Tuesday, February 21, 2012

Employee Fraud: What Can Nonprofits Do?

The saying “trust but verify” resonates more than ever in cases of employee fraud. Unfortunate situations like the incident recently surfaced out of Open Arms of Minnesota leave donors and nonprofits wondering “what can be done?” Open Arms, an organization that meets all of our Accountability Standards and has earned a place on our list of Most Trustworthy Nonprofits, is undergoing the painful experience of employee fraud through the discovery that a staff member was siphoning the payout of phantom food contracts totaling a loss as high as $156,000.

It’s important for donors and nonprofits to understand that no organization is immune to scams—no matter how accountable or transparent its operations might be. While there are legal restrictions to what can be said while a case is under investigation, once an incident like this occurs, transparency, as in all matters, should be the guide in communicating to the public. The tips below were provided by Michael Wirth-Davis, president and CEO of Goodwill/Easter Seals, whose own experiences dealing with employee fraud were shared at the Council’s 2007 Annual Forum.

Accountability practices to help nonprofits prevent scams:

  • Separation of duties within the finance department is critical
    Regardless of the number of employees, require two signatures on all checks. Include non-finance staff as part of the four members who can sign checks. Restrict use of CEO’s signature stamp and mandatory log entries when it is used.

  • Focusing on internal controls (just like safety drills)
    This should be an on-going responsibility of the Board Audit Committee and management, as well as the external audit firm. All accounts are reconciled monthly, with reviews and sign-offs. Use a lock box for all donations. Run all cash sales through store registers for retail operations. Deposit cash sales with store deposits.

  • Review internal controls
    A review of controls can lead to identifying areas of risk and vulnerability, which should then be shared with your Audit Committee.

  • Practice honesty, integrity, and accountability
    This should be part of your routine operation to establish credibility and will come in handy during the challenging times.

Manage the situation when fraud occurs:

  • The CEO and CFO should disclose issue to the Audit Committee of the Board of Directors.

  • Engage a forensic audit firm.

  • Engage your attorney.

  • Inform all members of the Board of Directors. Provide updates to Board regularly.

  • Engage a crisis communications firm to help create public messages for specific audiences.

  • Present findings from forensic investigation to County Attorney’s office.

  • Fully cooperate with legal authorities during investigation.

  • Inform your staff.

  • Inform the public. Coordinate activities with the media relations staff of the County Attorney’s office.

Telling the Public:
Since most organizations are involved with the public in some way, it is important to let them know what is going on. Below are steps to take in getting the media involved to accurately disclose the situation:

  • Work with a team of professionals as to how to go about letting the public know about the incident. This includes who all should be told and when to announce it.

  • Look at all possible scenarios that could be brought up during the process of public disclosure.

  • Make sure to tell the staff everything first before the media is told. Be direct and respectful to answer all questions received or point them to the appropriate communications staff.

  • Track and monitor all public responses.

  • Proactively alert the Attorney General’s office of the situation. Provide updates regularly.

  • Next, release the information to the media and allow interviews.

  • Reinforce the message publicly that this situation in no way reflects the work you do every day on behalf of those in your communities and it will not affect the quality of your programs and services.


Anonymous said...

This article fails to mention the single most important factor in preventing employee fraud - not hiring those predisposed to theft in the first place.

Undertaking background checks of job applicants is the cheapest and most effective method of employee fraud prevention available.

Jamie Millard, Charities Review Council said...

Thanks for your comment. Criminal background checks are only one part of screening a potential employee. This article, Background Checks, Screening and Your Nonprofit, does a great job of outlining the importance and limitations of background checks:

"The biggest misperception about criminal history background checks is that they are the only effective way to prevent the hiring of unsuitable paid or volunteer personnel. Criminal history background checks are a single tool in a toolbox of screening tools that nonprofit leaders should consider. Certain positions in a nonprofit may warrant the use of one combination of screening tools that looks quite different from the combination used for other positions. Applications, interviews, and reference checks are examples of other invaluable tools that savvy nonprofit leaders should keep close at hand in the screening toolbox."