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10 'Must-have' Controls: Embezzlement Risk on the Rise

The world’s largest Rotary Club in Seattle was the victim of a $350,000 embezzlement. If you lend to non-profits (including churches) you should be aware of the simple steps they can take to reduce the risk.

Non-profits have been hit harder than many businesses in this recession. As they cut staff to cope with dropping contributions, their risk of embezzlement goes up. The recession also increases one of the key elements of fraud, an employee in financial trouble who has access to funds.

In a Puget Sound Business Journal article you can read more about how the bookkeeper pulled this one off. They quote Jack Siegel, author of “A Desktop Guide for Nonprofit Directors, Officers and Advisors,” on his top 10 list of financial controls.

Ten controls that every charity should have

Require two signatures: Checking and investment accounts should have two signers, independent of each other, at least for checks above a certain threshold amount.

Check bank statements: They should be reconciled by someone who does not have signature authority over checking accounts.

Avoid cash: Especially susceptible to theft, cash should be eliminated as much as possible. For example, churches should consider asking congregants to enroll in an automated withdrawal program.

Check the vendors: A list of approved vendors protects against phony invoices submitted by insiders.

Verify the payroll: Many charities have discovered ghost employees. To minimize this risk, organizations should develop a system of reports between payroll/accounting and the HR department.

Control reimbursements: All expenses should be pre-authorized.

Take inventories: Physical inventories should be taken on a regular basis, and reconciled against the inventories carried on the books.

Rely on budgets: The nonprofit’s employees should prepare the budget, but the board should review or approve it.

Bid out purchases: Purchases above a certain threshold should be subject to a competitive bidding process. Look for meaningless requirements that may be directing a grant to an insider, or evidence of collusion, such as two vendors alternating high and low bids.

Learn about grants: Learn to understand allowable costs, overhead recovery and other issues that come with grants.


With very little adjustment, you can apply this list to any small business as well.
 
What other signs do you look for that make a business or non-profit susceptible?

    About the Author
    Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.