Fraud and Non-Profits Series: Part 1: Misappropriation Schemes

Non-profits are established to do good things. An unscrupulous person in a non-profit is a wolf who thinks he or she sees a pasture full of well-meaning sheep. The trick is to not be eaten.

 From WECT TV in Wilmington, NC:

A former employee with the American Cancer Society has been arrested on charges of embezzling money from the organization. According to the Pender County Sheriff's Office, Wendy Perdue, from Hampstead, opened a personal account in Nov. of 2012 under the American Cancer Society's Relay for Life name, which the ACS never authorized. Authorities say Perdue withdrew money from the ACS checking accounting for personal use, totaling $68,000. She is also accused of making donation deposits and withdrawals into and out of that account.

A New York Times story several years ago detailed a study done on cases of non-profit theft:

Nonprofit leaders tend to shrug off such cases as evidence of “just a few bad apples.” The report, by four professors who specialize in nonprofit accounting, found that the typical theft from a charity was committed by a female employee with no criminal record who earned less than $50,000 a year and had worked for the nonprofit at least three years. The amount she stole was less than $40,000. The most costly cases, the study found, involved male executives earning $100,000 to $149,000 a year. The thieves in such cases had typically been with the organization the longest.”

Principal non-profit misappropriation schemes are:

Revenue and cash receipts schemes

• Skimming (often characterized by elaborate schemes to hide the money trail)
• Theft of donated merchandise

Purchasing, cash disbursement, and expense reporting schemes

• Credit card abuse
• Submission of fictitious expenditures
• Fictitious vendors

Payroll schemes

• Ghost employees
• Overstatement of hours worked

The common denominator in each of these is that in some way, regardless of how careful the thieves are about hiding their actions, they leave a trail. Sometimes those trails are highly intricate and without cutting through dense bookkeeping underbrush, the thieves just walk off with the money hoping no one will notice.

To combat misappropriation, the first-line defenses are:

• No one within the organization should have sole authority over financial activities; the more closely-held these responsibilities, the more vulnerable the organization becomes.
• Require two signatures on all checks over a certain threshold, i.e. any check written for $500 or more.
• The Treasurer or other Board Member should make periodic and random “test” examinations of transactions, looking at funds or goods coming into, and leaving, the organization.
• An annual financial statement, compilation, review or audit performed by independent, non-profit focused CPAs.
• Current industry best practices suggest the development of an Audit Committee as part of the Board of Directors’ standing committees.

Rodefer Moss has an experienced team of CPAs that focus on the Non-Profit industry. If you have questions about the financial health of your Non-Profit organization, contact us today!

Look for Part 2 of our Series next Tuesday, January 14.