As a forensic accountant, I am involved in many different types of fraud investigations. Fraud in any organization can have a devastating effect on owners and employee.  In particular, fraud in small nonprofit organizations can be especially heartbreaking, as these organizations are often run by volunteers who are friends and neighbors.  Recently there have been dozens of cases of alleged embezzlement from local charities.  An article was featured on msnbc.com on December 22, 2009 “Insider Theft a Big Problem for Small Charities,” which drew attention to the heightened risk of fraud that nonprofits face due to the recession and lack of safeguards in these organizations.

The article spotlighted a grievous case involving a food pantry organization which was forced to close for six weeks leaving needy individuals and families without the food they had come to rely on.  The charity’s former executive director was charged with embezzlement after it was discovered that more than $50,000 was missing from the charity’s bank accounts.  Other recent stories from around the nation include:

  • A parent-teacher organization at a Spokane elementary school had nearly $20,000 stolen, (funds raised from selling cookie dough), and another parent-teacher organization in Pennsylvania had to cancel its field trips for the year after $34,000 was stolen by the PTO treasurer.
  • The bookkeeper of an amateur hockey association pleads guilty to embezzling more than $934,000 from funds raised to build a hockey rink.
  • The former leader of a Marine Corps league in Tennessee has been fired due to the alleged theft of nearly $60,000 from the group’s Toys for Tots campaign.

Small organizations like those above often lack the internal controls to prevent fraud from occurring.  There is typically little oversight, as the volunteers and employees are in trusted positions.   In many cases, the perpetrator plans to “borrow” the money, intending to pay the organization back.  However, as we often find with the fraud cases we have investigated, the fraud escalates as the perpetrator digs a deeper hole, and the funds are not repaid.  In these current tough financial times, volunteers who might not otherwise steal from a charity can feel driven to it due to a loss of job or inability to make mortgage or utility payments.

Small charities often don’t act to prevent fraud, due to the belief that anti-fraud measures would be too expensive or difficult to institute.  However, there are some simple internal controls that charities can institute to help ensure that fraud does not occur in their organization.   The following controls are some basic first steps to take to protect a charity’s assets:

  • Always have two people involved in handling money, (whether it be collecting, counting or spending it).  Checks should be signed by two people, for example.
  • Whenever money is collected, a receipts log should always be kept.  In addition, receipts should always be given for contributions or other payments to the charity.  If possible the receipts logging or money tracking should be performed by someone different than the treasurer, or the person making the bank deposits.  Then, the deposits can be checked to the receipts logs to ensure that all of the funds were properly deposited into the charity’s bank account. 
  • The original bank statements should always be reviewed in a timely manner by someone different from the person in charge of making bank deposits and writing checks.  The bank statement should be reconciled to either the charity’s checkbook or the accounting records, (if the charity has a formalized accounting system.)

During these difficult economic times, small nonprofit organizations are a source of support for many individuals and communities.   These charities must protect not only their financial assets, but their reputation and the trust of their communities and donors. 

Julia Miessner, CPA/CFF