Friday, March 16, 2012

Ripping off the good guys...

The media stories reporting embezzlement from non-profits appear far too frequently. Just last month a former bookkeeper at a Van Nuys CA adoption charity named Inner Circle was sentenced to 41 months in federal prison for stealing $700,000 from the organization over a seven year period. In February the former executive director of the Waterbury (CT) Boys and Girls Clubs pleaded guilty to charges of fraud and embezzlement of more than $470,000 from the charity since 2008. Sentencing will be in May. And not to pick on Connecticut, in 2011 Donna Gregor the controller of the Mark Twain House in Hartford received a 3 ½ year sentence in federal court for defrauding the museum of over $1 million in the period 2002 to 2010.

All of this is heartbreaking. These non-profits work hard to find scarce resources to support their missions. And the loss of funds in these substantial amounts can have a significant impact. In the Mark Twain case, the museum was struggling and had to lay of two thirds of its staff in 2008, at the same time Ms. Gregor was ripping it off. Some of her colleagues lost their jobs while she was improving her home, going on vacations and buying theater tickets. The fraud was discovered by a bank employee comparing check signatures.

There is a pattern in these and other stories. One is that the criminal tends to have occupied a position involving daily management of the nonprofit’s money. Another is that the techniques for embezzlement have similarities – such as creation of phantom checking accounts, false credit cards, forging signatures, etc. At the Twain house Ms. Gregor also accessed the museum’s payroll system through the Internet where she set about to increase her salary.

Several questions arise. First and probably unanswerable is: why did these people commit these crimes? The second is, might they have been prevented and third is, what should a nonprofit do about them when revealed? As to the first, stealing from a non-profit seems like snatching a panhandler’s cup. But the motive of greed is always a good bet. Added to that is some form of ease of commission, in other words it wasn’t too hard to pull it off, especially if you know the system and the controls or lack thereof.

To address the second question - controls are at the heart of the matter. If the nonprofit hasn’t established a system of checks and balances and oversight in its financial system the temptation to steal will be there for the miscreant. Quite often, responding to news of the crime, someone will say: “Oh I couldn’t possibly imagine X would ever have done that, he/she is a long time trusted employee.” Unfortunately that profile is a likely fit for the culprit.

Establishing controls can be done with the help of your independent auditor, if you have one, or with the advice of a volunteer CPA. It is vital that board members be involved in implementing the controls process as the board is ultimately responsible for the organizations finances. That being the case, having Directors and Officers Liability Insurance would seem to be a necessity.

Now, what should nonprofit do after embezzlement is discovered? According to Bob Carlson in a 2011 article for the Chronicle of Philanthropy there are three steps that seem self-evident but are not always followed: 1) Punish the offender. A 2007 study found that only 72% of affected non-profits actually fired the employee; 2) Report the embezzlement to appropriate authorities and 3) Seek to get the money back.

On the latter point the non-profit, aside from its own financial health, has an obligation to its donors to pursue this course. In the case of Ms. Gregor, the court along with the punishment of a prison sentence ordered her to make full restitution to Mark Twain House of the embezzled funds totaling $1,080,811, and to pay $500,000 to the insurance company, the amount it paid out to the museum.

That’s not all. Ms. Gregor owes the IRS $323,480 in back taxes for under-reporting her income during the time of her crime spree. By law she should have reported the embezzled funds as income!

What percentage of these funds will ever find their way back to their rightful recipients is a good question. In any case, non-profits can guard against internal theft by imposing stringent financial system controls regardless of any inconvenience and additional work that may be involved. Above all, avoid the “it can never happen here” syndrome, because it can - unless the organization is vigilant. Mark Twain once said “the lack of money is the root of all evil.” With that in mind and a lack of controls in place, a non-profit can be vulnerable to fraud.