The nonprofit news the past several weeks has focused on ACORN, a grassroots community organization around the country. ACORN has been in the press again concerning alleged fraud and corruption involving federal funds. Earlier press during the Presidential election in 2008 was about voter registration fraud. Nonprofit organizations and faith-based houses of worship make the headlines almost weekly about theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct. Nonprofit groups use grant funding for inappropriate activities. This article will review the latest press reports about nonprofit crime, several case studies from discovery to recovery in nonprofits, ideas for preventing and reporting nonprofit crimes and resources available for nonprofit employers and employees in confronting crime in a nonprofit. Nonprofit leaders tend to shrug off such cases as evidence of “just a few bad apples.” But a 2008 report, trying to identify the scope of such thefts for the first time, suggests otherwise. The authors put the loss in nonprofits from theft, embezzlement, corruption and fraud at $40 billion for 2006, or some 13 percent of the roughly $300 billion given to charity that year. Most of these crimes are not caught through an audit. Add to this the invisible act of wasting money many people believe we do, and we have a track record that needs cleaning up.
The nonprofit world has not found a clear way to minimize theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct. I think it is because we are afraid to. We are a trusting lot working with trustable people. The governance of nonprofits is not built to stop crime. “Best practices” may be helpful but they have not really had an impact. I suggest there are two critical decisions nonprofit leaders have to make:
Trust no one when it comes to the money. Not a board member, not a staff member, not the founder, not yourself, not me.
If a crime has been committed, prosecute the criminal. Do not hide it from the public and do not hide it from yourselves. Failing to prosecute is to assist others in contemplating a theft – they think nothing really bad will happen.
Does this surprise or shock you? Does it sound as though I am attacking leaders and dreamers? Am I challenging the core belief of nonprofits that it is good people doing good things? That is precisely what I am doing. We have to do a better job of protecting the organization. Every headline about one nonprofit alleged crime affects all nonprofits – and yet it has to go public. We are dealing with public gifts and grants. We have a higher standard like it or not. It is a higher standard that is being exercised with lower protections. Improved oversight, written policies, procedures, forms and recordkeeping and audits help. They are not always enough. We must stop the phony “better than thou” attitude that we trust everyone and we must stop the fear of prosecuting a thief.
It will start with a new mind set – trust no one, assure full prosecution and go from there.
We may not end nonprofit crime but we can minimize it starting with that premise – trust no one. Create whatever you have to with clear oversight of the money and do not apologize for the inconvenience of checking everything out. It is not personal, it’s business. .
- LATEST PRESS COVERAGE
- TWO CASE STUDIES OF NONPROFIT FRAUD
- PREVENTION AND REPORTING
- RESOURCES
LATEST PRESS COVERAGE
SAMPLE CASES PENDING – These are recent headlines from around the country of theft from nonprofit organizations Remember, in this country people are innocent until proven guilty. Nevertheless these headlines burn holes in readers brains about the trustworthiness of nonprofit leaders and organizations. One organization had to lay off staff, another close its doors, another has stopped work until a full study is made and another filed for bankruptcy. These are not “Mom and Pop” nonprofits. They are substantial groups including nationally known organizations. Crimes against nonprofits can include theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct: The next section will list the stories of recent convictions of such crimes. One man pleaded guilty of theft from two nonprofit organizations
ACORN scaling back or shutting down in many cities By P.J. Huffstutter and Kate Linthicum, September 19, 2009 Los Angeles Times - The community activist group is taking no new clients while it investigates its operations, which have been dragged down by the poor economy and recent scandals. http://www.nypost.com/p/news/local/li_pharaoh_phraudster_6M0V9X3dvSWivSV8PuWcpL
