At least once a week Fred Croop, an accounting professor at Misericordia University, opens up the newspaper and finds some case of fraud occurring at a nonprofit organization.
The situation is widespread, and Croop, who also is a board member of the Pennsylvania Association of Nonprofit Organizations (PANO), said he has made it his mission, along with his students at Misericordia, to put together a manual for internal controls to prevent fraud. Misericordia is in Dallas, Pennsylvania.
“Fraud at nonprofits is such a big problem. Often, they do not have the resources to recover. If they lose a lot of money, they will go out of business,” Croop said. “And if money is stolen, it is hard to prosecute the culprit because the records simply are not there.”
The professor said that within a recent six-week span about six nonprofits in northeastern Pennsylvania reported fraud.
Examples of those struck include ambulance organizations, fire companies, teacher organizations, athletic organizations and social clubs.
Croop is holding a free seminar at Misericordia on May 14 for CPAs called “Effective Internal Controls for Small Nonprofits and Volunteer Organizations.” Croop intends to talk about recent cases of fraud and money mismanagement at small nonprofits.
Croop gives tips he would offer any organization, including doing monthly bank reconciliations, requiring that two or more (unrelated) people within an organization handle the money and look over bank records, having board members who are not related to each other, and changing treasurers every few years.
Croop, who is licensed to do continuing education for CPAs, added that checks should have a minimum of two signatures, cancelled checks need to be looked at carefully and a treasury report should periodically be reviewed by members.
“If you can afford an auditor, then do it,” he said.
According to Anne L. Gingerich, executive director of PANO in Harrisburg, volunteers at nonprofit organizations lead busy lives. That makes internal controls even that more critical. It is necessary to document everything, keep multiple board members in the loop and, if possible, involve an accounting firm.
She said that small nonprofits can access a template to properly do financial records free of charge by becoming a PANO member. She points out that financial information needs to be shared with the board and staff routinely, and members have to ask important questions and address inaccuracies.
John Nonnemacher, CPA at Snyder & Clemente in Hazleton, does work for nonprofit organizations throughout Carbon and Schuylkill counties. He said he has been asked to speak on the topic of fraud.
“In my seminars, I use the analogy, ‘What is one plus one?’ I always say the person capable of committing fraud would answer, ‘What do you want it to be?’”
He said there may be other red flags in fraud scenarios. He said those in charge of money and committing fraud will likely be unwilling to take a vacation for fear of suspicious activity being discovered in their financial record-keeping. They will appear hostile and get defensive when asked questions regarding funds, and they will provide vague answers to financial questions.
“They have excuses every time someone asks to look at accounts,” Nonnemacher said.
The CPA cited an example of a recent situation regarding a doctor and his bookkeeper/secretary. The bookkeeper never wanted to take vacations, but when she finally did, the doctor’s wife reviewed bank statements in her absence. The wife discovered many checks in the bank account written out to the bookkeeper. Mistakenly, she became concerned that the doctor was having an affair with his bookkeeper when, instead, there was fraud being committed.
“In the case of nonprofits, these organizations are stretched so thin. You should have more than one person involved with counting the money, recording transactions, keeping bank records. But that often doesn’t happen,” Nonnemacher said, adding that nonprofits with volunteers to do the work will frequently avoid pressing charges against a fraudulent treasurer.
“They do not want the bad press for the organization,” he added. “And also there are times that they may feel bad for the person committing the crime. Members of the nonprofit may have personal relationships with the treasurer and have sympathy for that person because they may have taken the money in desperation due to financial struggles or issues with their health.”
Nonnemacher said he tells nonprofit organizations that want to avoid fraud to have copies of invoices for any expenses such as services and materials and have them attached to the back of all checks. The people who sign checks should carefully look at each invoice. The back of each check should be stamped ‘For Deposit Only.’
He said the head of the organization – the person who signs the checks – should never sign blank checks and then go on vacation. It gives those willing to commit fraud the opportunity to write checks for whatever they want.
“Sadly, when an organization has experienced fraud, it then becomes tainted. People are cautious about participating in or donating to fundraisers that the organization holds,” Nonnemacher said. “There are good people volunteering their time within the organization, and they do a lot of good things. That gets overlooked when fraud takes place.”
Gingerich at PANO gives volunteers committing fraud the benefit of the doubt saying, “Those managing the operations do not know the legal, ethical responsibilities in managing the dollars that the public entrusts to their care. Thus, rules get overlooked and/or processes do not include internal checks and balances. If fraud happens, it is usually done from ignorance and not with intention.”
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