added at a certain point to the accounting system. Had this report been reviewed, it may have flagged the bank as an odd vendor. Some accounting systems can send an email whenever a new vendor is added or changed, making this task automatic.

6- Bank reconciliations — Check on bank reconciliations, making sure they are done monthly. Keep an eye on deposits that are recognized in the accounting records, but don’t seem to be in the bank.  Also, look at the detailed outstanding checklist. This can be done online using the accounting system and can be emailed to someone at the board. If a check shows up at the bank, but not on the accounting records of the organization, it could be a red flag.

7- Self-reliance –Don’t count on auditors to notice embezzlement. Audits are designed to assure reasonableness of financial statements and they may identify fraud, but not always, especially when done by management. When something seems wrong, not it, and don’t wait for the auditors to figure it out. Insiders are the first people to note things that don’t seem right.

8- Education — Educate all employees on fraud and embezzlement. Nonprofits should have this topic on its policies and procedures documentation and not be embarrassed about it. Fraud happens not just with stealing funds, but in other areas as well, such as equipment theft and overtime pay without authorization. Just showing this awareness and clarity over fraud may prevent it in the first place.

It’s a shame that nonprofit boards must be always on alert for fraud and embezzlement, but that’s the reality of the situation.  Once a scandal happens, it’s hard for the organization to regain the trust and respect of donors, making it hard to move forward.

So, it’s time to talk about this issue openly and set up written policies and procedures with tasks specifically designed to prevent and identify fraud and theft.  The ideas presented here won’t assure boards that they are safe from this issue, but are steps in the right direction.  Each organization is different and I’m sure many will need more control features than the ones presented here.  The crucial point here is that fraud signs cannot be ignored by the board.

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Second Edition 

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

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

Measuring Program Success- Tips

Despite how wonderful your organization is, many funders expect you to prove that your programs work. So, this begs the question of how to measure success, a challenge with people knowing that they made a difference, but not being able to show it with factual data. As a CPA, my take on this is for people to quantify with numbers the ‘before” and “after” scenario as much as possible.

Before and After

The key here is to quantify the “before” as much as possible and make it a baseline.  For example, how many people attended an event before or now? How many calls were made to a center before or now? Set a baseline so that it can be compared and analyzed later on.

The other side is to show results over time and how the program is relevant, “the after.” For example, you could show that a certain drug rehab program started with 15 people and has grown over time with 25 people the following year and today has 100 clients.  However, be sure that you’re measuring significant items.  For example, maybe a better way to measure success in rehab would be how many people finish the program, not just number of clients at a certain point in time.  A nonprofit may have more clients, but if fewer are finishing the program, this may indicate a problem.

Objectives

To determine proper measurements, start with your program objectives. If your objective is to provide literacy services to adults, the number of students may provide a good measure. Or, maybe the number of students that pass a literacy test could make more sense.

A nonprofit that provides temporary housing for the homeless could consider success when the person moves on to permanent housing or when he/she gets treatment for addiction and gets a job.  It all depends on the program final objective. The yardstick to gauge impact could be the number of people in the temporary housing, or the number of people leaving such housing for something more permanent, or maybe how many new rooms have been added to accommodate this population. It all depends on the nature of the program.

Education and awareness

To implement a measurement system, staff and managers must be aware of the situation, so that proper data can be identified and tabulated. Since this may be new to many, be sure to explain the reasons for this “extra work “so that the staff not only understands its purpose but also give good ideas about how to measure impact meaningfully.

Set up a structure for people to work so that information is not forgotten or lost. You could use checklists, ask certain questions or fill out forms– all to document “before and after” on a systematic basis, not just at random. The idea is to institutionalize ways to evaluate programs. Knowing that there is a system in place is sure to please any new donor.

Keep it in writing

Keep all docs in writing with logs, notes, pictures and any pertinent information handy to show funders that your organization is indeed making a difference. Document major processes. For instance, if you provide a child care hotline, every call should be written up on a log with information about who took the call, time, etc. Keep close contact with providers that can give you backup and numbers about how many placements were made because of the hotline, for instance.

Keep the documentation in paper or digital format, safe and organized, so that it can be found and compiled quickly. This information should be available to both program and fundraising/development.  You don’t want people looking around for hours or days, trying to find a specific data that can help the organization grow and keep its funding.

Measuring program success can be a daunting task, but it’s usually doable, once the nonprofit defines what needs to be evaluated. Besides numbers, you can also use pictures to document baseline – “before and after”. This can be very effective when dealing with construction projects, for instance. Make sure to double check on the ways your programs are being evaluated.  Sometimes, a program or focus changes, but instead of changing, the evaluation methods stay the same. Be nimble here.

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award