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“The minute you think you've got it made, disaster is just around the corner.” - Joe Paterno. Keeping the Public’s Trust – How to Minimize the Risk of Fraud. Agenda. Ripped from the Headlines! Overview Of Fraud Specific Nonprofit Challenges Plan to Address Tone at the Top

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the minute you think you ve got it made disaster is just around the corner joe paterno

“The minute you think you've got it made, disaster is just around the corner.” - Joe Paterno

Keeping the Public’s Trust – How to Minimize the Risk of Fraud

agenda
Agenda

Ripped from the Headlines!

Overview Of Fraud

Specific Nonprofit Challenges

Plan to Address

  • Tone at the Top
  • Segregation of Duties
  • Perception of Detection

Plan to Sustain

September 4, 2013

presenters
Presenters

Daniel P. Healy, CPA Director - Operations & Controllership Genworth Foundation (Richmond, Virginia)

Ken Euwema Director – Member Financial Accountability United Way Worldwide (Alexandria, Virginia)

September 4, 2013

slide4

Ripped from the headlines

  • The stories you are about to hear are real… hopefully they are not about you

September 4, 2013

what were the warning signs
What were the warning signs?
  • Campaigns were good but yet bills were not being paid
    • Board asked long time CFO to determine why cash flow was bad but she couldn’t give a good explanation
    • CFO and CEO agreed that it was time for the CFO to “retire”
    • New CFO (a former auditor) was directed to “get to the bottom” of the cash flow situation as her first priority
  • Bank Reconciliation seemed like the obvious place to start
    • Found no reconciliations except those right around audit time, but those seemed to balance
    • Requested from the bank the missing bank statements for past 12 months and immediately found:
      • Checks clearing the bank that were not on the check register
      • Monthly deposit journal entry didn’t tie to sum of individual deposit slips

September 4, 2013

slide9

The plot thickens

        • Found canceled checks but unrecorded checks were conspicuously absent
        • Requested copies of missing checks from the bank
  • The truth comes out
    • All checks for odd amounts under the audit testing threshold of $10,000
    • All checks made out to CFO (with variations on name) or horse related entities
    • CEO was supposed to be looking through bank statement and canceled checks but CEO “trusted” her and didn’t follow control policy
    • CFO had full control over General Ledger entries, Accounts Payable entries, Check stock, Deposits, and Bank Reconciliation
    • Only other control was that checks over $5,000 needed two signatures but, all signatures on checks were forged

September 4, 2013

slide10

How bad was it?

    • Approximately $1.88 million misappropriated over 7 years… the largest theft from a non-profit ever to that date
    • United Way only insured for $600,000 of loss.
    • Former CFO sentenced to 4 years in prison and to make restitution, (including $1,000 per day in boarding costs incurred by the United Way while trying to sell off the horses)
  • “She just loved horses”
    • Owned full or partial interest in 72 thoroughbreds
    • Owned a 100 acre ranch with barn big enough to care for 26 horses
    • Attorney said that “her perfect day would be one where she could spend at least 8 hours in the barn with the horses”

September 4, 2013

slide12
A United Way “somewhere in the middle” of the USA…“Our campaigns are growing, how come we don’t have any money?”
      • Board was missing the “red flags”
        • Audit for 2005 took 13 months to complete
        • Finance Committee and Board rarely received financial reports because admittedly “staff could not produce them”
        • Campaigns were growing but receivables were aging
  • CEO deflected mounting problems
    • CFO always had excuses (software conversions & incompatibility, too busy with day-to-day, etc.)
    • CEO blamed other UWs (withholding designations, slow payments, etc.)
  • Board insulated from agency complaints
    • Designations only paid out when agencies cried foul
    • Allocation payments delayed due to “missing paperwork”

