Too little too late: A Tale of Fraud
There are so many things in this life that we think happen to 'other people.' It's just our human nature; our brain tries to protect us from acknowledging the worst. But I'm here to tell you, friends, that fraud can happen to anyone.
Any business,
Any non-profit organization,
And it can be those you never suspect of fraud.
I know of a small non-profit in my area that is very active in the community. It has a small staff of three employees and, most importantly, an active board of directors.
This organization had a new CEO who was struggling to find their feet, overwhelmed with job duties, not feeling supported by the board, had a lot of drama in his home life, and was dealing with ill loved ones. He was a great guy; everyone liked him, and he was really truly the guy next door.
Thankfully, after a few months, he was able to turn things around and find his groove on the job. He was managing the workload; he was starting to turn the tide. Things were going great.
Then, he suddenly felt the need to resign to spend time with his family and ailing parents.
But that's not the end of the story. It came to light that this CEO, perceived as a pillar of the community, was embezzling money from the organization right under the board's nose.
The board did everything right, was active, and had a treasurer.
So, how did this happen?
I don't know the particulars, but I have a few ideas that lead up to this.
This CEO was exhibiting all three points of the Fraud Triangle, a concept in fraud prevention. The Fraud Triangle suggests that for fraud to occur, three elements must be present: pressure, rationalization, and opportunity. In this case, the CEO was experiencing pressure at home and wasn't feeling supported in their new role, so they felt some rationalization and opportunity. The lack of controls allowed him to use funds with impunity.
There was most likely no segregation of duties within the financial processes. My guess is that the CEO had the authority to pay invoices unchecked. They allowed him to pay invoices, enter the information in the accounting software, sign the checks, and possibly reconcile the bank account.
What would I recommend in this scenario?
Well, let's look at the practicalities of the situation. There are three employees and the board. Two of the employees are very inexperienced, so it doesn't make sense for them to be involved in the financial process. So, the CEO and the board (specifically the Treasurer) must determine how to divide responsibilities.
There are a couple of scenarios that I'd propose here…
I recommend that the CEO manage the invoices and input them into the accounting software. Then, these invoices and check requests must be sent to the Treasurer for signatures on the checks.
If this isn’t feasible, the CEO could pay the invoices and turn all documentation over to the Treasurer for reconciliation… every month.
Finally, if none of these fits, I suggest hiring a third-party service provider to perform bookkeeping and report the financial report to the CEO and Treasurer.
The core issue is that no process was in place to protect the organization and the CEO. While the CEO certainly seemed trustworthy, and the board felt that their oversight was enough, this had never been a problem before.
But remember, friends, nothing is ever a problem until it is.
If you run a small organization, let's discuss how best to protect it. You can start protecting your organization today by downloading my “Effective Segregation of Duties” mini guide by clicking here.