· LI's Pharaoh 'Phraudster' Ex-museum big nailed in Egypt-art theft By KATI CORNELL and JOE MOLLICA September 16, 2009 New York Post - The ousted director of Long Island University's Hillwood Museum stole Egyptian artifacts from the collection and peddled the precious antiquities through Christie's auction house, the feds charged yesterday. The auction house's records show eight of the pieces, including bronze and limestone statues, sold this year for a total of $51,500. The artifacts were sold at two antiquities auctions at Rockefeller Center on Dec. 9 and June 3. Museum employees caught wind of the theft when Christie's faxed them a purchase offer on the one remaining artifact in June of this year. http://www.nypost.com/p/news/local/li_pharaoh_phraudster_6M0V9X3dvSWivSV8PuWcpL
· Logan man accused of bilking child-care nonprofit of $400,000 By DANA DiFILIPPO April 4, 2009 Philadelphia Daily News - Day-care provider Tyron Ali told the state he needed taxpayer money to feed needy kids nutritious meals and snacks. Instead, the Logan man used it to feed his greed, allegedly using more than $400,000 in state funds to buy himself jewelry, designer clothes and shoes; to dine at upscale eateries; to buy Amtrak tickets, and to take Caribbean cruises, according to state Attorney General Tom Corbett. Ali, 35…also allegedly used public money to make car and insurance payments and to pay $1,500 in city parking tickets, Corbett added. He was arrested Thursday on 371 counts of forgery, tampering with public records and related offenses stemming from the fraud scheme which lasted from 2004 to 2007. http://www.philly.com/philly/hp/news_update/20090404_Logan_man_accused_of_bilking_child-care_nonprofit_of__400_000.html
· Man indicted in theft of $780K from Harvard nonprofit By Charlie Breitrose/Daily News staff July 7, 2009 Cambridge Chronicle - A Middlesex County grand jury indicted a 58-year-old Framingham man Thursday for allegedly stealing nearly $780,000 from a Jewish nonprofit organization connected to Harvard University, for which he worked as an accountant. William O'Brien, 58, of Framingham, is charged with 11 counts of larceny over $250, two counts of larceny by continuous scheme, five counts of failure to file income tax returns, and one count each of forgery and uttering [the act of offering a forged document], according to Attorney General Martha Coakley's office. http://www.wickedlocal.com/cambridge/news/x135742054/Man-indicted-in-theft-of-780K-from-Harvard-nonprofit
· Judge won't toss theft charges against nonprofit ex-chief Woman accused of illegally paying boyfriend as well as making personal credit card purchases By JENNIFER GOLSON STAR-LEDGER STAFF Publication: The Star-Ledger (Newark, New Jersey) July 22 2009 A Superior Court judge refused to dismiss charges against the former executive director of a Tewksbury-based nonprofit organization and her then-boyfriend for the no-show job she allegedly gave him. Hilary Garzillo, 38, was the co-executive director for the Work-Family Connection, an agency that provides before- and after-school programs. Erik Marquardt's duties included office work and teaching. An eight-count indictment charges Garzillo and Marquardt, now her husband, of second- and third-degree theft by deception. Marquardt, 27, was charged with fourth-degree unsworn falsification to authorities in incidents that occurred between 2004 and 2006. http://www.allbusiness.com/legal/trial-procedure-judges/12570881-1.html
· Alaska man sought in $100,000 theft from nonprofit The Associated Press July 6, 2009 Police are searching for an Anchorage man suspected of stealing more than $100,000 from the nonprofit Alaska Marine Conservation Council. Anchorage police Lt. Dave Parker says it's believed 36-year-old Travis Robinson committed the crimes against his former employer by using company credit cards, company accounts and false reimbursements. The thefts forced the nonprofit to put all paid employees on furlough, and several workers lost their jobs. http://www.newsminer.com/news/2009/jul/06/alaska-man-sought-100000-theft-nonprofit/
· Nonprofit volunteer charged: 62 felony counts Documents say coffee shop owner got workers from nonprofit but didn’t pay for them JEREMY PAWLOSKI The Olympian The woman who owns the downtown Olympia coffee shop Java Flow has been charged with 27 counts of first-degree theft and 35 counts of second-degree theft for allegedly embezzling about $89,000 from an Olympia nonprofit group where she volunteered. Stephenie Patricia Jekel, 35, will be arraigned on the 62 felony counts Sept. 22 in Thurston County Superior Court. Reached by telephone Wednesday, Jekel said she had no comment on the criminal charges. Her father, Chris Jekel, who was working Wednesday at Java Flow, across from the Intercity Transit center, said his daughter is innocent. The group that Jekel is accused of stealing from, the Washington Cooperative Support Center or WCSC, formerly provided temporary labor and services to businesses in Thurston County, founder Bruce Palm said. It went bankrupt in 2006 because of losses it incurred as a result of the alleged thefts, Palm said. http://www.theolympian.com/112/story/965832.html?storylink=omni_popular
