5 Ways to Avoid Fraud and Embezzlement in Your Volunteer Civic Organization

5 WAsy to Avoid Fraud and Embezzlement in Your Volunteer Civic Organization

Embezzlement, it’s not a word volunteer, civic organizations like to hear. When it happens, it not only hurts the organization, but also hurts the community the organization supports.

Did you know that over 40 percent of fraud is discovered as a result of a tip? That’s according to the Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations. Also according to the report, the median loss to smaller organizations was $80,000.

According to Clifford Perlman, of Perlman + Perlman LLP Attorneys at Law, “It is generally clear that if board members have acted within their fiduciary capacity and have not been grossly negligent in their oversight of the nonprofit’s funds, they cannot be held liable for the stolen funds.” However, he added, “That does not prevent a state’s Attorney General from laying the blame on a board.”

To learn more about fraud and embezzlement’s impact, here are some civic organization examples:

5 Steps to Avoid Embezzlement

There are several steps organization leaders can take immediately to help prevent and detect fraud within its midst, including:

  1. Double Signatures and Authorizations. Multiple layers of approval make it harder for people to commit fraud or embezzle from an organization.
  2. Segregation of Duties. At a minimum, different volunteers should be in charge of authorizing payments, disbursing funds, and reconciling bank and credit card statements.
  3. Inventory Review. On an annual basis, conduct an inventory review to help ensure no fixed assets, equipment, or other goods have been removed.
  4. Electronic Notifications and Automation. Leverage today’s technology to alert senior leadership of bank account activity, balance thresholds, positive pay exceptions, and wire transfers.
  5. Internal Controls and an External Audit. In addition to the above steps, nonprofit leaders should also commit the organization to creating documented policies and procedures for accounting and personnel, including a code of ethics; plus, regular, external audits to help ensure the measures that you put in place are working.

Bonus Tip 1: Create an environment where staff and members feel comfortable raising concerns about financial mismanagement or improper conduct.

Bonus Tip 2: If your organization is too small to have someone on staff to complete the second signature or perform the secondary level of review, consider asking a volunteer officer or director to perform the task.

When Fraud Happens – Steps to Take

Here are some steps a nonprofit organization can take when fraud or embezzlement occur. None of them are easy, nor kind, and that may be why so many who commit the crime avoid prosecution.

  1. Determine the extent of the embezzlement. A good-faith attempt should be made by the organization’s treasurer, legal counsel, and forensic accountant and/or auditor to determine the extent of the theft.
  2. Confront the perpetrator(s). Once the evidence is collected, confront the person or people involved to allow for him/her to tell their side of the story. Also, during this time, it’s important the person or people be removed from their post and put on unpaid leave pending the investigation.
  3. File a police report and work with law-enforcement to bring justice. If no criminal charges are filed, the organization’s leaders may have to sue for the return of stolen funds.
  4. Disclose on Form 990 whether any significant diversion of assets happened during that fiscal year.
  5. Take action to retrieve the stolen money.

Remember to speak with your counselor and accountant before taking action.

Download and Share These Tips

If you liked this article, and would like to keep these tips handy or share them with others who may benefit, download the “5 Ways to Avoid Fraud and Embezzlement in Your Volunteer Civic Organization Tip Sheet” today.

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