Fraud in the Non-Profit World Part 1 of 4

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CASE 1: THE SECRET BANK ACCOUNT

This one is actually my personal favorite because of how innovative it was. The executive director (ED) of a large neighborhood association opened up a second bank account without the knowledge of the board, putting only himself as the signer on checks. He then began funneling donations to this bank account.

Making this even sadder, the neighborhood had just been hit by a tornado and residents whose homes had been spared were donating money to help other residents whose homes were damaged. Many of these donations ended up in this secret bank account. Periodically, the ED would write himself a check depleting the bank account. Eventually the board discovered what was happening, but not before the perpetrator had fled the state. The total amount taken was over $35,000.

Preventive Internal Controls:

1)   Proper Organization Setup: Most banks require that someone opening a bank account be an officer of the organization, and will check with the Secretary of State to see if this is the case. Therefore, it is vital that no matter how small the organization is, no employee, including the executive director, is listed as an officer. In addition, many banks will ask for a copy of the bylaws and look for a section indicating who can be a signer on accounts. It is, therefore, a good idea to put verbiage in the bylaws addressing this issue. For example, you should insert a policy that no employee can be a signer. Alternatively, there should be a statement that there must be at least two people listed as signers – one of which is an officer – when opening an account and those signatures must be obtained in person at the bank.

2)   Proper Board Oversight: Since some banks may not check things out, especially small community banks who may know the nonprofit staff personally, it’s very important that at least two people on the board review, on a monthly basis, bank statements, bank reconciliations and financial statements with comparisons to a budget. By segregating these restricted donations from the rest of the organization’s income on the financials and checking the reported numbers out with people involved in soliciting these restricted donations, it would have been obvious that actual donations collected were much higher than those reported on the financials.

repost by Gregg Bossen, CPA

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