· Pair charged in $110K theft from Mukilteo nonprofit By Diana Hefley Herald Writer February 24, 2009 - The president and the finance director of a nonprofit Mukilteo company that assists disabled workers have been fired from those jobs and are now facing felony theft charges. Prosecutors recently charged Kenneth Storkel and Sandra Adams Ball with first-degree theft. The pair is accused of stealing more than $110,000 from Diversified Industrial Services, a nonprofit company that provides skills training and employment support for disabled clients, according to court records. The amount of money involved prompted prosecutors to file the case as a "major economic offense," raising the possibility for extra punishment. http://www.heraldnet.com/article/20090224/NEWS01/702249874
· Former Trustee Indicted for Alleged $6 Million Theft from NonProfit Law Professor Law Blog June 30, 2008 - The Chicago Tribune reports that the federal government has indicted Dr. Robert Weinstein for conspiring to steal millions from the Northshore Supporting Organization, a charity formed ostensibly to support the Rosalind Franklin University of Medicine and Science in North Chicago. Dr. Weinstein served as a trustee of both organizations and allegedly worked with Stuart Levine, the government's star witness in its case against Illinois political fundraiser and insider Antoin "Tony" Rezko, to divert $6 million from the Supporting Organization using a Scandinavian accomplice, fake contributions to the University, and sealed promissory notes. According to the U.S. Attorney's press release and the indictment, Weinstein and Levine caused the Supporting Organization to transfer $3 million each to them in return for promissory notes that neither of them intended to repay. They managed to buy back the notes for only $1 million through a complicated scheme involving the University, an intermediary, and sealed envelopes holding the notes but which the University was not permitted to open. According to the indictment a third charity, identified only as IDDRS, was allegedly the original source of the $6 million ultimately diverted from the Supporting Organization, and Dr. Weinstein was the president and sole director of IDDRS. http://lawprofessors.typepad.com/nonprofit/2008/06/former-charity.html
· Woman Charged In Connection With Theft From Nonprofit Laconia Nonprofit Discovers $17,000 Missing From Accounts WMUR (NH) July 27, 2009 - A former employee of a Laconia nonprofit has been charged with theft after the group discovered thousands of dollars missing from its accounts. Police said Ozanam Place discovered that money was missing from its accounts and conducted an audit. The audit revealed that $17,000 was missing. Police investigated and arrested Maria Street, 41, of Moultonborough, N.H. Street had worked for Ozanam Place for about two years until spring 2009. The President of Ozanam Place, Bill Johnson, tells News 9 his organization was barely making it before and that the theft exacerbates its financial concerns. Ozanam Place helps single mothers find homes. http://www.wmur.com/news/20193200/detail.html
· Local nonprofit's ex-CEO faces theft charges May 7, 2009 from Coalition to End Family Violence Ventura CA $50,000 A judge has found there is enough evidence for a Newbury Park woman to be held for trial on charges that she embezzled more than $50,000 from the Coalition to End Family Violence. The prosecutor, Wendy Macfarlane, said the criminal complaint against Duval has been amended to include five felony counts plus a special allegation that the theft exceeded $50,000. It includes three counts of theft, charging three different ways that Duval, 42, allegedly stole, said Macfarlane. “One was excess compensation, another was she got reimbursed for expenses that shouldn’t have been reimbursed for, and charges on the Coalition’s (credit) card that were not authorized,” said Macfarlane. In addition, there are two criminal charges stemming from the unauthorized uses of the signature stamp of the organization’s board chairman, said Macfarlane. http://www.venturacountystar.com/news/2009/may/07/local-nonprofits-ex-ceo-faces-theft-charges/
