Nonprofit fraud hurts more than the bottom line
Posted on: February 20, 2018 at 10:04 am

By Marion Lee, CFRE

 A thief has three characteristics: first a thief is not recognized by you as being a thief; second, he robs you of what you have without your realizing it at the time; and third, a thief leaves you feeling foolish after you have been robbed.

–N. Ravichandran

In this article, I ‘d like to explore why theft happens, how to work smarter to prevent this happening in your nonprofit and how to recover when it does happen. This article is over 18 years in the making.  I have lived the devastating discovery of a theft, assisted in the discovery process, and watched as the perpetrator was prosecuted.  It changed my life.  For many years, the questions, the grief, and the feeling of responsibility and betrayal were my close companions.  Money was stolen, people I was responsible for were hurt, people I trusted betrayed trust and I had to face my own inadequacies as a leader. There is more peace now, but it was hard fought through important internal battles of trust and self-confidence.

Since January of 2017, our organization has direct knowledge of six cases of theft in Central and South Texas with an estimated loss of just under $5 million dollars.  All but one nonprofit will probably recover from the loss, but when people steal from a nonprofit more than money is lost.  Services to children and fragile populations are diminished or cut altogether.  Quality of life programs for everyone in the community are affected.  And the people closest to home, the donors, staff, volunteers and volunteer board will suffer loss of trust, jobs, fear, insinuation and rumor, investigation and a level of stress that is for some, unbearable.

Since 2011, there have been 1,100 reported cases of embezzlement (misappropriation of funds committed to one’s trust) in the nonprofit sector (IRS).  This figure may seem small compared to the 1.5 million nonprofits operating in the United States today until you begin to dig deeper.  The 1,100 reported cases are documented only through the IRS electronic filing of 990s.  They do not include cases reported through paper filing, which are hard to compile, nor do they include the cases that are not reported to the IRS or to legal authorities. The number of unreported cases is conservatively estimated to be at least ten times greater than those recorded (IRS).

In a 2006, a documented study conducted by faculty from New York University, in conjunction with the Association of Certified Fraud Examiners, estimated that charities had suffered a theft in charitable funds of $40 billion or 13% of total gifts to charity in 2005.  Twelve years later, the study has updated losses to approximately $49.6 billion, the majority of which go unreported and unpunished. 

We live in a time when if you make it easy for someone to steal from you, someone will.

–Frank Abagnale (focus of the movie “Catch Me if You Can”)

 And he would know.  Mr. Abagnale is one of the most celebrated confidence tricksters in America, lecturer for the FBI and now leads his own consulting company which focuses on financial fraud. In his article, “Embezzlement”, published in the Financial Fraud Law Report, Mr. Abagnale discusses the primary reasons fraud and theft occur in nonprofit and forprofit environments:

  • Lack policies and procedures that govern how money is tracked, receipted, deposited, and invested, which includes the oversight of basic accounting practices such as bank statement review and reconciliation, audit practice and correct and timely financial statements
  • Lack standards and procedures in hiring and employment tending to rely on the “good ole boy/girl network”
  • Rely on volunteer board members and staff members who do not have experience, expertise or understanding of their roles and responsibilities
  • Expand program services without the adequate number of administrative staff to manage the system
  • Have a pervasive culture among both board and staff members that: 1) standards and procedures normally found in a corporation are not needed in the administration of a nonprofit, and 2) passion for the mission equals goodness, honesty, and kindness
  • Rarely report the theft, prosecute the perpetrator or provide an appropriate response when asked for a reference on the perpetrator*
  • Face a legal system that does not support the investigation or prosecution of theft within nonprofits. On three occasions, I have been told by detectives, FBI and IRS representatives, and staff from District Attorney offices that the funds reported stolen were not enough to pursue an investigation. In each of these cases, amounts ranged from $150,000 to just under $1 million. One officer told me: “It is just not enough money to warrant the paper work, or the costs associated with the investigation.  After all, we probably are not going to get the money back. It is just not worth it.”

While “not worth it” to law enforcement, to the nonprofit, those lost funds meant cutting a program, potential reprisals from the funding source (government funds) and last, but not least, the thief would face no repercussions and live to steal another day. To another organization that needed the funds to provide hot meals and a safe place for the elderly in their community, it meant the closing of the center until they could regroup. Mr. Abagnale believes that prevention is truly the only recourse, as punishment and recovery of funds is very rare.

