Many boards and CEOs spend countless hours analyzing what the agency is spending its money on, without investing a minute on how the agency protects it. This changes when something terrible happens to that money. Many people in the non-profit world have blinders on about the potential for corruption and mismanagement within their organization. They might even be offended by the suggestion that the person managing the money is not doing a terribly good job of it. However, once something goes wrong every action in the agency is scrutinized in detail.
Over my 30-year career as a board member and executive director I have seen far too many instances of mismanagement, stealing and fraud to believe that these are rare occurrences. These run the gamut from innocent to ignorant to intentional and may be internal or external to the agency. Here are few examples:
Innocent: The agency had grown dramatically over a 2-year period and received new grants from a variety of government and non-government sources. The bookkeeper did not have the background or skills to manage the more complicated financial situation. Funders were on the verge of discontinuing their grants due to delayed and inaccurate reporting when the errors were discovered, disclosed and rectified.
Ignorant: An inexperienced CEO justified charging personal care and clothing items to the business. When discovered, she claimed that they were necessary for her professional image and therefore she considered them as business expenses. The CEO was dismissed, and charges were laid. The scandal showed up in the local paper a significant factor in the agency folding a short time later.
Intentional: Petty cash was stored in an unlocked box that all staff had access to. A large amount of money was being held in the petty cash for an imminent purchase. The money was stolen and never recovered. The close-knit staff team were shocked and their culture of trusting one another damaged.
External: Signed cheques were intercepted, altered and reproduced. None of these cheques were processed and the agency did not suffer financial loss. However, significant agency human resources were redirected to opening and closing bank accounts and ensuring that staff were paid while this was going on. Altered cheques continued to be discovered over almost a 1-year period.
Why the challenge?
There are many reasons that financial mismanagement occurs in non-profit organizations. In my experience the three biggest factors are an overabundance of trust, a lack of expertise in financial management and reliance on the status quo.
Too much trust is a major issue for NPO’s. There is a belief that everyone shares a “do good” motivation for being a part of the organization. When discussing implementation of financial controls, board members and staff can be offended at the suggestion that everyone in the organization may not be trustworthy. They need constant reminders that controls and rules are not put in place based on who holds key positions. Rather, they serve to identify or mitigate the risks of what the wrong person in the position could do in the absence of good controls.
Many smaller agencies lack expertise about non-profit financial management and risk, both at the CEO and board level. Often, staff members of the agency are promoted into a management position and suddenly are responsible for the finances. If they are relying on the services of a bookkeeper, they may simply trust that the job is being done correctly.
Often agencies have an accountant on their board and believe that this will remove the risk of errors or fraud. However, the role of accountants on boards may be to review financial statements and interpret them for the board. They cannot be expected to look for errors or fraud risk at this high level or review. Without day-to-day involvement those charged with governance often fail to identify fraud or mismanagement until the issue has gone on for some time. For example, in the case discussed earlier of the bookkeeper who was in over her head, there were 3 accountants on the board. None identified the problem until the bookkeeper asked one for assistance and confided that she had not reconciled a bank statement in over a year.
Too often, agencies rely on maintaining past practices without looking at current trends. After my agency experienced cheque fraud, I met with our banker to identify fraud prevention options. She told me that they have been trying for years to get businesses to stop writing cheques. Cheque fraud is a massive issue and completely preventable. (for more please see CIBC Other Common Fraud Examples.) While it was a short term challenge to move from writing cheques to electronic funds transfer, in the long term, it not only reduced our risk, it also saved us time and money as we discontinued printing and mailing cheques.
Your agency likely spends countless hours raising money so that you can make a difference. Shouldn’t you invest time in protecting those hard-earned funds from financial mismanagement? Once money is stolen, fraud occurs, or a funder is lost, the damage is done. Not only financial damage; you may face a loss of trust, damage to your reputation and hours of frustration and worry. Don’t shut the proverbial barn door after the horses have escaped. The time to ensure your finances are cared for is today.
Sandra Dunham is the sole-proprietor of Streamline New Perspective Solutions
Streamline New Perspective Solutions offers management consulting services for non-profit organizations. Please visit www.streamlinenps.ca
Cat Bristow CPA, CA is the sole-proprietor of Cat May CPA Professional Corporation. A public accounting firm that serves non-profit and charities among other industries.