The July 2019 news brought another case of employee theft. The Executive Director, Controller and a business partner of the Boston Center for Adult Education have been charged with stealing $1.7 million over the last seven years. Time to share this advice. once again.
Another news release about significant employee theft at a nonprofit rolled across my desk. A quick internet search on embezzlement at nonprofits turned up a myriad of cases. Time to talk to an expert in the field.
An attorney by trade, Michael has been in the insurance business for 20 years. We had a long discussion about many aspects of risk management at nonprofits, specifically in the area of employee theft.
GG: What can you tell me about employee theft at nonprofits?
MS: Employee theft is one of the most common areas of risk for nonprofits. Unfortunately, nonprofits don’t always have the level of controls that many private companies have.
According to a 2014 report by the Association of Certified Fraud Examiners*, Nonprofits across the US lose approximately 5% of annual revenues to fraud.
GG: Could you tell me some of the ways this happens.
MS: Unfortunately, there are lots of ways this can happen. Bookkeepers often create dummy invoices, ghost vendors or kickback schemes.
Take kickback schemes. In this case, an employee at the nonprofit works out a deal with the vendor. Let’s say the employee orders supplies, say 100 of some item. The vendor only ships 80 of that item and then kickbacks part of its profit to the employee on the 20 items that were not shipped. While the amount might be small, this type of theft adds up over time if it’s never caught.
Other types of employee theft are very innovative. For example, the office is being renovated so the employee slips in their own bills for renovation supplies for their own property. An employee can prepare dummy invoices, where the check is written to themselves and then fudged later. This happened at Roman Catholic Diocese in NYC where a long-time, trusted employee in the accounting department, who was obsessed with purchasing expensive Madame Alexander dolls, was arrested in 2012 for embezzling more than $1 million over seven years.
GG: So what can an organization do to protect itself?
M.S. While criminal background checks are important, unfortunately, about 87%* of fraudsters have never been charged with a prior offense and that holds for both for profit and nonprofit organizations.
Nonprofit organizations need to be vigilant and take preventative measures to minimize the risk of theft or catch it early.
It is pretty hard to spot an executive director engaged in this type of activity. Never let one person be in charge of everything.
For example, make sure that you segregate duties for the folks paying bills and those handling money, have surprise audits, make sure that you have counter signatures on checks, and conduct fraud training for your employees.
Often the way many organizations catch the thief is to make the employee take vacation and then someone takes look at their work.
Know your employees. Keep an eye out when something seems out of line… be astute about suspected changes. Have a confidential hotline for employees to report suspicious activity within your organization.
GG: What if a theft happens anyway?
M.S. The good news is that an organization can transfer the risk by buying an insurance policy. For example, a crime insurance policy covers theft such as forgeries, alteration, counterfeit, burglary or robbery. Most mid-sized nonprofits could generally buy a policy for around $5000 for comprehensive coverage. A tiny organization could buy one for a few hundred dollars.
GG: Thank you Michael for opening my eyes to this uncomfortable world of employee theft. But both boards and executive directors need to be aware that not only can this happen, that it does with some regularity, even in our nonprofit sector. Be prepared.
*2014 Association of Certified Fraud Examiners: http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf
Just as I was getting ready to write this post about the need for more moral capital on your board, the higher education scandal broke in the US. Thirty-eight people taken into custody as of noon on March 12th in this bribery scheme.
It turns out that very wealthy folks from business and the media bribed administrators, coaches, test proctors and others to grease their kids into elite private colleges and universities. I guess their large direct donations weren’t enough?
Shamefully, this was done through Key Worldwide Foundation (KWF), a 501c3 public charity led by William “Rick” Singer who is pleading guilty to the charges against him.
According to its 2016 Form 990, KWF has just three directors: Singer as President and CEO, a Secretary, one other person. (The treasurer is not a director.) And, not only were the donors to KWF offering bribes for college placements, they were likely getting tax deductions for making those bribes through the nonprofit.
You need a philanthropic or moral compass in your organization — and most assuredly within the board. All your well-crafted bylaws, job descriptions, and list of expectations with references to ethics, the rule of law and conflict of interest won’t make up for directors or staff who lack a moral guiding light to do what is right.
