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Preventing Theft of Funds in Organizations

They can come in all shapes and sizes... they are your neighbors, your trusted friends, perhaps even the leaders in your community organizations. One thing is certain, embezzlement is the most common financial crime in the nation and a predominant factor in the failure of many types of small businesses and non-profit organizations. Losses attributed to individual acts of embezzlement are more significant than losses attributed to all other types of business crimes combined. Not only is the money gone, but the hard-earned process of winning the community's trust is generally destroyed with the discovery of the financial loss.

Many embezzlers have been involved with the organizations they steal from for years without any prior incidents or without having been exposed. They are often the most hardworking volunteers in the group. These individuals do not necessarily set out to steal money for their own personal use. They may begin by borrowing funds without approval, knowing that what they are doing is wrong but intending to make it right eventually. Embezzlement tends to occur when three elements coincide: a person develops a need for more money, the opportunity to embezzle exists, and the person can find a way to rationalize the misconduct. The only way you can prevent theft from happening is to establish firm controls that minimize opportunities to steal your money.

How Can You Protect Against Employee Theft?

# 1 - Recognize The Warning Signs:

  • Regularly examine your prior year's financial activity to see if revenues are on track. If not, find out why. If the past records are in disarray, obtain the bank statements and check them to figure out when you should be expecting money to come in.
  • Make sure that expenses are recorded, verified, and approved by the group before purchases are made. Periodically audit the books with unannounced cash counts, inventories of equipment, and examination of the underlying documents that show your accounts receivable and accounts payable. These measures can uncover phony purchases, unrecorded sales, and routine pilfering of property.
  • Keep an eye on the "unpaid" list, especially in fundraising sales. Always balance the accounts for each of your fundraising programs as they are concluded.
  • Bounced business checks could indicate funds being stolen from your account.
  • Unexpected declines in profits or increases in expenses may be a sign that cash is being siphoned off illegitimately.
  • Slow collections can be a device to mask embezzlement.
  • Unusual write-offs of bad debts may be a cover-up for fraudulent financial schemes.

Cash handlers who never take a vacation could be covering their tracks. It is best to rotate duties occasionally and get another person to do the job for at least a short period, in order to get a better perspective on what is going on at each workstation, especially in those positions where employees are handling cash.

#2 - Establish Internal Controls

To set up an effective internal audit system, the key is to divide financial responsibilities and functions so that no one employee controls all aspects of a transaction. For example:

  • Require checks to be countersigned by two responsible officials.
  • Endorse all checks as "for deposit only," and provide the specific account number.
  • Do not keep cash lying around. Establish protocols that require regular bank deposits to be made every day, every other day, or at least weekly.
  • Have two people count all cash and fundraising monies.
  • The treasurer should verify all incoming money and provide receipts.
  • Have a person other than the treasurer go through the incoming mail.
  • Delegate the responsibility for receiving checks and cash to someone other than the person who records the incoming funds.
  • Make sure that volunteers who are responsible for ordering goods and supplies are not the same ones who are responsible for receiving them or paying for them.
  • If possible, do not give the authority to write off bad debts to the same person who has the authority to pay bills.

These steps are not enough by themselves. Take an inventory of property and have bank accounts audited by an outside party annually. If you can, screen your volunteers and have them submit to a security check before handling money. Even with the finest internal auditing system, the danger of collusion still exists. Therefore, some organizations protect themselves by bonding their members. Bonding is an insurance policy that covers an organization for losses of money or property that stem from dishonest acts of a "bonded" member. Last but not least - try not to become an organization that depends on one or two people to handle all financial activity. Don't take on more than the organization can handle in a safe, auditable manner. If you suspect embezzlement, take action immediately. A lack of internal controls can be very costly and ultimately ruin the reputation of your entire organization.