Embezzlement Prevention for Small Organizations

CONSUMER ALERT

BILL SCHUETTE

ATTORNEY GENERAL

The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern. Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General.

Embezzlement Prevention for Small Organizations

While embezzlement is a growing problem for small organizations especially in these rough economic times, there are steps that organizations can take to protect themselves.  Only two factors are needed for an embezzlement to occur: 1) a volunteer or employee with a motive and opportunity to steal; and 2) loose or nonexistent financial controls within the organization.  Of course, organizations cannot prevent trusted people with financial motives from thinking about embezzlement.  But organizations, even very small ones, can adopt simple financial procedures that discourage would-be embezzlers by removing temptations and increasing the likelihood of detection.  An added benefit of adopting effective financial controls is that they protect innocent employees and volunteers by shielding them from false suspicion if funds are found missing.   Below are a few simple financial controls any organization can put in place.

Establish a Culture of Transparency

First, in order to minimize the chance of embezzlement, establish a culture of transparency and responsibility. A charity's board of directors has a fiduciary duty to the organization and a responsibility to diligently manage its finances.  Therefore, directors should actively monitor the books and records of the charity.  A red flag should go up if officers or employees will not share the financial records or supporting documentation or refuse to answer questions about financial transactions.

Create and Follow Internal Financial Policies

Next, an organization should establish written internal financial policies and practice them on a consistent basis.  Everyone handling money should be accountable and know exactly what is expected of them.  Examples of effective procedures include using numbered tickets for events and raffles, maintaining a current inventory of goods and equipment, keeping supporting documentation for all payments or reimbursements, and giving duplicate receipts from a numbered book to donors or buyers of goods and services (whether requested or not).  When someone handling money passes it on to another, it should be counted and both persons should have a signed record of the amount that changed hands.

Have More Than One Person Involved In Finances

For bank accounts, organizations should adopt and maintain a system of checks and balances. At a minimum, a person other than the person writing checks and making deposits should regularly receive, review, and reconcile the bank statements and promptly ask questions if any irregularities appear.  In addition, if feasible, requiring two signatures for all checks is a valuable standard practice (provided, of course, that checks are never pre-signed).

Take Appropriate Steps to Report Theft and Recover Funds
 

Finally, even with proper safeguards in place, embezzlement may still occur.  In such an instance, the board should take appropriate steps to recover diverted funds and report the theft to authorities, and effective safeguards should assist an organization in identifying possible perpetrators and relevant time periods.  Failing to take action in the event of missing funds or property may amount to a breach of directors' fiduciary obligation to protect and preserve a charity's assets.

*

This is certainly not an exhaustive list of good financial practices, but adopting procedures appropriate for your organization will help minimize the risk of embezzlement.  While it is often inconvenient to follow standard procedures, being consistent in responsible practices will protect your trusted volunteers or employees and give the public a positive view of your organization as a transparent and capable entity that is worthy of donors' support.