People as capital
Talking about people as capital seems to be contrary to discussing your moral guiding light.
But I’ve previously pitched Professor Elizabeth Castillo and her typology of capitals. Using her list, you can begin valuing people beyond their own financial capital when you consider what you need in the way of the human capital you recruit to your board. This moves you beyond just recruiting directors who are wealthy donors and connectors to other money. It lets you value other assets that strengthen the board – e.g. intellectual, social, political, and cultural capital. And yes, moral capital.
And I don’t mean someone who can thread their way through the needle of what might or might not be ethical or legal. I want voices that are steadfast in defense of doing things the right way, with justice in their hearts, courageous enough to call out when something is bad, smells bad or just doesn’t feel right.
Unless our sector stands strong for honesty, truth and transparency, we risk the public’s trust — which has been on a downward slide for many years.
How much moral capital sits on your board?
Are you struggling with recruiting your board of directors? Take a look at the newest addition to our Toolbox: Recruiting your board of directors.
First, what do you want of your board members?
- First and foremost, to be great governors (I hope that is first). When you consider the right composition of your board to exercise its role in governance, you’ll need a mix of members demonstrating attributes such as strategists, systems thinkers, nonprofit, issue and community knowledge, diverse worldviews, wise stewards, moral and ethical folks, collegial, disciplined, and courageous, among others.
- Second, we have come to expect that our board members should be leadership volunteers. As volunteers who help the organization move forward staff functions as appropriately called upon, look to recruit to the board individuals who will use their skills and connections in service to particular functions of the organization, such as government relations, or fund development, or expertise in marketing, communications or evaluation. The need for these volunteer skills is highly dependent on the number and types of professional staff in your organization and your business model.
Consider your board members as vital components of the human capital your nonprofit needs to function.
So, in developing a great board, you need to consider what you have set forth in your strategic plan and what it will take to get from here to there. What is the ideal profile of the board to achieve your desired future?
Second, where can you find these folks?
I’ve written before about the benefits of keeping a running list of board members. IMHO you can’t have too many candidates to choose from. To get there, look everywhere. Start with your donors and volunteers. Consider asking for help. Read the newspaper and local (or national) magazines or other sources to find the folks that suit your profile. Leave no stone un-turned.
Share your best recruitment stories with all of us. We’d love to hear from you.
Has boring put your board to sleep? Is it the arcane machinery of Roberts Rules? Pointless reports? Endless discussions? Trivial debates?
Here are five tools you can use to help transform sleepy board meetings from ennui to engagement.
- Move that table out of the room. Suddenly, you’re sitting in a circle with no head of the table to establish hierarchy and nothing to hide behind. If you can’t move the table, move the board members.
- Serve food. Sharing a meal creates human connections, starts conversations and sets the mood for a great meeting.
- Break into small groups. Especially on larger boards, many participants never say a word. You might be missing a brilliant insight. Small group discussion helps advance board thinking as members help each other refine and develop good ideas.
- Take notes on flip charts. Recording key points where members can see them as the meeting moves along assures board members they’ve been heard. Flip chart notes provide structure and a sense of progress through the agenda.
- Move people around. Too many board members never get to know their board colleagues. Move table tents at each meeting. A new perspective on the meeting space may also open the door to a fresh look at the board’s business.
What to do. What to do.
Revulsion, anger, sadness, resolve. All of these emotions have been filling my head since Charlottesville. Well, really for much longer but seeing Neo-Nazis and Klansmen in the streets made them very raw again.
I found myself weeping reading some of the first hand accounts coming through my Facebook feed. Fear. Bravery. Disbelief.
I’m continuing to accept the challenge of confronting the protections of my own white privilege as I hear the anguish from my friends and colleagues.
I’m still shaking my head as to why we are still here, still at this point in 2017.
I believe the US desperately needs a Truth, Reconciliation and Reparations Process to take a hard look at its storied past on race. Our school history books have merely skated over the brutal aspects of US history that includes genocide, slavery, racism, and war crimes. We must come to a common understanding of what we have perpetrated as both a government and a people before we can begin to put an end to this hate.
It’s also time for a hard hitting inclusion reality check for your own organization.
If you want to respond to Charlottesville, it’s long past time to put an end to the half-hearted attempts at inclusion in your organization. Yes, your non-discrimination policy was a nice start.
