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Fraud? Say It Isn't So!

by the AFRDS


Did you know that the average fraud scheme goes undetected for 18 months? Or, that 93 percent of frauds are by first-time perpetrators? How about this? Dozens of parent organizations were victims of embezzlement by dishonest volunteers last year.

It's hard to swallow. But sometimes volunteers - people whom you may have known for years, people you trust - do not always have the best of intentions when it comes to safeguarding your non-profit group's assets.

"Long after my term as PTA President, I would get these calls from vendors who hadn't been paid, and families who hadn't received prize merchandise," recalls Terry Barr, Redmond, WA. "I started making phone calls, beginning with the treasurer who was very evasive and now won't take my calls."

After further research, Terry learned that the bank account had been closed. The principal was in the dark. And the elementary school, which her children no longer attend, was out $24,000.

"The police confiscated the treasurer's records and they say they're investigating, but no arrests have been made," reports Terry. And now, because of her fiduciary responsibilities as a PTA officer at the time the theft occurred, Terry has stepped in to help the school recover the loss and its reputation. How did this happen? And, more importantly, how could it have been avoided?

The Fraud Triangle

Many parent groups and non-profit organizations start by having clearly written by-laws and strong policies and procedures that detail punitive action for misconduct by one of its officers or members. But the best way to avoid being swindled, most organization leaders report, is to institute a few simple checks and balances and respect a 50-year-old theory developed by sociologist Donald R. Cressey.

According to Cressey, three circumstances must be in place to entice a seemingly trustworthy person to steal.

  1. Motive - Even "good" people sometimes find themselves financially stretched (sick parent, unemployed spouse, child in college) or suffering from an addiction to drugs, alcohol, gambling or the inability to live within their means.
  2. Opportunity - While carrying out their duties, vulnerable volunteers may be tempted if they believe they "can get away with it" because of lack of oversight stemming from poor business practices.
  3. Rationalization - First - second - and even third-time embezzlers will convince themselves that they "deserve more for their hard work," or that the organization "will never miss the money."

According to Terry and others who've been burned, the best defense is to dismantle the triangle. Remove "opportunity" from the equation. "You must have security measures and no one person totally responsible. I repeat NO ONE PERSON should have sole custody of the money."

Two heads are better than one

Always require two signatures on every check and never leave people alone with cash. A finance committee - comprised of the president and two board members - should review all transactions and bank statements monthly. A complete audit by a third-party - preferably a certified public accountant - should be conducted annually.

Deposit cash daily

Never leave money unsecured in unlocked containers. Don't allow volunteers to take cash home. Avoid leaving cash at school overnight - no matter how late it is or how tired you are after the event is over. Once money is counted, each person signs a "funds received" form and puts the money in a locked box for the treasurer to deposit. Petty cash funds should not exceed $100.

Keep it formal

No payments should be made directly from daily cash receipts. Develop a paper trail by requiring financial requests, vouchers or reimbursement forms before any payment is made to a volunteer or vendor. And remember, two people should always be present whether counting OR distributing money. A common approach is to have one person (a secretary for example) prepare the invoice and check request, and two others (president and treasurer) to write and sign the check.

Get Insurance

Even well-crafted cash controls cannot protect every non-profit group from theft. By purchasing a fidelity bond, groups insure that if any money is stolen, it will be recovered. Liability insurance to protect the officers and members and other third parties also is a good idea. Any agency can provide this coverage, however, there are a couple of agencies that specialize in group insurance for parent groups and may offer better rates: Association Insurance Management (AIM Insurance) out of Dallas, TX; and R.V. Nuccio and Associates, based in California.

Additional Resources: "Stealing from the PTO," by Michelle Bates Deakin for PTO Today Magazine, October 2002; "Essential Business and Practices Protect the Money You Earn"by Tim Dwyer for Momentum Magazine, February/March 2003

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About the Author:

This article is from the Fall 2003 issue of the Fundraising Edge, an online publication of the Association of Fund-Raising Distributors and Suppliers, and is reprinted with permission. Visit their web site at http://www.afrds.org/ for more information and a look at the complete issues of the Fundraising Edge.



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