· Ex-director of NYC nonprofit charged in food theft By Carly J. Rothman NJ.com November 13, 2008 - The former director of a Brooklyn nonprofit is accused of stealing more than a half million dollars in federal aid that was intended to pay for food for meals and snacks for poor children. Andre A. Lewis is charged with defrauding the U.S. Department of Agriculture's National Child Food Program of more than $500,000 while he was the executive director of the Better Brooklyn Community Center. The nonprofit received the funds from the federal agency as part of a 2005-2006 contract with the city's health department to serve meals and snacks to children at its centers. http://www.nj.com/helpinghands/index.ssf/2008/11/exdirector_of_nyc_nonprofit_ch.html
· Two Accused of Embezzling $200,000 From South Bronx Nonprofit Group They Headed By RAY RIVERA June 10, 2009 - Two people were charged Wednesday with embezzling $200,000 from a Bronx nonprofit group and using the money pay for a lavish lifestyle for themselves and for political favors for two elected officials that included Caribbean trips and campaign donations. Richard Izquierdo Arroyo and Margarita Villegas were accused of stealing the money from SBCC Management Corporation, a nonprofit group that receives city and federal money to manage low-income buildings in the Bronx. (Snip) The complaint says that between 2005 and 2009, Mr. Izquierdo Arroyo and Ms. Villegas charged $15,000 worth of clothes and shoes from Tommy Hilfiger, Coach and Polo Ralph Lauren to the group’s American Express account. They are also accused of spending $66,000 on meals at restaurants like Ruth’s Chris Steak House and Tavern on the Green, and $48,000 on hotels and airfare. http://www.nytimes.com/2009/06/11/nyregion/11embezzle.html?_r=2
CONVICTIONS OF NONPROFIT EMPLOYEES
These are samples of recent headlines of convictions of former nonprofit employees. It is interesting to see the length of time from the criminal act to the conviction.
· Woman Admits Theft From Nonprofit: Former Treasurer of Group Gambled Away $265,000 3 June 2006, from Asian Women United of Minnesota St. Paul, Minn. $265,000 Pa Paulette Vang pleaded guilty to felony theft by swindle in Ramsey County District Court. Judge James Clark will sentence Vang on Aug. 1. The 34-year-old St. Paul woman stole an estimated $265,000 by secretly opening four bank accounts in the name of the nonprofit and transferring money from the primary accounts of the organization into the accounts she opened. She was able to access the money without oversight, according to a criminal complaint. An auditor retained by the organization found $265,864 in questionable transactions between May 2004 and December 2004. http://www.redorbit.com/news/business/525663/woman_admits_theft_from_nonprofit_former_treasurer_of_group_gambled/index.html
· Former finance director of child abuse nonprofit admits stealing payroll checks May 5th, 2009 from National Children’s Alliance, Washington DC over $15,800 Sharon Martin admitted she stole eight payroll paychecks totaling more than $15,800. The alliance, based in Washington, has more than 500 Children’s Advocacy Centers across the country devoted to helping victims of child abuse. It’s funded in large part by grants from the Justice Department. Martin was the alliance’s finance and senior staff director from 1994 to 2007. http://blog.taragana.com/n/former-finance-director-of-child-abuse-nonprofit-admits-stealing-payroll-checks-53455/
· Former accountant pleads guilty to nonprofit theft June 3, 2009 embezzled $425,000 Washington DC from the American Society for International Law from 2004 to 2008 and $150,000 from the American Bakers Association. A former accountant has pleaded guilty to stealing more than $500,000 from two D.C.-based nonprofit groups. Thirty-four-year-old Charles Clifton of Stafford County, Va., pleaded guilty Tuesday to wire fraud and theft in an embezzlement scheme. Clifton, who held financial jobs at both groups, embezzled $425,000 from the American Society for International Law from 2004 to 2008 and $150,000 from the American Bakers Association between 1998 and 2004. http://content.usatoday.net/dist/custom/gci/InsidePage.aspx?cId=indystar&sParam=30889801.story
TWO CASE STUDIES OF NONPROFIT FRAUD
1. A Case Study - The Case of Free Street Theater in Chicago
This is the story of one nonprofit’s experience, Free Street Theater in Chicago, a nonprofit organization involved in the arts and theater. Their mission - Free Street Theater teaches acting and writing skills to youth so they can open their potential to be creative, active participants in their own lives.
