How to Protect Your Agency’s Assets
posted on: Tuesday, March 04, 2008
By Gary Snyder
Public confidence is essential to America's 1.5 million charitable organizations and the 14 million–plus staff and volunteers. With the sector boasting over $3 trillion in assets, hundreds of articles and newsletters about the diminution of trust in the charitable sector have been written. This interest, in large measure, is the result of poor management of funds. These problems are not sporadic; these are systemic issues that are pervasive in all areas of philanthropy.
I worry about the confidence that clearly affects the public's willingness to donate time and money, shape the political and regulatory environment that governs charitable organizations, and the influence on morale within the charitable workforce.
Brookings Institution studies find only 11% of the public thinking that charities do a very good job of spending their money wisely. A very recent study from Ellison Research showed that 62% of the public believes that charities spend an inordinate amount of money on overhead costs (fundraising and administration).
Nonprofit Imperative, the monthly e-newsletter, finds that billions of dollars is absconded from charities, principally by those with whom we put our trust. The pilferers include top management, board members and financial staff.
So what needs to be done before the regulators---Congress and the Internal Revenue Service---tell the philanthropic sector how to run its agencies? Here are a couple of organizational tips to avoid a heart-wrenching discovery of fraud.
Executives should have some financial knowledge- nonprofit executives are surprisingly devoid of understanding of charitable finances. Frequently, they treat the books like their personal checking account. Most training financial seminars are lacking. They should give the executive the financial skills in which to conduct the financial end of the nonprofit. Based on studies of fraud, one central focus is the failure to demarcate between the financial staff and executive leadership.
Board members should have some financial knowledge-board members become glossy-eyed when the financials are discussed at meetings. Financial statements intimidate them. They prefer to talk about programming or good and welfare instead of budgets. Board members should be offered some tutorial so that they understand financials. In most instances it won’t raise their interest but will give them some idea as to what to concentrate on while reviewing the financials. For obvious reasons (one of which is control), many executives are not interested in having a board that is financial literate. As a board member, you should demand a tutorial.
Accountants should have significant knowledge about nonprofit accounting-most accountants subscribe to the theory that a business is a business. Charitable organizations are not for-profits and there are significant differences. A most obvious distinction is the degree that they have to adhere to Sarbanes-Oxley. Seek an accountant that has nonprofit experience and understands the many nuances that is integral to the charitable sector. We have experienced in our study of fraud that there should be an arms-length relationship between the charities decision-makers and the accountant.
Increase the number of independent (outside) members on the board
Establish an audit committee-an organization that has an audit committee should review if it operates within generally accepted guidelines.
Whistleblower protection-makes sure that there is a prohibition against taking punitive actions against employees who disclose information---illegal practices or violations of adopted policies---to the audit committee or any one else.
Records retention-a policy to maintain records for posterity purposes is important.
As part of updating your policies and practices, consider the following operational changes:
Four eyes-multiple views-staff should divide tasks so as to prevent illegal activity. Dividing the tasks is arguably the best defense against embezzlement.
Bank statement review-the executive should be the first to open and review bank statements, thus preempting manipulation of the documents by financial staff. In smaller organizations, reconciliation should be separated between 2 different employees or a board member.
Employee background checks-needless to say an employee background check is important for any new member of the staff. It is extremely important for those that are working in the financial area. Even though most employee thefts go unreported (because repayment and dismissal are typical), you can check to see if any prospective worker has had any problems with law. In your investigations, trust your instincts and explore and explore until you are comfortable.
Internal controls-few nonprofits have strong internal controls. Most charities have good intentions in developing them but getting around to developing them is another matter. As organizations grow, the internal controls need changing. Make sure the controls are operating at a level that will deter and detect fraud. Establish a code of conduct that will create a clear understanding of what is expected of all employees.
Watch employee’s life style-observing radical changes in employee consumption or travel may be a good tip-off to start monitoring the books.
Have a positive culture-demanding that employees stick to the internal controls and make sure that they (staff and rules) are frequently checked, will create a culture of adherence.
Purchase fidelity insurance-although having insurance will not deter embezzlement, it will cover, at least some of the losses. On the other hand, since the organization is often left whole, it may cover up any public knowledge of the misdeeds and enable the malfeasant to continue to his/her fraudulent behavior in another setting.
An overwhelming number of perpetrators of frauds do not get caught. There are hundreds and hundreds of embezzlements, thefts and larcenies at charities. As a result, there is a diminution of confidence in the charitable sector. Consequently, there is sufficient impetus to institute the abovementioned short and long-term barriers to malfeasance.
Smartness instead of indifference is the way to go. It isn’t that hard.
Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.Labels: accountability, Best Practices, Philanthropic Malpractice, self-regulation
Public confidence is essential to America's 1.5 million charitable organizations and the 14 million–plus staff and volunteers. With the sector boasting over $3 trillion in assets, hundreds of articles and newsletters about the diminution of trust in the charitable sector have been written. This interest, in large measure, is the result of poor management of funds. These problems are not sporadic; these are systemic issues that are pervasive in all areas of philanthropy.
I worry about the confidence that clearly affects the public's willingness to donate time and money, shape the political and regulatory environment that governs charitable organizations, and the influence on morale within the charitable workforce.
Brookings Institution studies find only 11% of the public thinking that charities do a very good job of spending their money wisely. A very recent study from Ellison Research showed that 62% of the public believes that charities spend an inordinate amount of money on overhead costs (fundraising and administration).
Nonprofit Imperative, the monthly e-newsletter, finds that billions of dollars is absconded from charities, principally by those with whom we put our trust. The pilferers include top management, board members and financial staff.
So what needs to be done before the regulators---Congress and the Internal Revenue Service---tell the philanthropic sector how to run its agencies? Here are a couple of organizational tips to avoid a heart-wrenching discovery of fraud.
Executives should have some financial knowledge- nonprofit executives are surprisingly devoid of understanding of charitable finances. Frequently, they treat the books like their personal checking account. Most training financial seminars are lacking. They should give the executive the financial skills in which to conduct the financial end of the nonprofit. Based on studies of fraud, one central focus is the failure to demarcate between the financial staff and executive leadership.
Board members should have some financial knowledge-board members become glossy-eyed when the financials are discussed at meetings. Financial statements intimidate them. They prefer to talk about programming or good and welfare instead of budgets. Board members should be offered some tutorial so that they understand financials. In most instances it won’t raise their interest but will give them some idea as to what to concentrate on while reviewing the financials. For obvious reasons (one of which is control), many executives are not interested in having a board that is financial literate. As a board member, you should demand a tutorial.
Accountants should have significant knowledge about nonprofit accounting-most accountants subscribe to the theory that a business is a business. Charitable organizations are not for-profits and there are significant differences. A most obvious distinction is the degree that they have to adhere to Sarbanes-Oxley. Seek an accountant that has nonprofit experience and understands the many nuances that is integral to the charitable sector. We have experienced in our study of fraud that there should be an arms-length relationship between the charities decision-makers and the accountant.
Increase the number of independent (outside) members on the board
Establish an audit committee-an organization that has an audit committee should review if it operates within generally accepted guidelines.
Whistleblower protection-makes sure that there is a prohibition against taking punitive actions against employees who disclose information---illegal practices or violations of adopted policies---to the audit committee or any one else.
Records retention-a policy to maintain records for posterity purposes is important.
As part of updating your policies and practices, consider the following operational changes:
Four eyes-multiple views-staff should divide tasks so as to prevent illegal activity. Dividing the tasks is arguably the best defense against embezzlement.
Bank statement review-the executive should be the first to open and review bank statements, thus preempting manipulation of the documents by financial staff. In smaller organizations, reconciliation should be separated between 2 different employees or a board member.
Employee background checks-needless to say an employee background check is important for any new member of the staff. It is extremely important for those that are working in the financial area. Even though most employee thefts go unreported (because repayment and dismissal are typical), you can check to see if any prospective worker has had any problems with law. In your investigations, trust your instincts and explore and explore until you are comfortable.
Internal controls-few nonprofits have strong internal controls. Most charities have good intentions in developing them but getting around to developing them is another matter. As organizations grow, the internal controls need changing. Make sure the controls are operating at a level that will deter and detect fraud. Establish a code of conduct that will create a clear understanding of what is expected of all employees.
Watch employee’s life style-observing radical changes in employee consumption or travel may be a good tip-off to start monitoring the books.
Have a positive culture-demanding that employees stick to the internal controls and make sure that they (staff and rules) are frequently checked, will create a culture of adherence.
Purchase fidelity insurance-although having insurance will not deter embezzlement, it will cover, at least some of the losses. On the other hand, since the organization is often left whole, it may cover up any public knowledge of the misdeeds and enable the malfeasant to continue to his/her fraudulent behavior in another setting.
An overwhelming number of perpetrators of frauds do not get caught. There are hundreds and hundreds of embezzlements, thefts and larcenies at charities. As a result, there is a diminution of confidence in the charitable sector. Consequently, there is sufficient impetus to institute the abovementioned short and long-term barriers to malfeasance.
Smartness instead of indifference is the way to go. It isn’t that hard.
Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.
Labels: accountability, Best Practices, Philanthropic Malpractice, self-regulation
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