Where Are They Most Vulnerable and What Can We Do? Part One - Disbursements
The most common frauds, in any business, involve schemes associated with the person handling the money and stealing the funds that have already been deposited into the organization’s checking account. Part one of this brief series focuses on theft by disbursements. In part two, we’ll discuss theft associated with cash receipts.
At Marvin and Company, staff members – regardless of their position – are encouraged to actively participate in community volunteer organizations. Like you, many of us volunteer our time on behalf of a charitable organization, whether it’s volunteering or sitting on a board for an educational, sporting, civic or religious organization.
Many of these nonprofit organizations are potential victims of fraud due to the lack of internal controls and financial oversight. Many organizations struggle to find qualified members to fill executive positions, let alone finding those willing to become more involved in instituting proper internal controls, or – donating even more time – to become a member of a financial oversight committee.
Recently, there have been several news accounts of smaller nonprofit organizations that have lost money due to internal theft. In some cases, the bookkeeper or treasurer embezzled funds as a result of countless volunteers working bingo, reverse raffles, bake sales, car washes, paying dues, and an array of other different time-consuming fundraisers.
It doesn’t matter if the organization is a parent/teacher association, sports league or religious organization—all have been victims of the unscrupulous volunteer with a financial hardship, criminal intent and the opportunity, as a result of deficient internal controls, to allow them to get away with the crime.
Theft by Disbursements
Common disbursement schemes typically involve the bookkeeper using the organization checkbook to pay unauthorized personal expenses – such as credit cards or car payments, writing checks payable to “cash” or issuing checks payable to themselves. All are bold. All are quite common.
With little accountability and lack of executive or membership oversight, these individuals get away with this crime until someone asks for a balance sheet, a listing of annual disbursements, access to the cancelled checks, or better yet, a copy of the bank statement. Frequently, in an attempt to conceal their embezzlement, the bookkeeper overstates the organization’s cash balance to members. It’s all too common that the bookkeeper will modestly inflate the actual cash balance on hand. Many nod and move on to the next issue. But what if someone asks for the bank statement and the balance is less? You’ve just busted the thieving bookkeeper with this one simple step.
Smaller organizations cannot afford the cost of an outside audit, and many don’t have members who want to serve – or are qualified to serve – on a financial oversight committee. In one case, a vendor called the organization’s president (not the bookkeeper who ignored them), upset that an outstanding invoice has gone unpaid. That is when the president learns they have been victimized by their trusted bookkeeper. The cash is gone and there aren’t adequate funds to pay the vendor.
The reason fraudsters get away with these smaller organizational crimes is that many board members are too busy to get involved where it is needed most—providing internal controls. Many volunteers would rather work the beer stand or sell raffle tickets than look over bank statements. When it comes to the money and accounting, most shy away and leave that for the one person who volunteered to be the treasurer. Sadly, that apathy in a smaller organization is a recipe for financial disaster. Board members must hold the treasurer accountable no matter how honest and respected they are perceived to be. It’s not insulting to have someone look over one’s shoulder. Given the significant increase of internal theft, smaller organization financial oversight should be mandatory.
Many smaller organizations do not require the treasurer to distribute a financial statement at regular board meetings, let alone provide a copy of the bank statement. Providing a copy of the bank statement to board members would alert everyone to the increasingly popular financial crime of unauthorized electronic payments, similar to those we commonly have withdrawn from our personal checking accounts. And yes, we have seen unauthorized personal debit card transactions and other electronic transfers – such as ATM withdrawals – withdrawn from nonprofit organizations’ checking and investment accounts. Why? No one was ever looking for them.
We strongly suggest that smaller nonprofits enlist a group of two or three volunteers to review the books and disbursements on a quarterly basis, secure all of the bank statements and see if the cash balance reflected in the financial statement matches the reconciled balance on the bank statements. Ask questions. Randomly request original paid invoices. Make sure there aren’t any electronic withdrawals. If necessary, give me a call. I’d be happy to spend an hour to provide forensic guidance that will benefit your organization for a lifetime.
Together, by implementing some very simple controls and donating a few extra hours toward financial oversight, we can ensure that more of the hard work associated with the fundraising actually benefits the organization’s overall charitable mission.
Watch for part two, where I will provide specific information about theft associated with cash receipts.
Do you have questions about fraud or want more information about matters relating to valuation and litigation? Contact your Marvin and Company, P.C. representative.