In July of 2005 Free Street’s board and staff discovered that our then Managing Director had been taking organization funds for personal use. Our Story ….
And Why We Believe it is Important to Tell it Publicly:
In July of 2005 Free Street’s board and staff discovered that our then Managing Director had been taking organization funds for personal use. Before we share the details of our story, and share what we have learned through our trials and tribulations, we want to explain why we think it is important to be public about a subject that is typically hushed.
1. We want others to benefit from our experience so they do not have to learn the hard way as we did.
2. We believe silencing crime aids criminals. Our auditor told us that nonprofits tend not to prosecute because they fear a myriad of potential consequences. Our auditor has seen thieves get caught at one organization and easily move on to another organization. We think being active in stopping that trend is worth the risk of being publicly vocal. We hope that through our example, we can help other organizations confidently prosecute when necessary, and ultimately lessen the vulnerability for all nonprofits.
3. Free Street is a nonprofit organization and as such exists to serve the community. The community deserves a transparent, open understanding of our work. This includes our pitfalls as well as our successes.
4. We could not have pulled Free Street out of this crisis without the overwhelming outpouring of support from the community. We want to be able to share our gratitude. Ultimately we have emerged as a stronger organization. Sometimes it takes being faced with the question “Why should you exist?” to really discover why your existence matters. We are proud to exist, evolve and thrive.
(Skip)
Major Lessons We Learned:
1. Nonprofits are vulnerable because they are mission driven. Everyone is working based on the belief that the mission is important and everyone in the organization is passionately working for the cause. No matter how deeply you are engaged in your mission, how much you hate dealing with the money, or how short staffed you are, never ever entrust one person to handle all the money matters. (Of course, we didn’t think we were doing that. Read lesson number 2.)
2. Checks and balances need to be effective. We had a bookkeeper, an auditor, and a board who had roles in examining our financial information. There are a surprising number of places in general operating systems that are vulnerable to manipulation if someone aims to harm your organization. Unfortunately, if someone is presenting misleading information to the financial overseers, the assumed checks and balances are rendered ineffectual. (See “What We Do Differently”)
3. Financial matters are the bones supporting the body of programming. Learning to be interested in the financial practices is essential. We came to the conclusion that as artists who are passionate about Free Street, we are the best caretakers of the organization. We accept the challenge of learning the financial management skills we need to be able to support the organization to the best ideals of our mission. The three full time artists who comprise our core staff have worked together for ten years. We have evolved a management style that uniquely contours to our strengths, and we have built a stronger board. We have learned a great deal about creating better accounting practices for our organization through lessons from the Nonprofit Financial Center, private consultations, and public resources. (See “Resources”)
4. Ask for help when you know you need it. There is no way we could have pulled through this crisis alone. Thank you Lawyers for the Creative Arts, Reclamation Committee, Chicago Police Financial Crimes Detective Sergeant Lucky, State’s Attorney William Merritt, Pro-bono legal counsel from Robert Zimmerman and the team of Edward Green, Karl Von Drathen and Karen Kawashima at Foley and Lardner, Chicago funding community, James Mitchell of the Abbey Woods Fund, and all our friends.
Preventing Nonprofit Theft
This is a subject we wish we knew nothing about. Unfortunately we have learned a tremendous amount about the ways nonprofits are particularly vulnerable to criminal financial manipulation.