September 4, 2013

slide13

A changing of the guard

    • CEO resigns to “seek other leadership opportunities in the community”
    • New CEO immediately sees the red flags, starts to investigate, and reaches out to UWW for help
  • A Grim looking situation
    • Board had to be lobbied hard to convince them that a Forensic Audit would be needed to determine the extent of the problems
    • No substantial internal controls on campaign or general accounting systems
    • Unsubstantiated pledges were frequent and write offs growing
    • Operating expenses increasing while cash flow decreasing
    • Estimated that the organization spent $900k more than it really took in over a period of two years

September 4, 2013

slide14

Cleaning house

    • Forensic Audit found “inconclusive evidence” of criminal activity by staff but ethical problems abounded
      • Forensic Audit cites Board for lack of financial oversight… Board Chair & Vice-Chair resign to help UW rebuild its reputation
      • Summary of the Forensic Audit released to the public and UWW Public Relations team works with local PR consultant to manage media coverage (on the edge of one of the top 25 media markets)
      • Story picked up only by local divisions of national media so far
      • Community leaders and agencies supportive UW’s efforts to restore itself to financial viability

September 4, 2013

united way of central maryland baltimore maryland
United Way of Central Maryland(Baltimore, Maryland)
  • $400,000 stolen over 7 years by the Accounts Receivable Clerk
  • Not “Rocket Science”:
    • Small, unrecorded checking account
    • Instead of closing the account, address changed to home address
    • Unexpected incoming checks deposited into account
  • Found only after clerk went to another employer and overdrew the account
  • Auditor did not know about the account because its activity was never recorded on the organization’s books

September 4, 2013

slide16

Where did we fail?

    • Did not require at least two people to be present when making changes to bank accounts
    • Did not require a log of all incoming checks and reconciliation to deposit records
    • Auditor were not made aware of all organizational accounts so that they could verify that approved changes were properly made
  • Staff and Board respond properly to situation:
    • Investigated quickly and thoroughly
    • Instituted stronger internal controls and implemented them quickly
    • Coordinated public announcement of arrest and corrective actions taken internally with UWW and legal authorities, in advance
    • Full transparency resulted in a focus by media/public on the “shaming” the perpetrator rather than United Way

September 4, 2013

a united way that is still investigating where did all the construction money go
A United Way that is still investigating…“Where did all the construction money go?”
      • A change in Leadership
        • New CEO hired and bookkeeper soon resigned
        • CEO discovered that audits had not been done for two years and the records were a mess
  • Investigation
    • New book keeper began reentering all transactions for prior two years and started noticing some “odd” things
    • $300,000 that should have been in a separate account for the costs of the new building construction was gone
    • What construction bills there were on file looked suspicious (15,000 feed of wire for a 1,300 square foot office?)
    • Duplicate payroll checks issued to the bookkeeper
    • Weekly checks written to a grocery store chain, all for the same amount, used to purchase gift cards but no record of a program to give out gift cards to community members in need

September 4, 2013

slide18

In the absence of a CEO:

    • The bookkeeper convinced the board that audits were too costly and not necessary
    • The bookkeeper was left all alone with all the money and no oversight
    • Board simply was too small and not at all focused on their fiduciary responsibility
  • With the oversight of UWW membership staff:
    • Board hired a forensic auditor to build a case for the authorities but no arrest made yet
      • Board re-engaged with financial statement auditor to do missing year audits and corroborate the forensic auditor’s findings
      • UW disclosed misappropriation of assets on their amended IRS Forms 990
      • Board considering whether or not to proceed with a civil case against the former bookkeeper

September 4, 2013

lessons learned
Lessons Learned

The Board must exercise their “duty of care” by asking questions and having a mission that aligns with the rest of the UW network

The Board needs to pay attention to the financial indicators

The Board needs to hold Senior Management “accountable” for protecting the organization’s assets rather than “trust” them, because they have been there a long time and have always seemed “as honest as the day is long”

Be concerned when someone can’t explain why cash is in short supply

Control Policies don’t do any good if no one checks to see if they are being followed

When the “S#!@ hits the fan” (and sooner or later it will), call UWW for help in managing the situation

September 4, 2013