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Six Tips for Non Profit Board Members
"I was responsible for all the finances, paying all the bills, all the invoicing. Everything that came in went through me. …I had so much control over my own Board of Directors because they had so much trust in me, that I was able to do basically what I wanted to do.”
These are the words of a woman who embezzled over $100,000 from a non-profit organization, spoken during an interview while she was in residence at the South Boise Women’s Correctional Facility.
Non-profits and religious organizations combined account for approximately 16.5 percent of all embezzlement incidents – an increase compared to our prior years, according to The 2011 Marquet Report on Embezzlement. The report also states that Non-profits ranked #2 in the amount of embezzlement losses, behind the financial services sector, which means non-profits beat out healthcare, manufacturing, real estate, government and all the other industry categories.
Idaho ranks seventh in risk of embezzlement according to the 2011 Marquet Report on Embezzlement. Does this mean Idaho has a higher number of criminally inclined residents? Probably not the propensity for theft is high in our state because of the prevalence of small organizations. Small organizations tend to be vulnerable to embezzlement because they have fewer checks and balances in place.
Nonprofits as diverse as homeowners associations, youth athletic associations, medical facilities, foundations, and libraries share common characteristics that increase the risk of being victimized by a trusted employee with a faulty moral compass:
1. They are governed by volunteer board members who have fiduciary responsibility for safeguarding the organization’s assets.
2. Only one or two people have access to and control of credit cards, bank accounts, tax filings and financial reports.
3. There is little financial oversight other than reports presented at board meetings.
Most states have laws, regulations and expectations that define the fiduciary responsibility of board members. The State of Idaho Office of the Attorney General has published a guide, Service on an Idaho Nonprofit Board of Directors, which emphasizes the fiduciary duty of board members. According to the guide, board members have three responsibilities under a duty of trust: duties of care, loyalty and obedience. Board members must:
1. Act with common sense and informed judgment;
2. Act with undivided allegiance to the organization (i.e., avoid conflicts of interest);
3. Institute proper financial controls to secure the organization’s assets and records; and
4. Abide by the organization’s bylaws and policies, as well as federal and state laws and regulations.
Click here for a list of other States' non-profit information.
Here are six tips board members can use to comply with these duties of trust. Together these tips help a nonprofit establish and maintain accountable and transparent processes.
1. Hold a formal orientation for new board members covering the organization’s mission and charitable purpose, bylaws and other governing documents, laws and regulations, code of ethics, fiduciary responsibilities, conflicts of interest, past financial results and current budget.
2. Develop a code of ethics and have each board member, employee and volunteer read and sign it annually. A code of ethics is a statement of values and principles that defines expectations for proper behavior. It sets the tone for accountability and transparency and provides direction on reporting illegal, unethical or improper behavior. A good rule of thumb is to keep it simple and memorable. Also, promote your organizations values – discuss them at meetings, hang posters, publicly recognize and celebrate employees and volunteers which exemplify these values.
3. Conduct background checks and criminal history checks on final candidates for leadership positions. Conduct a credit check on key individuals responsible for finances. Use a reputable service provider to conduct these checks to assure compliance with relevant laws and regulations. About 5% of embezzlers have a prior criminal history. They may be few in number, but they are high in risk potential. Criminal history checks are a cost effective means of protecting your organization.
4. Develop written policies and procedures that define access to bank accounts, check signing authority, financial reporting standards, and oversight responsibility and expectations. A would-be embezzler is motivated to act if she perceives that her scheme is likely to go unnoticed. Conduct periodic compliance reviews to assure that employees and volunteers are following approved processes.
One of the best fraud deterrents is unscheduled reviews by a trained financial professional. If accounting staff knows someone will be dropping by unannounced to review their work in detail, they are far less likely to indulge in immoral shenanigans. Many schemes used by embezzlers are simple – forging signatures on checks, paying personal expenses with company funds, charging personal expenses to organization credit cards. These types of schemes can be detected by a simple review of bank statements and cancelled checks.
5. Obtain proper insurance coverage. Embezzlement can never be completely prevented, and board members sometimes make errors in judgment. To protect the organization and board members, obtain fidelity insurance coverage and directors and officers (D&O) coverage.
6. Embezzlement is easy to engage in and easy to hide when one person has complete control of accounting records. Separate duties so no one controls a transaction from beginning to end. Use your accounting system to enforce separation of job duties. Give users only the rights they need to do their jobs – and no more.
Don’t confuse internal controls with mistrust. The top executives in any non-profit – especially those trained in accounting and finance – know that internal controls protect employees, volunteers and board members. No organization wants to deal with the reputation fall out of embezzlement by a trusted employee. Protect your organization from becoming a victim by instituting accountable and transparent financial processes.
Nonprofit organizations are invaluable to the causes they support. Board members should be knowledgeable of their duties and obligations and insist on accountability and transparency in all aspects of the organizations for which they serve as fiduciary. Excessive or misplaced trust on the part of board members can usurp an organization’s mission and assets. Trust, but verify.
Denise McClure brings over 20 years of experience in public accounting, business management and non-profit board involvement to her work as a Certified Public Accountant (CPA) and Certified Fraud Examiner (CFE). Her business, Averti Fraud Solutions helps businesses and non-profit organizations become more profitable, secure and efficient by creating accountable and transparent work environments.
Tags: non profit, board members, small business, embezzlement
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