Overview of What We Do Differently Now
We have a detailed fiscal controls policy that includes:
1. All financial duties are shared between two staff members.
2. A board member opens the bank statements and reconciles our computer records.
3. We have developed a more experienced board.
4. We have a payroll service issue checks for the staff and pay the required taxes.
5. Bryn Magnus and Anita Evans have taken part in many financial training sessions to continually deepen their understanding of accounting practices, budgeting, and recommended checks & balances.
http://www.freestreet.org/prevent.html
2. Report Sketches Crime Costing Billions: Theft From Charities By STEPHANIE STROM Published: March 29, 2008, NY Times
To support the allegations in the headlines, the Times refers to a report prepared by four professors. Their study concluded the following:
· The volunteer treasurer of the Madison County Humane Society in Indiana was charged this month with using $65,000 of the charity’s money to buy jewelry and makeup. In San Francisco, the chief financial officer of the Music Concourse Community Partnership was fired after he was accused of taking $3.6 million of the organization’s money to play the stock market.
· 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.
· The report’s estimate of the overall cost, which the authors put at $40 billion for 2006, or some 13 percent of the roughly $300 billion given to charity that year.
· Government, for-profit or nonprofit, “lose on average 6 percent of their revenue to fraud every year.” Applying that percentage to nonprofits’ total 2006 revenue of $665 billion — donations, government payments and other income — the authors came up with the $40 billion estimate.
· Losses to fraud among the 58 cases reported to the fraud examiners association in a random survey of nonprofits ranged from $200 to $17 million, with the median fraud costing $100,000.
· Most of these things are not caught by routine audits
· They’re usually done by someone in the financial area — the treasurer, the bookkeeper, the signer of checks — who knows how to avoid getting caught.
· Almost 95 percent of the reported frauds entailed loss of cash, and a majority of those involved false or inflated invoices, billing for expenses that were never incurred and check tampering.
· Failure of organizations to punish those who steal from them was perhaps one of the biggest reasons for fraud in the sector.
Asked about his favorite example of nonprofit fraud, Mr. (Gary) Snyder was initially stumped.
“There are so many,” he said.
He eventually settled on the embezzlement of some $25 million from Goodwill Industries of Santa Clara County in California.
It started in the 1970s and continued until one of the participants blew the whistle in 1998. Merchandise donated to the organization was sold outside the Goodwill shops by the perpetrators, who kept the proceeds. One of the embezzlers committed suicide before arrest, and six others, all related, pleaded guilty, were fined and, in some cases, were sent to prison.
The thieves had given more than $800,000 to the organization’s president and chief executive, who parked the money in accounts in Switzerland, in Austria and on the Isle of Man and then escaped to Guatemala as investigators closed in, according to the authorities. Guatemala sent him home in 2003, but he ultimately pleaded guilty to only one charge — of tax evasion unrelated to the scandal at Santa Clara Goodwill — and walked out of the courtroom.
“I like that one,” Mr. Snyder said, “because it’s an extreme example of something typical: that no one gets in trouble for this.”
http://www.nytimes.com/2008/03/29/us/29fraud.html
PREVENTION AND REPORTING
How does the board of trustees and staff leadership prevent theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct? That may not be possible. There is no full-proof prevention available. There are however many things that can and should be done to minimize crimes against a nonprofit organization. The organization needs to take appropriate steps to minimize the theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct and to minimize the effect of the crime on the mission and obligations of the organization.
Nonprofit organizations should have written policies, procedures, forms and recordkeeping separating financial duties between officers and employees. For instance the duties of opening envelopes with checks, registering the checks, preparing bank deposits and accounting for funds are different duties that should be shared by various board officers or employees. Talk with your accountant and attorney to develop these written policies, procedures, forms and recordkeeping to increase accountability and transparency
Steps to minimize theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct:
- Trust no one when it comes to the money and assets. Not the board, not the staff, not the founder.
- Prosecute crimes against the organization.
- Be honest and moral in your actions with the nonprofit organization, whatever your position
- Create checks and balances for handling the receipt of cash and checks, the review of all accounts receivable and payable, a policy requiring two signatures on all checks, neither of whom perform the other duties.
- Develop written clear and appropriate internal controls and monitoring procedures that are vigorously enforced including finances, unethical behavior, and policies such as sexual harassment, discrimination and so on.
