It happened again just a few weeks ago. This isn’t the first time a center has been victimized by employee theft. And usually it is the bookkeeper or accountant, someone you trusted. Often they are not small thefts, but larger ones that have been going on for awhile before being detected. So what can you do to prevent or at least find and end such theft?
Most centers depend on their auditors to protect them against theft. However, unless you are spending at least $750,000 in federal funds you are not required to have an annual audit. Even if you do have a review of financial statements, that is not an engagement to investigate fraud. When auditing financial statements, the theft might not be found, depending on the level of sophistication of your financial person.
Remember that the person holding the financial position in the organization has an understanding of the audit process and its inherent limitations. They may be able to divert the center’s assets into their own pocket through several deceptive practices. It is your responsibility as the executive director or a board member, to make sure that your practices limit the possibility of theft. Here are some important practices that will offer protection:
- The executive director or board treasurer should receive bank statements directly from the bank and review them. Look at each check. Are some made out to a staff person that don’t seem right? How was the check endorsed? (Some staff create an account for themselves with an innocent-sounding name, but they have to endorse the check to deposit it.) If cancelled checks are not returned by the bank, arrangements can generally be made for online access enabling the key officer to view scanned images. After this review, the bank statements and checks can be given to the accounting department for reconciling to the books. The completed reconciliation should then be returned to the key officer for review and approval.
- Review credit card bills including the original receipts. Employees have been known to use cards for their own utility bills, for example. If you see the original receipt you will see the address. If the original receipt isn’t available, request it from the vendor or the credit card company.
- Employees have been known to add some of their own items to their cart at the office supply store. Someone different from the person who ran the errand should put away the supplies, checking them off the receipt.
- Make sure that someone other than the accountant picks up the mail and opens/directs it. This is where late payment notices are hiding, and where donations may be received and pocketed rather than deposited. If the receptionist or the executive director reviews the mail they can log in the donations and stamp checks for deposit only.
- Regularly check payroll. Verify the names. Notice whether the amounts withheld agree with what is sent to IRS. Check the hours. Make sure your withholding is sent on a timely basis. Thefts can occur by siphoning off payroll related funds.
- Do not allow the controller or bookkeeper to sign checks.
- Occasionally verify the names of all the suppliers.
- Do not sign checks which have not been completely filled in.
- Require that checks that were cut in error are saved and filed, so that you know if a check is missing. Typically the signature is torn off the check and the original, not the copy, is kept to insure that a missing check can’t be used.
- Require employees with accounting functions to take annual vacations and have others perform their duties.
- Prepare and carefully review monthly financial statements in detail. Especially look at significant variances from prior year or budget to the current year.
- Carry insurance for employees in sensitive positions. Consider fidelity insurance, bonding, and directors and officers insurance to protect the organization.
These steps cannot prevent all fraud, but should allow you to find most of the sources of fraud and take appropriate action. When you have routine policies and practices like these in place, the likelihood of fraud is greatly reduced.
One more note. You are required to report any fraud to your funders immediately. You will want to make sure your board is informed, and that you have turned the investigation over to law enforcement at the local, state and/or federal level for appropriate prosecution of anyone guilty of theft, fraud or abuse of funds.