Wisdom cannot be stolen…it can only be shared

–Jefferson Smith (no, not Jimmy Stewart, although he might have said it)

 Putting policies in place

It only takes one step to change.  Sometimes in nonprofit organizations the smallest step means so much, but it seems to take an army to make it happen. Small administrative, overworked staff are frequently unable to face one more task, but let’s parse this out: 

  • Policies and procedures
    • Conduct a mini assessment that follows a check or a gift through your organization.  Does one person pick up the mail, enter the gift into the system, make the deposit and receipt the gift? Does anyone log in a gift ledger separate from the financial software?
      • Split these jobs up. Have another staff member pick up the mail and enter the check or gift into a ledger or Excel spreadsheet
      • Check your daily deposits against the ledger on a weekly basis at the minimum (this also keeps gifts from being lost)
    • Bank and Financial Statements – The single easiest and most used way to steal is the direct route: writing a check
      • Review the bank statements monthly.  Look for checks that do not clear or for duplicate checks. Do not rely on printed statements-review statements electronically
      • Make sure that the bank statements balance with the reconciliation – out of balance due to timing, etc. is understandable, but not for months
      • Produce monthly correct financial statements from the financial software including a balance sheet, profit and loss statement and year-to-date comparison. DO NOT LET ANYONE TALK YOU INTO DOWNLOADING TO ANOTHER FORMAT (Excel) AND FOR GOSH SAKES-DO NOT ROUND UP!
      • Watch for odd or consistent amounts posted under miscellaneous or other headings
  • Hiring and employment
    • Create a job description based on realistic needed skills and post it in the appropriate venues
    • Ask for three references from at least two current or past employers and check the references*
    • Run criminal and credit background checks for positions that will be handling money or that will have access to funds. Run criminal and credit checks once a year.
    • DO NOT let anyone -staff or board-talk you into hiring friends without vetting them: “They are friends of friends, family, employers so you don’t have to check into their references. The staff or board member is not trying to lead you astray, but they truly believe in the recommendation of their friend- “who should know and can be trusted.”
    • The best embezzlers are frequently the hardest workers in the office.  They’re in early, last to leave, never take vacations, prone to over-deliver and never want or accept help. Establish policies that require staff to take vacations and share information.  (Alexis De Sela will have an article in the March newsletter with more on this topic.)
  • Board members and support staff
    • Do not place undue reliance or responsibility on the shoulders of volunteers even if they present as the most revered, best board treasurer in the world.  Do your own work and follow the standards and guidelines that you can find at www.councilofnonprofits.org
    • Do not count on the bank, accountant or auditors to catch your thief.  They can act as a limited safeguard, but it isn’t their primary responsibility
    • Help board members learn their roles and responsibilities through educational classes, resources and good modeling
  • Skilled administrative staff to manage the system
    • Running the organization on a dime is admirable, but not having enough people to do the job, and thus allowing theft due to lack of oversight is not. The executive cannot do it all well.  Ask for help.
    • Do not assign tasks, particularly financial oversight, to unskilled staff
    • Do not grow the program, even if urged by board members or funders, beyond the capacity of the staff to manage
    • Don’t over estimate your own capacity. Admit what you don’t know and either educate yourself or find professional support
    • Be aware of odd behavior or inappropriate relationships or alliances
    • Open your eyes and if it walks like a duck, looks like a duck and sounds like a duck, it’s a duck or an embezzler; either way, listen to your instincts
  • The very culture within nonprofit organizations is what draws us to be a part of something that betters lives.  That’s why it’s so wonderful to work in and for a nonprofit.  Sadly, in an economy that moves over $390 billion (2016) we can no longer afford to be innocent.
    • Educate staff and board in acceptable business practices
    • Teach board members to read the financial statements and create an environment where asking questions about the finances is acceptable
    • Promote responsible reporting, hiring, polices and processes
    • Establish high standards and avoid the pitfall of trading accountability for kindness
    • The easy way is not always the right way
  • Reporting the theft, prosecuting the perpetrator and being honest (within the law)** when asked for a reference on the perpetrator is the toughest part of the discussion. The decision to invest the time, energy and money into investigating the theft and then potentially prosecuting the perpetrator is a decision that has to be made by the nonprofit’s leadership.  The organization has to take into account issues related to:
    • Liability (replacement of funds if government grant)
    • D&O insurance (costs associated with the investigation and prosecution and/or replacement of funds)
    • How the funds were stolen and how to secure the system
    • If the perpetrator was working alone or if there is an accomplice within the organization or support organization such as a bank or audit or investment firm
    • Public perception and donor reactions
    • Effect on staff, volunteers and board members
  • Some nonprofit organizations are reluctant to report a theft and to prosecute the perpetrator because:
    • They are fearful of damaging the nonprofit’s reputation in the community and with donors. This has not been proven true when organizations are transparent with the public
    • They are fearful of damaging their personal or professional reputations or being held accountable legally and financially. It is human nature and is actually more prevalent than the first reason, and
    • We have a legal system that does not support the investigation or prosecution of theft within nonprofits because if the amount stolen is not in the millions, it is simply not worth the work

Making the decision to investigate and prosecute is very difficult.  When asked, my opinion is the same as it was many years ago and I can only state my own beliefs – the beliefs of a person raised by my great grandfather, a District Criminal Judge in Bexar County for 32 years.  A crime is a crime.  No matter how you dress it up, it’s a crime to steal and if you hide it, for any reason, in my opinion, you become a part of the crime. If you fail to report it and fail to do everything in your power to bring the individual to justice, then you are accomplice to the crime.  If you do it to protect your reputation, then you lack integrity. I paid dearly for this opinion, but it is the one decision I made years ago that I do not regret. 