- Assess the potential for conflict of interest, both real and perceived; never have the CEO serve on the board of trustees even as an ex-officio (this has nothing to do with the attendance of the CEO at board meetings, however, which she/he should); take care that relatives do not control the organization or supervise one another; have written policy concerning conflict of interest in the bylaws and personnel manual
- Follow and perform the tasks and activities in the written policies, procedures, forms and recordkeeping
- Protect employees from retaliation for reporting alleged theft, embezzlement, corruption, fraud, health/safety violations or misconduct
- Conduct an annual inventory of equipment owned by the organization
- The board of directors performs its duties of oversight for the organization and the public good
- Budget for and provide appropriate training for board and key employees on performing their duties, management, accounting, transparency and understanding financial and audit reports
- Trust without verification will produce at best shoddy accounting and at worst hidden theft, embezzlement, corruption, fraud, health/safety violations or misconduct
- Develop, adopt, and disclose a formal process to deal with complaints and prevent retaliation.
- Be receptive to any employee and volunteer complaints, investigate the situation, and report or fix any problems or justify why corrections are not necessary.
- Perform background checks in hiring or in assigning people to financial responsibilities
- Have the leadership conduct a risk assessment for the organization concerning activities, building conditions, legal policies, finances and more
- Develop a process for recording all incidents related to alleged criminal and inappropriate actions involving finances and waste
- Assure the organization has an annual audit, whether by a committee of the board or a certified public accountant
- Assure the organization cooperates with the auditor to review all relevant and requested records
- Create a safe policy and process for employees to feel they can be whistleblowers if they believe they have seen inappropriate action or failure to perform action by responsible employees or volunteers (There are state and federal laws concerning the protection of employees for acting as a whistleblower; employees need to know when those protections are triggered. Posters in the workplace are required.).
- The organization purchases appropriate and adequate insurance and keeps it current reflecting business changes
There are many great articles offering ideas, sample policies, procedures, forms, recordkeeping and so on linked below.
See - The Most Common Financial, Management Risks Facing Nonprofits. Alliance for Nonprofit Management 2008 This resource discusses and provides examples of possible financial risks that a nonprofit organization may encounter. Nonprofit grantees may find this resource useful in identifying potential risks within their organization. The risks in financial management are any actions that result in the reduction in value or loss of any of the organization's financial assets. http://www.eclkc.ohs.acf.hhs.gov/hslc/Program%20Design%20and%20Management/Fiscal/Program%20Management/Risk%20Management/TheMostCommonF.htm
A new temptation for theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct is the Recovery Act (ARRA) stimulus funding, a pot of $787 billion. Although most of that money is not going to nonprofits, some of the money is. One of the elements of the ARRA is the section on whistleblowing, a variation of other federal and state laws on employees’ protection for blowing the whistle on crime in the workplace.
See - Corruption Alert - Potential Economic Stimulus Fraud by Right Side News (an online newspaper, publishing accurate information about threats against Western civilization) 17 September 2009
The ARRA, signed into law earlier this year, will inject $787 billion into the U.S. economy, providing jobs and other resources for states and local communities. While most of those receiving the funding are honest and dedicated individuals, experience tells us that there's a good chance that some of the money could end up in the hands of a few unscrupulous government officials and others seeking to line their own pockets
(Snip)
Based on the areas that the ARRA funding is targeting, we've pinpointed specific programs that could be the most vulnerable. They include:
- Transportation and infrastructure: Schemes historically involve bribery of contracting officers and inspectors and fraudulent billing for inferior materials or work not performed.
- Education: Funding and contracts for public schools are typically conducted by an independent board with full spending authority and little or no oversight.
- Energy/Environment: The increased popularity of renewable or alternative forms of energy-coupled with stimulus efforts to promote environmentally-friendly energy sources and create "green jobs"-will result in more projects and more opportunities for corruption and fraud.
- Housing: Funding to redevelop foreclosed or abandoned homes will be provided to state and local governments via grants, providing opportunities for public officials or grant recipients to manipulate the program for personal gain.
