Another news release about significant employee theft at a nonprofit rolled across my desk. When a quick internet search on embezzlement at nonprofits turned up a myriad of cases, I thought it would be helpful to talk to an expert in the field.
So I turned to Michael Santocki, Esq, Managing Director of the Management and Professional Risk Group at Crystal & Company, described as a “ leading strategic risk and insurance advisor.” Michael told me they were known as one of the top insurance brokers for nonprofits in the US.
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. I’ll share some of his insights on other matters in a future post.
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 then 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
Gayle will share other advice she received from Michael in a later post.
Through collaboration the partners in Cleveland’s Gordon Square Arts District generated a vision that promised more than new buildings and attracted many times the funding they could have hoped for working separately – $23 million so far, with more to come.
Captain Ahab set out from New Bedford, Massachusetts, with just one idea: putting his harpoon in the ultimate big fish, Moby Dick. His all or nothing approach didn’t work out so well for anyone but the whale.
The Coalition for Buzzard’s Bay got a far happier result by spreading nets in many different waters when they set out on their own New Bedford-based quest to grow membership by more than 50 percent over the last two years
Yesterday was the National Philanthropy Day celebration and awards breakfast in Rhode Island. In speaking about her own philanthropy, Joan Abrams, the winner of the Outstanding Philanthropic Citizen Award, shared her belief that philanthropy and service were essential elements of exercising one’s citizenship and participation in a democracy.
We couldn’t have said it better, Joan. Philanthropy as love of humankind. Philanthropy as democratic obligation. Philanthropy as justice.
To each of you for stepping up every day to shape our world through voluntary action in philanthropy, we add our own great big THANK YOU.
In many of the talks I give, I start with charts and graphs that give an overview of the nonprofit sector.
I want to thank Ben Klaskey of Philanthropy Reports for putting it all together in such an engaging way. Thank you Ben, for letting me share “Know Your Sector” with our readers.
4. Make your own luck. No one could have predicted two game-changing gifts that came to Growth Through Learning, including a $1 million bequest that has essentially solved the problem of paying GTL’s current very lean overhead. But we could easily predict that they would never have come about without Roger’s persistent effort at steps 1, 2 and 3 above.
Some of the lessons we learned: 1. In the smallest organizations, capacity is in individuals and their institutional knowledge, not organizational systems. When inevitable transitions occur, built capacity can quickly be lost. Attention must be paid to building sustained people capacity somewhere in the network. Transitions often occur at a rate that prohibits capacity building. 2. Small groups need either a large organization with significant built capacity already on their team or they will need a much larger cash investment to buy what they lack.
Unfortunately, you won’t find WVE listed at a big rating sight like CharityNavigator because they don’t meet its income levels (less than $500,000 in public donations, $1 million total budget). Yet. (that’s where you can help.)
I’ve seen this lean and passionate band up close and can testify to its worthiness. Despite its small size, WVE has played an important role in getting manufacturers like OPI and Clorox to clean up their products.
Congratulations! to RI’s own Curt Spalding on his appointment as Regional Administrator for EPA New England. Curt was my boss at Save The Bay when I worked there from 1990-1995. He had just been named Executive Director and I was his first hire as Director of Development & Marketing. We were good partners and worked closely together.