Chapter Rescue: Identify, Prevent and Respond to Chapter Financial Mismanagement & Fraud

There is seemingly no end to the books, blogs or podcasts from personal finance gurus. From Suzy Orman to Dave Ramsey, they’ve gained a massive following for their financial know-how. When it comes to finding the right direction for non-profit finances, your chapters will be looking to your organization as their guru. They are dependent upon your organization’s financial training, policies and procedures to be successful.

In our Chapter Rescue series, we cover crisis scenarios from financial meltdowns to natural disasters that can derail chapter operations. While you can’t control all the factors that contribute to a potential chapter crisis, there are prevention steps you can put in place to make sure your chapters are on the best path forward.

We begin with a crisis scenario that is all too commonplace: financial mismanagement. Even with the best intentions, chapter and volunteer leaders are susceptible to poor financial decisions. Deliberate or not, careless and incompetent management of funds can reflect negatively on your organization. Potentially more important than the loss of funds, is the damage to your organizations’ trust and reputation.

Risk Factors in Chapter Financial Mismanagement

Chapter officer positions are a great opportunity for members to learn the ropes of fiscal responsibility. However, with so much on their plate already and a limited background in organizational finances, it increases the chances for mistakes. Recognizing and identifying the risk factors of financial mismanagement can allow you to offer help before the problem reaches crisis level. Ask yourself if any of the following factors are putting your chapters at risk:

• Insufficient training and orientation resources
• Limited time for officers to spend on chapter financial duties
• Annual turnover of chapter officers
• Lack of financial policies and procedures

Response to Financial Mismanagement

Any parent will tell you they would want their children to come to them for help when they make a mistake. Certainly they may still need to take a few breaths and rub their temples, but ultimately how they respond can make a huge difference in their relationship.

When a chapter comes to you during a financial crisis, it’s best to have a plan for how to respond. Although it’s not fun to plan for the worst case scenario, it can ease the initial panic of uncovering a financial mismanagement situation.

1. Set the Tone for the Path Forward: Let the chapter know they’ve made the right decision to come to you. Not placing blame or shaming can strengthen your relationship with the chapter. This way you can move forward together and open doors for better communication in the future.
2. Get Your Internal Finance Team On Board: Recruit the right expertise from your organization to fully understand the situation and the best plan to reconcile. Your team may need coordinated conference calls with the chapter or even getting someone on the ground to support officers.

Prevention Strategies

Putting your response plan together is similar to an insurance policy. You will be covered in the case of an emergency, but you hope you’ll never have to use it. The best way to avoid having to use the response plan is to take measures to prevent financial mismanagement in the first place. Focus on communication and training to lay the groundwork for healthy chapter finances

Do Your Chapters Have A Plan in Place to Prevent Financial Fraud?

When thinking about all the exciting plans you have for your chapters, fraud and embezzlement policies likely don’t jump to the front of the line. Yet you can‘t help but feel a pang of anxiety when reading the headlines of another seemingly infallible organization collapsing due to malicious activity.

It’s time to shake off the “it would never happen to us” mindset. In the end, the time spent organizing prevention strategies will be less costly than the legal, financial and reputational damage of the fraud crisis.

Response to Chapter Financial Fraud

Uncovering fraud or theft at a chapter can usher in a wave of emotions: confusion, anger, and even downright panic. With a response plan ready for this worst case scenario, you can show your chapter that you are here to help them right the ship.

The first step is to enlist the expertise of your accounting professionals to audit and review the situation. After you have a better picture of the damage, start seeking legal advice. It’s also important to get in contact with your CPA or tax attorney to see if it’s necessary to report the fraud as a diversion of assets on the chapter’s Form 990.

Along with the financial and tax implications, your response should include a communication plan for both the chapter and National brand reputation. In today’s world of social media, news travels fast. Looping in your communications or PR team from the beginning will ensure everyone feels comfortable responding when asked about the situation.

Prevention Strategies

Even with training and procedures in place, you can’t rule out the chance for fraud. There are, however, steps you can take to minimize your chapter’s risk.

Ask yourself if your chapter leaders would be comfortable seeking you out for help. They should feel confident you are ready and able to respond appropriately. Let chapters know that if they see something, they should say something and that they will be protected from repercussion. Establishing a whistleblower policy will ensure chapter leaders who report are shielded from retaliation. You can also consider an anonymous hotline run by a third party that can be used to report unethical behavior.

While financial policies and procedures may not sound warm and fuzzy to chapters, in the end having tight guidelines to follow will make them feel more secure. Here are some items to consider adding to your policy:

• Establish term limits for chapter Advisors and volunteers.
• Require 2-3 representatives to have access to review online banking
• Provide technology that can automate bank reconciliation and have it reviewed by chapter leadership on a monthly basis.
• Separate financial functions such as handling from record-keeping or purchasing from payables.

Virtual Banking Platforms to Minimize Chapter Financial Fraud

It can be daunting to think about overseeing these prevention strategies for all of your chapters. Consider an online banking platform that can automate these functions for you and your chapters. An automated platform can minimize financial risk for chapters and take some of the administrative duties off National.

A virtual banking platform eliminates the burden of reporting while at the same time provide fraud controls like spending approvals and notifications. Consolidated platforms have one master bank account for National that is divided into separate virtual bank accounts for each chapter. Chapters can interact separately while also giving National the ability to monitor accounts for fraud red-flags.

Alternatively, you can choose to build up the resources to manage chapter finances at National. Chapters may see this as a loss of control, so it’s important to provide complete transparency and adequate response times to payment and information requests. By outsourcing back-office processes, they can focus their time on chapter programming and engagement.

Fraud can happen to any organization – having the proper plans in place can reduce the risk to your chapters and the headache of dealing with the consequences of being unprepared. As we move forward from financial crisis, the next post in our Chapter Rescue series will focus on federal and state compliance issues that chapters face.