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

Preventing Fraud in Your Nonprofit– Tips

I don’t know about you, but I’m sick and tired of hearing about nonprofit fraud, especially when done by an in-house, trustworthy person. It’s heartbreaking to see people in stealing from such organizations. In many cases, the theft lasts for a while, until someone stumbles upon it by chance to the shock and dismay of many people. Unfortunately, this is not that rare. So, how can a nonprofit stop such unpleasant incidents and at the same not be overtly suspicious of people who are, in most cases, innocent?

There are a couple of activities that can be used to find errors that may be very innocent, while at the same time identify signs of fraud. These tasks, known as controls within financial circles, can do double-duty in keeping an organization safe and error-free. They are by no means the only controls to prevent or identify fraud, but they are fairly easy to perform and worth a close look.

1- Look at bank accounts online —-Someone from the board could review bank activities online, looking for unusual vendors or checks. This task should be specified in the organization’s policies and procedures and should be known by everyone. The idea here is to let people know that there’s a process established that is part of the day-to-day business of the organization and not a big deal. Having a board member ask questions about checks and deposits should be expected. This is not micro-management, but a way to double check on bank transactions, like unusual vendors or amounts paid out or deposited.

A second pair of eyes looking at online bank data at least once a week can also help to find errors. For example, if the board member knows that someone donated $20,000 recently, but only sees $2,000 deposited in the bank, then the bank should be contacted and asked if this was an error on the part of the bank, which can happen. This discrepancy could also be an error from accounting that can be fixed right away. However, if errors don’t explain the discrepancies, then the situation needs to be further investigated. There’s a chance that someone misappropriated the funds, even if you don’t want to think about it.

2- Contact donors often — Someone outside development dept. or the CEO’s office could contact donors, especially if they haven’t donated as before or as expected. The point is to have someone who usually doesn’t talk to donors to follow up on an informal basis, verifying if any donation or payment was made. Why is this important?

Fraudsters call donors as a follow-up, but when the money arrives instead of depositing the money in the organization’s bank account, they deposit it elsewhere. Sometimes the payment goes to a bank account with similar name or initials, while other times the check is endorsed and deposited elsewhere with a totally different name.  Banks usually don’t look this closely at the check to identify the ruse, unless there is a problem. Accounting staff wouldn’t  know about the donation, and nobody, except for the thief, knows about the payment. This issue may be found when someone different talks to the donors.

Note that issues found are likely to be very innocent as well. Maybe the donor forgot about making the donation. However, if the donor made a payment, but it didn’t make it to the organization’s bank account, it could be because it was lost or the bank deposited it in the wrong account by mistake. These situations usually don’t point to internal fraud, just errors that can be corrected.  The point is to follow the money trail.

These are only a few activities a nonprofit can do to protect itself against theft and fraud.  It’s sad that we have to be a bit paranoid running a nonprofit, but it’s a must in today’s environment. Auditors may come in once a year to double check on financial issues, but they usually don’t find all fraud. By following just these two processes, nonprofits can make fraud harder to happen and that’s always a good thing.

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.