Imagine trying to explain to your board (or your donors) how someone was able to rack up $25,000 on your nonprofit’s credit card before anybody noticed.
Funding is the lifeblood of every nonprofit. As a nonprofit leader, you owe it to your team, your community, and your supporters to make sure that every penny is accounted for — and that every expense advances your mission.
That means it’s critical for your organization to keep strict internal controls around all your financial instruments — including checking accounts, credit cards, lines of credit, etc.
Let’s look at a real claim NIA received and discuss what the nonprofit did (and did not do) that impacted the outcome of the claim.
The Nonprofit:
An environmental-focused nonprofit organization, with a mission to provide age-appropriate presentations to classrooms throughout the community.
The Incident:
An employee of the nonprofit was entrusted with a credit card in the organization’s name, with the understanding that the employee would keep it on-hand for purchases “as needed” to support the mission.
However, the employee soon embarked on a spending spree of massive proportions, using the nonprofit’s credit card to amass nearly $25,000 in charges before anyone caught on.
The Legal Action:
Once the nonprofit noticed the suspicious charges, they conducted an audit, which indicated the employee’s actions. Then, a police report was filed, and the employee was arrested.
The Coverage:
The nonprofit had chosen to purchase optional coverage for instances of employee dishonesty as part of their insurance coverage from NIA.
The Result:
Because the nonprofit organization had elected to purchase coverage for employee dishonesty, NIA was able to trigger that coverage, evaluate the damages, and negotiate a resolution of the claim where the employee agreed to provide full restitution in order to avoid jail time.
What Did the Nonprofit Do Right?
The nonprofit made three smart decisions that helped in this situation:
- They had purchased coverage for employee dishonesty from NIA.
- When the nonprofit noticed something suspicious was amiss, they immediately began an audit of their finances.
- When the audit confirmed the employee’s actions, the nonprofit notified NIA and filed a police report.
What Could the Nonprofit Improve?
While the nonprofit did have insurance and did take swift and appropriate action when the fraudulent changes were noticed, these were mostly actions that happened after the fact.
Had the nonprofit taken stronger preventative measures and enacted better controls and safeguards over its finances from the beginning, the employee’s theft might have been stopped in its early stages, or even prevented altogether.
In this case, the nonprofit knew that the employee had a credit card — and yet the employee was able to rack up a staggering $25,000 in fraudulent charges before anybody caught on? That’s a clear indication that the nonprofit was entirely too lax in its financial oversight and practices.
With a lack of effective safeguards in place as a deterrent against theft or embezzlement, it created ideal conditions for someone to take advantage of the nonprofit.
How Can Your Nonprofit Avoid This?
Considering the hard work your organization puts into raising funds for your mission, it’s important that those funds actually get used to serve your community.
No one wants to explain how thousands of dollars disappeared out from under your nose, so it’s important that you include procedures and safeguards around your nonprofit’s purchases, expenses, accounts, and record-keeping to ensure that your funds are being used appropriately.
Some examples could include:
- Limit purchases and expenses to mission-related products and services
- Clearly define what is (and is not) a mission-related expense
- Never allow someone to keep a company credit card
- Avoid placing one person in total control over accounts without oversight
- Contact your bank to set spending limits on credit cards
- Always require signed approval on all purchases and expenses
- For payments and purchases made by check:
- Never allow blank, pre-signed checks to be used
- Require two authorizing signatures on all checks
- Require that itemized invoices, receipts, and expense reports be given to the financial team in a timely manner
- Conduct regular and random bank reconciliations and audits — not just when something appears suspicious
- Consult with an outside certified public accountant, if needed
- Get board approval before setting up any automatic purchases/payments
- When you handle cash from fundraisers, etc., have a minimum of two people count it
- Thoroughly vet anyone whose role might give them access to financial records, bank accounts, investments, company credit cards, etc.
- Note: These should be done before anyone is granted access
- Update your rules and procedures as needed
- Ensure that everyone on your team understands the rules — and the consequences if they are not followed
- Be sure your rules are consistently, evenly, and appropriately enforced
Conclusion
People can and do steal: It’s human nature and it’s always a betrayal — and unfortunately, it can come from the people we trust the most and suspect the least.
As nonprofits, we want to be able to trust the people that serve our communities alongside us. But when it comes to the funds that power our missions, we can’t afford to be naive about the world we live in, either.
It comes down to opportunity and temptation: Someone sees a weakness, acknowledges it as an opportunity, and becomes tempted to exploit it.
When someone has access to a nonprofit’s funds and sees that no one is doing things like checking the books regularly, asking for itemized receipts, or any other protective measures — that’s an opportunity.
Even a scrupulously honest person would recognize that as an opportunity. Even if they never acted upon it, it would be easy for intrusive thoughts to appear: “If I wanted to steal something, no one would ever know…”
That’s why you enact appropriate checks, oversights, and safeguards around your nonprofit’s money. When you keep tight control over your funds, that reduces the opportunities for would-be thieves to steal. And when people know they’re likely be caught quickly because you’re being vigilant, that reduces the temptation to steal.
Doing this can help you protect your mission and better ensure your funds are being used for the purpose they were raised — serving your community.
For a Deeper Dive
- Five Internal Controls for the Very Small Nonprofit (Blue Avocado)
- Internal Controls for Nonprofits (National Council of Nonprofits)
