Preventing Theft, Fraud, and Embezzlement

From National PTA

Piggy-bank-theftIt is hard to acknowledge that theft, fraud and embezzlement are pervasive in today’s
society. In many cases, the person who
commits these acts is someone you know, like and trust. Convincing a nonprofit to prosecute is often difficult. A nonprofit’s duty to its members, the community, and its donors are significant and this should have strong consideration when determining whether to prosecute or not. Managers of nonprofit organizations must constantly be on the lookout for fraud. Fraud costs U.S. organizations more than $400 billion annually. The average organization loses approximately 6% of its total annual revenue to these abuses. And these abuses are perpetrated at all levels of the organization.

Internal Controls

Every organization should have a strong system of internal controls. Internal controls are not only for large organizations; there are steps small organizations can take to protect their assets as well. They may not have enough volunteers or employees to maintain strict delineation of duties but internal controls are still possible. Without good internal controls it could take months to become aware of a problem. View our Fraud Prevention Checklist. Also be sure to access the Preventing Theft in Your PTA e-learning course. This course will teach you how to detect theft in your unit and what to do if you suspect it is happening.

Internal controls are a process designed to provide reasonable assurance regarding the reliability of financial reporting, the effectiveness and efficiency of your operations, and compliance with applicable laws and regulations. Implementing proper internal controls provide assurance that:

  • Fraud will be discovered on a timely basis
  • Perpetrators will be identified
  • A strong deterrent to improper activities is in place
  • Loss will be covered by insurance

Good internal controls will take away the opportunity needed by desperate people to commit a crime. What will cause a normally good person to reach this point? Gambling debts, divorce, illness, drug problems, peer pressure, and work lay-offs are some of the reasons that are given when people are questioned about these abuses. It may be hard to take appropriate action when you have compassion for the person committing the fraud, but that should not be part of the consideration.

Internal controls include policies such as:

  • Always using deposit and expense vouchers for income and expenses
  • Requiring two signatures on every check
  • Having two independent money counters at an event before turning the collected funds over to the treasurer (who then counts again to confirm how much they are receiving)
  • Depositing funds immediately after events
  • Never using blank checks
  • Having bank statements sent to and signed off by a non-signatory to the PTA checking account who is familiar with the PTA’s activities (e.g., the PTA secretary if the president, vice president, and treasurer are all signatories to the account)

PTA-Specific Warning Signs

The following is a list of PTA-specific warning signs that may indicate that theft, fraud or embezzlement is taking place:

  • Treasurer’s report delayed or non-existent
  • Budget monitoring reports delayed (may be part of the treasurer’s report)
  • Delayed deposit of cash receipts
  • Missing supporting documents
  • Multiple corrections to the cash book
  • Checks bouncing when there should be sufficient cash
  • Lifestyle or behavior changes of staff or volunteers

The Cost of Not Prosecuting Fraud

There are many costs as a result of not prosecuting fraud:

  • Not pursuing action sets a precedent that may cause additional fraud later on or create an environment that encourages fraud rather than deters it.
  • This may cause loss of credibility and respect for the association among the members, community, partners and donors.
  • Lack of prosecution may void the insurance policy.

Fraud can have a significant impact on your association. It can lead to:

  • Financial loss
  • Costly investigation (in actual dollars and time lost)
  • Lost opportunities
  • Damaged reputation
  • Damaged relationships with vendors, partners, members and the community
  • Loss of donors
  • Litigation

Investigate all suspected fraud and decide if sufficient probable cause exists to prosecute. You may want to get an attorney involved from the beginning to make certain that evidence of possible fraud is properly preserved. They can advise the association on the likelihood of success in civil court, and protect the organization from issues related to improper actions or civil rights violations against the suspect.

Do not be afraid to talk about fraud. Make it well known that theft will not be tolerated and that prosecution may result. Promote safeguards to reduce incidents of fraud and encourage people to come forward if they suspect irregularities.

Suspected Fraud Action Step-by-Step

When you suspect fraud, be sure to consider the following:

  • Determine if insurance covers the loss.
  • Consider whether to call the police.
  • Consider whether to call the district attorney.
  • Consider whether to meet with the individual.
  • Contact your Illinois PTA district or region director for resources and guidance.

Be sure your PTA has a written policy with procedures describing how future incidences will be handled.

Check the insurance policy before you have a problem to see if it requires prosecution in order to recover a loss. You should also check the policy to see if it will cover losses if you do not have written controls in place or what happens if the controls are not followed. Many times this is grounds for denying a claim. You may want to check your state law to see if there are provisions that you may want to incorporate in your policy.

If you have evidence that fraud has occurred, take the following steps:

  • Do not make accusations.
  • Do not offer not to prosecute if the money is paid back. Doing so is a form of extortion.
  • Determine what other access the suspect has, what other types of fraud schemes the suspect could have perpetrated, the likelihood of collusion, and the possible duration of the schemes discovered.
  • Document all allegations.
  • Gather facts, documents and interviews.
  • Identify all bank accounts involved and consider closing or freezing the accounts. Follow the steps in your policy developed to cover such matters.
  • Contact the authorities.
  • Contact insurance company.
  • If it is determined that fraud did occur, National PTA recommends that the PTA should file an official report with the police department.