What should we do if the finances seem amiss?

Any nonprofit, large or small, can be the target of illegal financial activity such as fraud. Anyone with access to financial transactions, from order processing clerks to the chief executive to the treasurer, can capitalize on opportunities to move money from the organization’s coffers into his or her own pockets. Smaller scale fraud say, losses of $10,000 or even $100,000 may not make a splash on the evening news, but it can be financially and emotionally devastating to a nonprofit that counts every penny and values its reputation.

“I can’t believe it!” is what most people say when they learn an employee or board member has been stealing equipment or supplies, forging checks, perpetrating credit card fraud, or otherwise embezzling from a nonprofit. Unfortunately, it happens.

The temptation may be to handle the situation internally and quietly ask for repayment and the employee’s resignation. After all, once the media gets wind of financial malfeasance, your organization is sure to be front-page news, and the resulting coverage could affect financial and volunteer support. But you must report the crime to the proper authorities. Just put yourself in the position of hiring a new chief executive: Wouldn’t you want to know if that person had a history of fraud or embezzlement? If you allow the chief executive to depart without a proper investigation, he or she may victimize another nonprofit in the future.

Appropriate Oversight

Instituting internal controls is part of risk management. Having controls in place lessens or eliminates opportunities for fraudulent activity. To minimize the potential for employee theft, a nonprofit board can put appropriate safeguards in place, such as those described as follows.

Emphasize the board’s role as financial monitor. As part of new board member orientation, review the position’s fiduciary responsibilities . The board’s accountability goes beyond telling the chief executive to make sure everything gets done. All board members should understand and feel comfortable with the accounting method used (cash versus accrual), statement of financial position (assets and liabilities), statement of activities (actual receipts and expenditures, usually compared with the budgeted amounts), and cash flow statement (which resources are available at a certain time). Your organization may also develop a capital expenditure budget to cover long-term assets that can be depreciated.

Delegate in’depth financial reviews to High level committees.

Unless board members have a financial background, their eyes are likely to glaze over when they’re presented with page upon page of numbers. To keep the board focused on the organization’s overall financial picture, have the finance committee review monthly and quarterly reports, the annual budget, the annual audit, and financial policies before their presentation to the board . Other responsibilities may include recommending an auditing firm and ensuring that the organization meets its regulatory requirements. The treasurer serves as the committee’s liaison to the board of directors.

Some organizations have a separate investment committee that, in consultation with the finance committee, looks at short and long-term opportunities for growth. It’s crucial that the committees reach beyond the board of directors for their members, ideally tapping volunteers who are bankers, accountants, or money managers. Regardless of their expertise, finance-related committees should forward recommendations to the board for approval, so that the final decision and responsibility ultimately rest with the elected leadership.

Institute checks and balances. Although you don’t want board members involved in day-to-day operations, such as signing all checks prepared by the staff, implement policies to govern large transactions or decisions with financial implications. For instance, you might require the chief executive and board chair to cosign checks over the amount of $10,000. Transferring funds from one account to another may require the approval of one or two executive committee members. A member of the executive or finance committee might have the responsibility of meeting with the chief executive and the auditor to review the firm’s findings and specific recommendations, without other employees present.

Ultimately, the full board should meet with the auditor and be able to ask questions directly. This practice enforces the sense of fiduciary duty that each board member needs to embrace.

Internal systems should also include fraud controls. For example, the person who opens the envelopes containing charitable contributions should not be the same person who records the contributions or deposits them in the bank. Whoever signs the checks should not also balance the bank statement each month. Although such procedures may seem cumbersome, especially in a nonprofit with a small staff, they can reduce temptation for would-be embezzlers.

Establish human resources policies. Managers in charge of hiring should be required to check employment references and credentials.

Employees who commit fraud rely on lies, so when applying for a new job they are likely to submit a resume with fictitious employment or achievements. Human resources personnel should trust their intuition if they are uncomfortable with someone’s explanation of a gap in employment or educational credentials. A few phone calls might uncover a pattern of deception.

Also, every employee who comes in contact with money, including part-time and temporary hires, should be bonded.

Your auditor may have additional fraud-prevention suggestions tailored to fit your organization’s size, structure, and type of operations. As an objective outsider, the auditor can more clearly identify areas in which employees, suppliers, or volunteers could easily engage in wrongdoing. Just don’t rely solely on your auditor to detect fraud. Although auditors do spotchecks of selected statements and documents as part of the annual audit, they are not necessarily looking for fraudulent activity. In addition, they work from the documents and explanations provided by staff members who may have something to hide.

Suspicious Activity

Several behaviors may point to fraudulent activity. Be on the lookout for an employee who

Continually hires and fires other employees, especially those with access to financial records

Often mentions being behind on work and needing to stay late or come in on weekends to catch up

Has difficulty producing financial reports on schedule or responding to requests for receipts or account statements

Insists on personally handling certain tasks because “No one else could figure out my system”

Always meets with the auditors alone; discourages others from talking with auditors

Appears to have financial problems, perhaps related to drug or alcohol abuse or gambling debts

Gets caught in little white lies

Doesn’t take vacations

Acquires an expensive habit or makes an extravagant purchase that seems beyond his or her means and openly talks about it

If you and other board members suspect fraud within your organization, or if an employee has raised the subject with you, quietly gather evidence. Look for altered documents, conflicting financial statements, payments to companies the organization does not do business with, and so forth. Should the evidence point to a longstanding pattern of deceit, arrange for a forensic audit that looks back several years.

Guard against making any public statements that could be construed as slander. If your assumptions prove incorrect or if you need more time to gather evidence, your statements could put you at legal risk.

Assuming you have evidence of wrongdoing in hand, call local law enforcement officials to report the crime and stop the thief in his or her tracks. The chief executive should handle this if the fraud involves another employee; the board chair should make the call if the chief executive is suspected. If the crime violates federal laws, the Federal Bureau of Investigation may become involved as well.

SUQQESTED ACTION STEPS

1. Board chair, arrange for the full board to meet with the auditor, without staff present, to review internal controls and identify any areas in which controls are lacking.

2. Board members, develop a whistleblower policy a process through which employees can report suspected fraud without fear of reprisal.