Fraud Risks and Remedies

Posted on Friday, March 10, 2017

In the past decade, the not-for-profit sector has been hit by a number of financial scandals. White-collar crime isn't limited to the for-profit corporate sector. And it isn't always the big name not-for-profit organizations that are hit, as illustrated by the following account of a scandal at the Palm Beach County Convention and Visitors Bureau in Florida, which employs fifty people and has an annual budget of $10 million, financed by a local 5 percent hotel tax.

More Findings from the Audit

In its audit of the Convention and Visitors Bureau, Palm Beach County found that not only did the controller embezzle more than $1.5 million, other issues were discovered, including:

The CEO traveled extensively without adequate documentation of reasonableness and necessity, in violation of the county's policies.
The bureau did not have adequate fidelity bond insurance coverage to protect the county.
Withholding taxes were not paid to the IRS.
Controls over check security and voided checks were inadequate.
There was no segregation of duties. The controller cut the checks and reconciled the bank statements.
The bureau used outside legal counsel to perform administrative tasks.
Security of the automated accounting system's test database was not sufficient.
Controls over use of corporate credit cards were inadequate.
There was no centralized invoicing or purchasing.
Password security policies were inadequate.
Procurement procedures were not specific.

The lesson to be learned is that your organization, however big or small, should have strong internal financial controls.

Because of lax procedures, fraud at the Palm Beach County Convention and Visitors Bureau went unnoticed for three years until the organization's bank discovered irregularities in an account. Palm Beach County, which finances the $10 million annual budget, conducted an audit and discovered that the group's controller allegedly embezzled more than $1.5 million by writing more than 200 checks to herself to cover extensive gambling debts.

The controller, who was later terminated, used money that had been earmarked for such operational finances as membership services, payroll withholding taxes and the organization's pension fund. She was convicted and sentenced to 10 years in prison for grand theft and money laundering in July of 2007.

The group's president and chief executive officer of nearly two decades and its vice president of finance resigned in the wake of the scandal. The rest of the board came under heavy scrutiny for not detecting the irregularities.

In its report, the Palm Beach County auditors cited a "complete breakdown of internal controls and lack of management oversight within the financial operations" of the Convention and Visitors Bureau.

Apparently, the embezzled funds cannot be recovered, so the Palm Beach bureau must determine other sources of income to replace the organization's pension fund, pay back taxes and cover other operational shortfalls.

Frauds like this -- and even larger ones in the corporate world -- sparked the passage of the Sarbanes-Oxley Act, which sets guidelines for publicly traded companies' internal and external governance of financial affairs. Although not-for-profit organizations aren't required to follow the provisions of Sarbanes-Oxley, many have adopted some of its accountability standards. Continuing scandals such as the one in Palm Beach may add to the motivation.

When a not-for-profit organization has a firm system of internal controls in place, it can ensure third parties that it complies with high standards of governance and remain firmly aligned with its stated mission and goals.

One of the most important measures a not-for-profit group can adopt is setting up an independent audit committee. The members of this panel should:

Be free from conflicts of interest and not receive compensation for their service on the committee.
Include at least one financial expert.
Establish an independent level of scrutiny when it comes to crucial financial matters.
Require full committee approval of the audit results.
Provide financial literacy training to board members.

If the Palm Beach County Convention and Visitors Bureau had an independent audit committee in place, the embezzlement scandal would likely have been detected early because members would have carefully reviewed financial statements on a regular basis.

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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