The COO of Somerville Homeless Coalition in Massachusetts allegedly embezzled $108,000 over the course of 18 months around 2014-2015, according to an article in The Boston Globe. He reportedly used the company credit card for personal expenses and added his adult son to the nonprofit’s group health insurance. The embezzlement was discovered when he increased his own pay, which was noticed by a board member.
According to the COO, he paid himself extra for working overtime and not taking vacations. He said, “The problem became that I took more vacation time than I earned.” He also admitted to adding his son to the insurance and said he then forgot to take his son off of the plan.
But this isn’t the only example of theft in nonprofits the article lists. There’s also a bookkeeper who stole $800,000 from a nonprofit in Connecticut from 2009-2014. And a machine shop manager who stole more than $640,000 from a nonprofit hospital in Boston. Let’s not forget about email scams as well. In 2015, an employee at The American Museum of Natural History in New York City unfortunately wired money through an email scam, costing the company $2.8 million.
The article explains that, between 2011 and 2017, “More than 1,100 tax-exempt organizations nationwide have reported theft, embezzlement, or other major diversions of assets…Experts say the total number of thefts is almost certainly far higher, because most cases of fraud are either never detected or reported in the digital filings.”
Nonprofits can find themselves particularly vulnerable to financial crimes. They’re often smaller organizations, may have staff with less financial experience, and can have less oversight than for-profit companies. In some cases, nonprofits worry about their reputations and don’t report issues or press charges. They don’t want anyone to know. Unfortunately, this can also mean the money never gets paid back.
The good news is there are steps you can take to prevent financial abuse in your nonprofit.
Have Financial Policies, Including Checks & Balances
No single person should have all the financial information and control. Even if you only have a handful of staff, you can arrange your financial procedures so that at least two people are involved. Make sure there are others outside of the finance department who have visibility into how money is handled. This could include other employees, board members, etc. The more transparency, the better. The goal is to be so transparent that it eliminates the room for anything inappropriate to happen. In doing so, you greatly lower your risk of theft and embezzlement. If it does happen, you should be able to catch it quickly.
When I worked in HR at a church, I thankfully didn’t have to do payroll. We had a finance department that included a payroll accountant. We used ADP software that finance and HR both had access to. (I highly recommend using software as one of your financial controls.) The way the system operated, HR entered information, and it flowed over to finance. So, finance had the ability to check our work. However, it was hypothetically possible for someone in finance to make a temporary pay change in the system that HR wouldn’t see. So, HR reviewed every payroll register.
Depending on your niche, there may be financial organizations you can join that provide advice on your policies and procedures. For example, the Evangelical Council for Financial Accountability (ECFA) provides accreditation to Christian nonprofits.
Hire an External Auditor
Even if you have employees or board members with strong financial backgrounds, you need to hire an external auditor. They’ll come in periodically (my experience is annually) and audit your finances, ensuring everything is as it should be. They’ll also talk with others outside of the finance department to see if anyone else has concerns about how money is handled. They’ll be able to assist with having appropriate policies and procedures in place.
Clearly Communicate Pay and Benefits
When hiring employees, clearly communicate the details of pay and benefits. Have policies in your handbook that outline how these work for everyone as well.
With the COO of the Homeless Coalition, his rationale is disturbing on many levels. He seems to not realize that adding his son to the company’s insurance plan cost the company money. Plus, the son had health problems, which could very well have caused premiums to increase for everyone. Regarding the extra pay, he somehow thought it appropriate to pay himself for working more hours than he thought he should work. Interestingly, he said that, before he was fired, he submitted an invoice for $50,000 for extra hours worked. He seems to think of himself as an hourly employee. I can’t think of any scenario in which a COO should be hourly. (Read more about exempt vs. nonexempt status.)
Make sure pay and benefits are clearly explained, and that policies are followed by every employee. If anything seems odd or not understood at any point along the way, have a conversation. With leaders and executives, make sure there is some form of accountability. While certainly you want an environment of trust, this is best accomplished when there’s a sense of accountability to each other as well.
Remind Employees How Money Is Used
Regularly talk about the good that your organization is doing. Talk about how many people have been helped, or how many services have been provided. Make it clear that you are very intentional in how you spend your money as an organization. Communicate your financial goals and what each employee can do to help accomplish them. The more employees adopt a high level of personal responsibility for the company’s finances, the less likely they’ll misuse funds. (Read more about prioritizing the right things in your budget.)
Provide Regular Reminders About Email Scams
Email scams are annoying, to say the least. They’re unfortunately getting sneakier too. Remind your employees that, if they receive an unexpected email that contains a link, don’t click on it – and don’t open any attachments. If they receive an odd email that appears to be from a leader or executive asking for help or money to be sent, don’t do it. They can always reach out directly to the leader or employee asking if the email is legitimate. Traliant has 10 tips you can share with your employees.
Report Financial Crimes
Report any financial crimes to the police and/or the appropriate government entity. It’s not enough to fire an employee who steals money from your organization. Reporting these actions is an appropriate next step. It will hopefully help you get your money back (although that doesn’t always happen with email scam situations). In addition, it sends a message that fraud, theft, and embezzlement aren’t welcome at your organization. Hopefully, as more people realize nonprofits take financial crimes this seriously, they’ll happen less often. If your donors are truly supportive of your organization, they’ll appreciate your transparency and your willingness to do everything you can to correct what happened. Sweeping it under the rug doesn’t help.
Yes, it might take some time to go through these steps. And I know it can easily feel like you’re spending time on paperwork that should be spent on people. But I assure you this is time well spent. Think about the true cost if something were to happen. Not only would your organization lose money (and time dealing with it all), but the people you’re helping would lose too. According to the executive director of the Homeless Coalition, the money they lost would have prevented 100 families from being homeless. Your time spent preventing financial abuse has a direct impact on the people you’re serving.
Photo credit: By Mehaniq / Canva
It was interesting to know that email scams can lead to fraud. My friend wants their nonprofit to prevent fraud. I should advise him to turn to an expert in nonprofit fraud to ensure their safety.