But he that filches from me, steals my good name.

— William Shakespeare

 So, let’s talk about the people that get caught in the vortex of an embezzlement.  Not the donors or the people you serve, but that quiet group: the board, the staff and the perpetrator.

Why do they steal? When I interviewed some perpetrators, the answers are oddly the same:

“They owed it to me,” tops the charts. People who steal from nonprofits feel that they work long hours for low pay, little-to-no recognition and they are owed the funds for their dedication.

“I had to so that I could support the image expected of me.” Maybe this says something about the messages we are sending in our work environments. This tells us that our interview questions should focus on asking candidates about about their values and how we fulfill our mission.

“It wasn’t their money anyway, somebody gave it to them so…”  

And my personal favorite, “It is no big deal, because no one got hurt.”

Collateral Damage

We don’t often hear about what goes on behind the scenes when fraud is discovered.  The focus always seems to be on how much money was stolen, sometimes who stole it and how, but rarely do you hear about the people who are left to pick up the pieces, staff and board members who share in the aftermath.

For all members of the nonprofit, initially there is a profound sense of shock and disbelief.  The successful embezzler is usually someone who is well liked, fun, charming, compelling and the go-to person in the office. Get rid of your image of the dark loner working in a small office, keeping to themselves. Board members ask each other and themselves how they could not have seen it.  Staff gathers to compare notes and ceaselessly examine how they could have kept it from happening.  They have a sense of guilt, self-doubt and helplessness.

And, finally, comes the fear.  In a fraud situation, the staff sadly, is guilty until proven innocent.  Unless the mode of theft is clear cut, there is always the chance that more than one person was involved.   They along with everyone connected to the situation should be vetted and cleared.  It is a lengthy, time-consuming process which is distracting, often feels degrading, and instills a sense of distrust within the remaining group.  Additionally, staff members worry that they will lose their jobs, lose respect within their community and be tainted in a way that will harm them professionally as well as personally.  They wonder, should they stay or seek employment elsewhere.  Some leave as soon as possible but most remain, true to the mission and the people they serve.  Their hearts and minds are focused on keeping the programs alive and helping the people they serve.

Board members experience all of the above and for some, this includes a profound sense of responsibility. Upon their shoulders lies the decision on next steps: sweep it under the rug, or grapple with the full gamut of discovery and prosecution?  Over the years, we have found that approximately one-third of the board resigns upon the discovery of the fraud hoping to escape liability, notoriety and responsibility. One-third will remain, but take an inert position, heads buried in the sand, just hoping it will be over soon, and one-third, brave souls, step up to actively support the organization through the troubled times.  They support the staff, accept interim positions, make hard decisions that may lead to facing the media, communicating with law enforcement, and taking the heat.  

Profile of an Embezzler

In a study conducted in 2005 (updated in 2016), The Hauser Center for Nonprofit Organizations at Harvard University in partnership with the Association of Fraud Examiners, developed a profile of an embezzler.  They found that the majority of individuals who committed fraud were married women, median age of 41, with children.  They steal on average, $160,000.  Men who steal are usually married, with children, between the ages of 35 and 55, and steal considerably more, with an average of $350,000.  Embezzlers have many of the characteristics that remind me of front line responders and fighter pilots. Intelligent, perceptive, highly skilled in predictive behavior, with a high-threshold for anxiety and risk-taking.  Most understand that nonprofit leadership will not prosecute due to their own fear of exposure.  Although the embezzler realizes if caught that their employment will be terminated, (in 5% of the cases, the individual is not terminated), but they will keep the money or the goods and lay low in a job outside of the nonprofit sector until enough time passes, and they can step back into a position where it is made easy for them to steal again.

So where do we go from here?

Nonprofit organizations are likely to discover a theft or fraud situation more quickly and endure it with less trauma if they have taken the measures outlined above and established the clear, definitive policies and procedures they need before the fraud occurs.  We are blessed to work in an industry that changes the world on a daily basis where we: laugh often and much, find the best in others, try to leave the world a better place, and know as we turn out the lights that one life may have breathed easier because of our mission.***

*Organizations should have scripts when providing references to make sure they are being factual.

 ** Be sure to have a policy on providing references and consult an attorney on how to best provide a reference for someone who has stolen from the organization.

 ***Exerpt from What is Success? By Ralph Waldo Emerson.

 Nothing in this article should be construed as legal advice. If you have specific issues with theft or suspect theft at your organization, please consult with legal counsel or the authorities.