But where are the individuals of color on your board? On your staff? Among your client base? At your events? Among your partnerships? Who else are you leaving out?
What is staff’s response when a big donor makes a racist or bigoted remark? How will a fellow board member respond? It happens all the time. Shocking stories.
Get comfortable with discomfort, as a recent article in Nonprofit Quarterly advised.
I promise to remind you, to challenge you, to hold you accountable for fulfilling your espoused values.
There is much work to do. Let’s get to it.
The board’s role in approving the budget provides a great teaching tool for the difference between management and governance..
Okay board, what are you really approving?
In the typical organization, your Executive Director with her leadership team have crafted the budget to review with the board of directors. But when the budget gets to the board level, what exactly is the board approving? Is it that $10,000 printing expense? The $6,000 you are spending this year on electricity?
Here’s what a focus on governing would lead you to consider:
Does your spending match your priorities?
Your budget is a reflection of your annual plan. It shows what investments you are making in the organization. Have you decided that you want to grow your education program, yet your advocacy work is eating up all the personnel? Or was this the year you decided you had to deal with your antiquated technology, but there are no dollars included in the budget to support this work.
Can you pay the bills?
This can be determined in many ways. First and foremost, does the income projected for the year cover the expenses you have outlined? Does your income receipt and expense spending schedule cause cash flow problems at various times of year? If you’ve decided to take on a deficit, what is the implication on your financial reserves this year, and into the future?
Are you spending donor restricted dollars as required?
This is a subset of the above. It may look as if you have a lot of revenues coming in this year, but cash is not always fungible in nonprofits. That grant that doesn’t arrive until the third quarter and can only be spent forward could leave you with a deficit in your unrestricted assets. Or your expenses are meeting the promises of those grants. Or are revenues meant for your capital campaign hiding income shortfalls in your operating budget?
How much risk are you accepting in your income projections?
What is the data behind those revenue projections? Is there a well-defined plan based on past experience and carefully projected new revenues? Do you have the capacity to execute the level of effort behind those growth numbers? Or are you carelessly plugging holes with fictional new revenues because you don’t want to cut expenses that really should be cut.
What are the implications of compensation and benefit increases in the budget?
While I’m not one to want to deny staff well-earned pay increases, I also know that when you raise salaries you are fixing personnel at a higher level for years to come. On the flip side, did you budget staff increases but forget to make any provisions for an increase in compensation for your Executive Director or leadership team? Remember to document the level of your ED’s compensation based on market and any other considerations to justify should the IRS inquire.
What’s Plan B?
If you don’t make your revenue projections, when and what do you start cutting? Do you have another solution, say a line of credit? How much debt are you willing to take on?
Are you following your spending policy?
If you’ve got investment income, what is your policy for moving earnings into your operating budget? Are you staying in those guidelines or making an exception? Why? What are the long-term implications of this decision?
Is there anything suspect or unjustified among the line items?
Theft does happen. More than we want to imagine. So a quick check on growth in expenses from one year to the nest should pop out anything that seems highly unusual and may need a second look. If there is a completely new line item, its okay to ask how that was calculated and if other options were considered.
Do you have a overhead to program spending ratio? Is the budget within that guideline?
Yes, overhead ratios are highly controversial in this sector. Yet for organizations that submit to charity watchdogs or participate in state or federal payroll deduction programs, there are ratios you need to stay within. If you are part of an international federation, there may be nationally mandated limits in other countries that influence your spending ratios. Does a full cost look at your budget meet those guidelines?
What else? What does your board consider when it reviews the budget?
Yes, the election left me gobsmacked.
But this is no time to act like a deer in the headlights. Hundreds in my community and across the US are already thinking and planning to prepare to act strategically.
You don’t have to be for or against the incoming administration to recognize that a lot is going to change.
As a board and strategy consultant, I’m troubled that very few of the boards with whom I’m working are talking about planning for scenarios that might be heading their way. While front line advocacy organizations are already moving forward, I’m not seeing discussions happening in very many other sectors.
I understand that there is considerable uncertainty. I recognize that it might feel like a waste of time to talk about the unknown.