See - Legal Alert: Whistleblower Provisions in American Recovery and Reinvestment Act May Impact Employers from Ford and Harrison LLC
The recently enacted American Recovery and Reinvestment Act (ARRA) contains whistleblower provisions that apply to non-federal employers who will receive funds under the ARRA. These provisions prohibit the employers from discharging, demoting, or discriminating against an employee for disclosing, to a covered entity,
1) gross mismanagement of an agency contract or grant relating to covered funds;
2) a gross waste of covered funds;
3) a substantial and specific danger to public health or safety related to the implementation or use of covered funds;
4) an abuse of authority related to the implementation or use of covered funds; or
5) a violation of law, rule, or regulation related to an agency contract (including the competition for or negotiation of a contract) or grant, awarded or issued relating to covered funds. All qualified employers are required to post notice of the rights and remedies provided under this section.
http://www.fordharrison.com/shownews.aspx?show=4557
RESOURCES
It is not clear whether the new IRS 990 family of forms will assist in preventing or discovering nonprofit crimes. Other potential protections are certain provisions of the Sarbanes-Oxley Act that apply to nonprofits and whistleblowing, ARRA laws, contract compliance sections, state and local laws.
IKnow is Interactive Knowledge for Nonprofit Organizations Worldwide - http://www.iknow.org/Main.cfm?Main=14
Evangelical Council for Financial Accountability Standards and Best Practices - http://www.ecfa.org/Content.aspx?PageName=ECFABestPractices
The Basic Guide to Nonprofit Financial Management by Carter McNamara at http://www.mapnp.org/library/finance/np_fnce/np_fnce.htm
Policies for Financial Accountability at Idealist/Action Without Borders http://www.idealist.org/if/i/en/faq/56-25/50-5
Foundation Center Tutorial, Proposal Budgeting Basics - http://foundationcenter.org/getstarted/tutorials/prop_budgt/
Whistleblower Protections Under the Recovery Act - http://www.recovery.gov/?q=content/whistleblower-information
Federal and State Laws Protect Whistleblowers - http://whistleblowerlaws.com/index.php?option=com_content&task=view&id=141&Itemid=54
The Sarbanes-Oxley Act and Implications for Nonprofit Organizations (one section affecting nonprofits is the provision on whistleblowing) – http://www.independentsector.org/issues/sarbanesoxley.html
Compendium of Standards, Codes, and Principles of Nonprofit and Philanthropic Organizations - http://www.independentsector.org/issues/accountability/standards2.html
Audit Committee Toolkit - http://www.aicpa.org/Audcommctr/toolkitsnpo/homepage.htm
Checklist for Accountability - http://www.independentsector.org/issues/accountability/Checklist/index.html
American Institute of Certified Public Accountants How Fraud Hurts You and Your Organization http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/FraudDetectionandPrevention/PRDOVR~PC-056513HS/PC-056513HS.jsp
Kathryn M. Vanden Berk has two very helpful articles; one has tips on minimizing risk of loss and the other an internal control checklist.
Preventing Employee Theft - Tips to minimize your risk of loss
Author: Kathryn M. Vanden Berk Issue 3 – 2009 Alliance for Families and Children Magazine
http://mag.allianceinfo.org/content/nonprofitlaw/issue3-09/preventing-employee-theft
Internal Control Checklist
http://mag.allianceinfo.org/content/issue3-09/internal-control-checklist
One Phase of Nonprofit Organizational Readiness for Grant Funding: Recordkeeping
http://dongriesmannsnonprofitblog.blogspot.com/2008/11/one-phase-of-nonprofit-organizational.html
Background Checks The following online companies offer background check services, public record information and pre-employment screening to businesses and organizations. Check your state web site for such services approved in your state.
http://www.bestbackgroundchecks.com/general.html
Sample written policy, Illinois University Policy for Background Checks
http://www.indiana.edu/~uhrs/policies/uwide/bkg_check.html
Employment Background Checks: A Jobseeker's Guide
http://www.privacyrights.org/fs/fs16-bck.htm
How to Find a Lawyer for Your Nonprofit Organization -
http://stepbystepfundraising.com/how-to-find-a-lawyer-nonprofit/
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