Top Ten Tips for Preventing Theft and Embezzlement

Nonprofit embezzlement is nothing new. It seems like a new story breaks every week about a charity being exploited by an insider. Charities lose an estimate of 7%-13% percent of their annual profits to theft, embezzlement, or fraud, to the tune of approximately 40 billion dollars a year.

Nonprofit organizations are often hesitant to report these losses to authorities for fear of tarnishing their reputation. Don’t fall prey to this instinct: not reporting these losses jeopardizes insurance coverage and communicates the wrong message to employees and funders. If the individual had substantial influence, the loss may also be an excess benefit transaction reportable on Form 990.

How to Prevent Embezzlement in Nonprofits: Top 10 Tips

Tips to help tighten an organization’s asset control include the following:

Institute Strong Financial Oversight Policies

An organization should have in place strong, specific financial oversight and financial control policies that are tailored to the specific organization including a strong whistleblower policy. Periodically review finances and finance management to ensure that the Board, as well as employees, is consistently using the policies.

Ensure Theft is Covered by Insurance Policies

A general liability policy that covers employee theft and embezzlement is a must for nonprofits with significant assets.

Educate Staff on Online Fraud Scams

Educate staff about online fraud scams and other financial concerns. Foster an environment of responsibility.

Have More Than One Set of Eyes on Finances

Specifically, have someone other than a signer on a transaction review the transaction and regularly balance the books. Audits are good but are not designed for catching nonprofit embezzlement unless you specifically request this type of audit.

Require dual authorized users for administrative security changes and for online transactions, as two separate authorized users on separate devices reduce exposure to asset loss. Require that original invoices be reviewed before checks are signed, and that original receipts are used.

Implement a Signature Authority Policy

Implement a policy that requires progressive authorization (e.g., CEO, CEO plus one board member, Board Resolution) based on the size of the transaction or the duration of a contractual obligation.

Know Your Team

Institute background checks on Board Members, staff, and any key volunteers with access to the organization’s assets. Conduct a criminal background check as well as speak to at least three references. Research shows that most nonprofit embezzlement is perpetrated by trusted insiders and that a surprising percentage (up to 15%) of offenders have been convicted of a similar offense in the past.

Keep Authorizations Up to Date

When an authorized signor or approver leaves the organization, notify the bank immediately to have that person removed. Shred and destroy any out-of-date card stock, credit cards, and signatory stamps. Collect any credit cards, keys, or other asset-control-related items from departing staff or Board Members. Also, keep anti-virus software up to date

Lock Up Assets

Keep credit cards, check stock, and signature stamps under lock and key. If you store data in the private cloud then ensure it’s locked up tight with as few people as possible having access to it.

Set a Schedule to Conduct Fixed Asset Inventories

If the organization owns a significant amount of fixed assets or equipment, conduct fixed asset inventories annually.

Know the Signs

Often, a person trying to steal from an organization acts in peculiar ways. They may be strangely reluctant to take time off, and may regularly work weekends or evenings after everyone else has left, out of step with the habits of others.

Take note of late, erratic, or incomplete financial asset reporting, or frequent excuses blamed on technology, as such behavior is common. Also, in our experience, the perpetrator is most often motivated by a drug habit or a gambling addiction and is often a person in a highly trusted position.

Following these 10 proactive steps to protect your organization’s assets will greatly reduce the odds that your organization will have its reputation and balance sheet stained by nonprofit embezzlement. Should the unfortunate happen, read our actions to take when nonprofit embezzlement occurs.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.