But isn’t that your job as a governing board? Shouldn’t you be considering best case, worst case and starting to prepare a plan of action? Haven’t you enough evidence of the policy changes that are likely to be made to start planning for those changes?
Your board has a lot of thinking and planning to do.
Need an example? We’ve already in a profoundly new world order. Jobs are vanishing fast, not necessarily because of global trade, but because what can be automated will. And there are very few jobs that can’t be automated.
What does this mean for your clients? What about your donors? Your community? Your employees?
Here’s another: How is the shifting landscape of philanthropic giving affecting your organization, where the rich are giving more and the rest of everyone less?
And the big one: What policies have the new administration and the majority party been championing over the last eight years or eight months? How will that affect us?
If there was every a time for both strategic and generative thinking, it’s now.
When the proverbial sh*t hits the fan, it may be too late to mobilize a satisfactory response.
- I’ve felt that way at least three times before in my voting life. But yes, this one seems completely different. Having been a member of Amnesty International for more than four decades, I’ve read the stories on how democracy can be lost seemingly overnight.
What are the basic principles of nonprofit governance?
Friday I attended an ARNOVA colloquium called A Pluralistic Perspective on Nonprofit Governance: How should context be taken into account?
Four non-US academics cautioned us to think about the many factors that influence how governance is practiced in civil society organizations. They hailed from the UK, Southeast Asia, Reunion and Sweden.
Ola Segnestam Larsson of Ersta Sköndal University College asked the provocative question I repeated at the opening of this post.
A question yes, but really it was a challenge.
- What are the principles that guide governance in our organizations?
- Does our approach to governance flow intentionally as an expression of those principles?
For example, we’ve all learned that boards act as fiduciaries. Fiduciary embodies the principle of stewardship, or having in your care something you don’t own. This fiduciary role requires the duties of loyalty and care in making decisions. Behind the duty of care are the principles of reasonableness and prudence.
Yet, the principle of stewardship is likely not enough to sufficiently guide your governance practices.
Some nonprofits place high value in being democratic. If so, it’s very likely that your organization would spread the ability to influence decisions beyond the board. At Amnesty International USA members have the opportunity to propose and debate policy at regional meetings, at their annual general meeting and in the international body.
In the colloquium, Ola Larsson suggested other principles at play, such as independence and transparency, He did not suggest that there was one prescription for what those principles should be.
If you were to describe the principles of nonprofit governance guiding your board’s practice, what would they be? Would all directors agree?
I’m hearing you say: but we have articulated our values as part of our strategic planning.
Yes, that may be a starting place. But do those values translate to the way you approach governance?
I know I’m going to start this conversations with the boards with whom I work and serve.
The tough challenge for all volunteer nonprofits is finding people to do the work that isn’t so much fun to most people, jobs like fundraising, membership, financial management, communications, human resource management, IT support — you get it.
My colleagues and I are still digesting the lessons to be learned from the Voices of Board Chairs research. (I served on the research team, a subgroup of the Governance Affinity Group of the Alliance for Nonprofit Management.)
One area our research team wanted to learn more about was board chair succession.
Very interestingly, what we heard from these chairs was:
- Fewer than half of our chairs had previously held the role of vice chair, a position commonly accepted in our sector as the primary precursor to the board chair.
“The board chair and vice chairs just quit one day and I was left.”
“.. I was a member of the Executive Committee when the Vice Chair, who was to take over as Chair in three months, had to resign from the board for a significant family health situation.”
- 16% of our chairs had been on the board of their nonprofit for less than a year, and just over half for three years or less.
“I had been on the board for 9 months. Because of my profession, and also my dedication to the group, I was a natural choice to become chair… but it was really early…”
“…all the members of the Board of Trustees, with one exception, indicated they were resigning. I was not on the board, I was a volunteer.”
” the board chair … needed to vacate the position for family reasons, and since I was vice-president of another nonprofit, I was asked to step in.”
My take-a-away from this:
Even well-crafted chair succession plans hit unexpected bumps in the road, such as health issues, new family or work responsibilities, or job relocations.
That left me thinking a lot about building a deep bench of potential leaders.
- What would your board do differently if right from the start it considered every director a potential leader?
- What would you do differently to nurture a big bench of future leaders rather than just one or two?
- What do you do now? How is it working for you?