Key Steps to Guard Against Embezzlement
In a previous blog post, we talked about five red flags that someone might be embezzling from your organization. Embezzlement, which is just one of many types of fraud, isn’t uncommon in nonprofit organizations, but there are some key steps you can take to prevent embezzlement and protect your organization.
Your financial policies and standard processes can dramatically reduce the possibility of fraud. Most people who embezzle don’t start out with malicious intent. Some do, of course, but it’s far more likely that someone accidentally charges their groceries to the wrong card. Nobody notices because of lack of oversight, and so maybe next time they do it on purpose and just mentally count it as a little bonus for all the hard work they’re doing. Or perhaps they are in a financial emergency, and it’s easy to take a little here or there and tell themselves they will pay it back.
In those examples, the entire situation could have been prevented if some basic practices were in place. In other situations where the embezzlement is much more intentional and malicious, having the right policies and practices could lessen the damage by catching the issue sooner.
Here are four things your organization can do to help guard against embezzlement.
Background checks
Many nonprofits already conduct background checks as a contingency of the employment offer, especially if the nonprofit works with children or provides other direct services to people. If your organization doesn’t already conduct background checks, start doing them for anyone who will have access to bank accounts, checks, debit cards, or credit cards. Be sure the people with access to your money do not have a history of being sued for non-payment of accounts or for anything else related to financials. This includes those in volunteer roles and board members who may have access to financials. A simple background check makes you aware of potential signs of future fraud.
“Be sure the people with access to your money do not have a history of being sued for non-payment of accounts or for anything else related to financials.”
Separation of duties
One of the best ways to protect your nonprofit from embezzlement is separation of duties. If money is involved, no one person should be doing those tasks on their own — from the moment the money comes into your organization until it leaves. Even opening the mail alone provides opportunity for checks to go missing or for accusations of misconduct to arise. Having another employee watching as mail is opened and signing off on the amount of funds received prevents any issues.
Other aspects of financials should be verified by different people as well. After one employee or board member approves invoices, they need to be handed off to a second person to write the checks or pay the expenses. If one employee does data entry, another person should verify the data, then pass it on to an officer of the board to review the bank statements with the reconciliation detail.
By enacting these controls, the opportunity to commit fraud diminishes significantly. Whether you’re taking away the temptation caused by an accidental error or putting up roadblocks for those who intend to embezzle, having two or more people involved in everything pertaining to money goes a long way in protecting your organization.
General financial oversight
The board is responsible for providing financial oversight for a nonprofit organization. While executive directors and others in charge of financials need flexibility to operate within their budget, the board’s responsibility extends further than simply passing a budget and letting go. The board needs to verify that information received in reports is accurate by going directly to the source of information to confirm rather than relying on one single person to provide that information.
Board members should have direct access to online accounts or original bank statements to verify information. Their online access could be set to read-only if needed so they can’t change things, but they should be able to access the accounts.
They should also be checking regularly to ensure there are no unauthorized PayPal or bank accounts set up in the organization’s name. PayPal accounts can be set up, funds directed to that account, and then the account can be used to buy all sorts of things for personal use. If you are unaware of the account, it may be quite a while before you know there is a problem. The same issue can even occur with multiple accounts at the bank used by your organization. The best protection against this sort of fraud is to regularly search for accounts in your name. For PayPal accounts used by your business, reconcile them as you would a bank account.
Contracts, procurement, and payroll oversight
Another place where fraud can occur is with contracts, procurement, and payroll. The board should be keeping a close eye on all of these areas to protect the organization.
The board should not only be signing contracts or ensuring they are within the budget, but also tracking when contracts are fulfilled. For example, watch out for phantom contracts set up as a line-item in the budget for which the organization isn’t receiving the contracted goods or services.
The board should also provide oversight on payroll, especially if the executive director or other employee approves their own payroll. Check to see if payroll taxes are being properly paid or if the CEO or executive director has approved a pay raise for themselves. Legally the board must approve all such pay raises. Having a board member looking over payroll will protect against fraud in this area.
Board members should always sign the meeting minutes with a time or date stamp. Very aggressive embezzlers retroactively change minutes to show board approval for lines of credit, credit cards, increase in payroll, or other expenditures. By signing and dating minutes, you protect against later changes used to cover the embezzler’s tracks.
Fraud happens more than any of us would like to think, and there are many different ways that people embezzle money. With the right financial policies and practices in place, the chance of your nonprofit experiencing fraud greatly diminishes. Conduct background checks, separate all duties related to financials, and provide proper financial oversight to help prevent fraud and protect your organization.
