Chapters in Crisis: How to Prevent Chapter Financial Fraud

We’ve all seen headlines about embezzlement at local nonprofits. Didn’t they have controls in place? Learn how to prevent chapter financial fraud.
Chapters in Crisis: How to Prevent Chapter Financial Fraud

We’ve all seen headlines about embezzlement at local nonprofits. You can’t help thinking:

  • How could someone like that get into a position of responsibility?
  • How could they get away with their crime for so long?
  • Weren’t there any warning signs?
  • Didn’t the organization have controls in place?

 

Oh yeah, one last one: That would never happen to us!

Wishful thinking is comforting but dangerous. Yes, it can happen to you, but no one wants to see it happen, which is why the second post in our series on chapters in crisis focuses on chapter financial fraud.

In this series, we assume chapters are subsidiaries, a situation that brings more risk to National, but also provides more control. Even if your components are independent, you’ll benefit from the advice we share.

 

Chapter financial fraud (not so innocent)

Innocent incompetence, like the financial mismanagement we described in the first post in this series, is easy to forgive. After all, you may be at fault for not providing sufficient training and policy requirements to prevent it. But fraud, that’s another story.

 

Dealing with chapter financial fraud

The new chapter president finally gained access to bank statements and is troubled by what she sees: unexplained cash withdrawals going back months. She can’t think of any reason for the withdrawals. The former treasurer is not returning her texts, calls, or emails so now she’s on the phone with you.

First, ask your accounting professionals to review the situation, and then seek legal advice. Once the dust clears, check with your CPA or tax attorney, you may have to report the fraud on the chapter’s Form 990 as a “diversion of assets.”

You’re dealing with financial and tax implications, possibly legal action, plus hours of frustration and lost productivity. But that’s not all. Depending on the severity of the theft or fraud, the chapter and National brand is at stake too. If word gets out, industry watchdog publications may aggressively investigate the situation.

fraud

How to prevent chapter financial fraud

You can never say “never” but you can minimize the chances that this could happen in one of your chapters.

 

Relationships

Chapter staff and volunteer leaders must feel comfortable asking you for help. They must be willing to get vulnerable and admit their ignorance or point out something that doesn’t look or feel right. They must understand there will be no repercussions if they do.

No one wants to admit failure or call attention to a problem that could potentially escalate later, but chapter leaders must adhere to this familiar rule: If you see something, say something.

 

Financial policies and procedures

Establish term limits for chapter officers.

At least three chapter representatives should be authorized signers on all accounts at all times and have access to online banking If one of the three is suspected of fraud, the other two can have the third removed from the account or their access frozen.

Bank accounts should be reconciled every month. Better yet, provide technology that can automate bank reconciliation. Whoever is keeping the books should send a bank reconciliation to all officers or the whole board, if appropriate.

The American Academy of Pediatrics provides a financial controls checklist to their chapters. A system of checks and balances ensures that no one person has control over all parts of a financial transaction. For example:

  • Separate handling (receipt and deposit) functions from record-keeping functions (recording transactions and reconciling accounts).
  • Separate purchasing functions from payables functions.
  • The same person isn’t authorized to write and sign a check.
  • Check requests must be accompanied by a sharable PDF with any supporting information.
  • If a chapter is so small that it can’t separate duties, an independent check of work, for example, by a board member, is required.

Run a credit check periodically to uncover unauthorized accounts.

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Establish a whistleblower policy and procedure to ensure that anyone who wants to report something fishy is ensured protection from retaliation. Consider an anonymous hotline run by a third-party, like MPI Cares, that members can use to report unethical behavior.

Take some of the administrative burden and financial risk off chapters. Technology shared by National and chapters can automate repetitive tasks and eliminate the reporting burden, for example, a virtual or consolidated banking solution for chapters.

With a virtual banking solution, fraud controls are built in. National has one master bank account divided into separate virtual sub-accounts for each chapter. This specialized software allows each chapter’s virtual sub-account to function like a standard bank account. Chapters can view and manage their sub-accounts separately.

An alternative solution, if you have the bandwidth, is to manage your chapters’ finances. Chapters may push back on this option, seeing it as a loss of control. However, they still have budget control, plus they can enjoy the primary benefit of outsourcing back-office processes and tasks: more time to spend on programming and member engagement.

If you go this route, you must provide complete transparency as well as a quick (within reason) response to payment and information requests. Provide training each year that outlines the division of duties and manages chapters’ service expectations.

 

The next post in this series covers federal and state compliance issues for chapters.

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