Research:Embezzlement Avoidance Guide
The purpose of this document is to outline actions that a movement organization can take to ensure financial safety from fraud and more specifically embezzlement. Additionally, many of these suggestions make for strong accounting practices.
What are Fraud and Embezzlement[edit]
Fraud is the umbrella term for deliberate deception intended to secure unfair or unlawful gain. This could include actions such as forging a time sheet, forging records or claiming false results. Embezzlement is a specific type of fraud that is defined as the unauthorized taking of money or other assets for personal gain and benefit. In this document, we will mainly focus on embezzlement however many of the practices discussed can also protect against fraud in general.
Why it Matters[edit]
According to the New York Times, 20% of all non-profit organizations suffer from fraud and embezzlement costing an estimated $40-50 billion in losses each year worldwide.[1] Any group or organization regardless of size or number of employees is at risk of embezzlement. Research by the Association of Fraud Examiners found that 84% of those who committed theft had never been guilty of a crime yet 81% exhibited behavior indicating potential fraud.[2] Smaller organizations with less controls tend to be more vulnerable. However, by establishing basic internal controls and instituting certain practices, an organization can help protect itself from potential embezzlers.
Internal controls are defined as systematic measures and processes that safeguard assets and resources by deterring fraud and theft. We will be going over some basic internal controls in this document.
Safety Measures[edit]
1. Background checks
For volunteers or employees who will be dealing with the finances of your organization, one of the best preventative methods to protect against embezzlement is to have a background check conducted. This is an inexpensive way to ensure that you are only involving trustworthy people into your finances, and can allow you to see red flags before you bring them on. Beyond checking for criminal background, conducting reference calls with past employers can reveal a lot about potential employees.
2. Secure the mail stream
One of the easiest ways to deter embezzlement is to have mail (especially mail containing financial documentation) sent to a post office box as opposed to the place of your organization. This ensures that you or a designated person can collect the mail directly from the source and keep a detailed record of what was received. Additionally, bank statements should be sent to at least two people in the organization.
3. Require verification of expenses
All expense requests must have an attached receipt and be pre-approved to ensure that someone isn’t falsifying expenses. Expectations should be made clear to employees and volunteers regarding reimbursement documentation.
4. Separation of powers
Using a system of checks and balances to ensure that no one person has control over all parts of a financial transaction is crucial. Separating the handling (receipt and deposit) function from the record keeping function (reconciling and recording transactions) is a great start. Ensure that the same person isn’t authorized to write and sign a check. Rotating accounting positions not only helps with professional development, but also reminds any potential thief the higher risk of discovery.
5. Independent review of finances
Reconciling the bank account at the end of the month is an important review. Depending on the size of your organization there may not be enough employees to separate all of the various functions. In which case outsourcing reconciliation to an outside agency or someone within the organization not involved in the day-to-day bookkeeping such as the Director is a strong way to ensure that all of the statements are adding up correctly. Having an outside auditor assess the company and its transactions is a great and important step in preventing fraud and embezzlement.
6. Ensure security of cash
Beyond safeguarding checks and transactions involving checks, it’s important to keep an eye on your cash. Smaller amounts of cash can be kept in a cash box or other locked storage method while large amounts should be kept in a secure bank account. Most embezzling starts small with acts like borrowing $10 of cash. By nipping it in the bud early on, the chances of it escalating or starting in the first place are greatly reduced.
Things to Watch Out For[edit]
According to the Associate of Fraud Examiners in their 2012 comprehensive report, it was found that the following actions tended to correlate with fraudulent activities:
1. Excessive control issues/not willing to let others participate in their function.
2. Refusal to take time off or let others view their data trail.
3. Petty cash tends to go missing or disappear quickly.
4. Assets of the organization are depleting with no explanation.
5. Expense reports for goods that you haven’t seen.
What to Do[edit]
It’s crucial to be proactive regarding potential fraud and embezzlement. After reviewing the suspicious behavior or transaction(s) bring them to the attention of the head of your organization. In the event that the person you suspect of fraud is the director of the organization, involve the board or bring to the attention of the Wikimedia Foundation.
If fraud is indeed the case, confront the employee suspected of committing the act. If the employee cannot explain the missing funds, put the employee on unpaid leave immediately. If there is fear that the employee will cover up the missing funds or try and hide their actions, delay confrontation until a significant case is built up against them. If they cannot explain their actions, contact local authorities to bring up a case against the employee who committed the act.
As non-profits, it is our duty to have financial transparency and to engage authorities when donor money has been compromised. An effort to recover the funds should be made and there are links below regarding how to conduct an investigation, however it is quite possible that this will not be successful. According to the Association of Fraud Examiners only 14% of organizations who suffered fraud had successfully recovered the lost funds. [3]
Conclusion[edit]
Ultimately the best way to avoid embezzlement and fraud is to create systems that make it impossible to commit it in the first place. However, remaining vigilant and having many eyes on the organization's finance also allows for rapid detection of suspicious activity. In the event that illegal activity has been committed, engaging the proper authorities is the best way to minimize damage and contain the situation. If you have any other questions regarding embezzlement and internal controls, don’t hesitate to reach out to the Foundation for more in-depth advice regarding accounting practices and safety of funds.
Useful Links[edit]
These links are good starting places for more in depth education regarding embezzlement specifically:
- http://perlmanandperlman.com/blog/index.php/embezzlement-board-liability/
- http://gettingpaid.kareo.com/gettingpaid/2011/06/best-practices-12-steps-to-avoid-embezzlement-in-your-medical-practice/
- https://www.omh.ny.gov/omhweb/resources/internal_control_top_ten.html
- http://www.bizmove.com/general/m6t1.htm
- http://www.t-account.com/newsletters/Basic-Internal-Accounting-Controls.html
- http://www.gilbertcpa.com/2013/02/04/consider-outsourcing-your-nonprofits-accounting-functions/
For more general overviews on how to detect fraud and conduct an internal investigation, here are some great guides:
- http://www.mhtl.com/pdf/How%20To%20Conduct%20A%20Fraud%20Investigation.pdf
- https://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/managing-business-risk.pdf
- https://www.oxfordshire.gov.uk/cms/sites/default/files/folders/documents/aboutyourcouncil/corporateovernance/Anti-FraudandCorruptionStrategy.pdf