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fraud

How to Prevent Theft of Cash from Smaller Nonprofit Organizations

It’s no secret that many fraudsters steal cash from smaller nonprofit organizations because cash is more difficult to trace than stealing through any of the disbursement schemes discussed in my previous blog, “Smaller Nonprofit Organizations are Prime Fraud Targets.” There can also be a significant lack of financial oversight by the organization. Whenever cash is involved, the organization’s board should strengthen internal controls and take an increased oversight role. Failure to take a proactive approach is a recipe for financial disaster—and fraud.

Many volunteers handle cash at the “point of sale.” In smaller nonprofit entities, the point of sale would typically entail concession or spirit wear sales, registration or dues, bingo sales, gate sales, reverse raffles, general donations, tag days, car washes, bake sales, night at the races, event parking, and any of the many other revenue streams commonly used to generate funds.

Skimming

Cash receipts are usually stolen by skimming. A dishonest volunteer skims when they steal the cash before it is recorded in the books. The one example I like to use (disturbing, because it involves the theft from a religious organization) would be the trusted individual who handles the collection of weekly donations at a church. Typically, parishioners contribute either via a check in a preaddressed envelope, or they place a cash donation in the collection basket. When cash is involved there is no record of who contributed the cash or how much. Absent good internal controls, church collection baskets are the ideal place to steal cash. Who is to say how much cash was contributed in a given week?

While it is always recommended to discourage cash donations, sometimes this is impractical and inevitable. Checks, credit card and electronic mediums such as Paypal are preferred.

Many organizations provide donors with an annual statement of contributions or some form of a written receipt that can be used to substantiate a charitable contribution. With cash payments in smaller organizations, there are usually no statements or receipts provided to the donor.

Steps to Minimize the Theft of Cash

There are a number of steps an organization can take to better secure collection processes:

  • Make sure multiple people are involved in the cash collection process
  • A duplicate receipt of cash collected should be prepared and signed by all present
  • If someone must take the cash home, the responsibility should be rotated
  • Store cash in a safe
  • Deposit cash as soon as possible in a bank; cash should never be placed in an unsecured desk drawer
  • Someone not involved in the cash collection process should compare the receipts of the cash collected to the bank deposit—if there is a discrepancy, the executive board (not the treasurer) should be notified immediately.

Smaller organizations typically do not expend the time to determine if the cash receipts reasonably approximate the value of the goods sold. Rarely do organizations take nightly inventory. Many organizations do not perform any historical comparative statistical analysis on weekly or monthly receipts by payment method. The amount of cash transactions materially varying from period to period is cause for concern.

We recommend compiling a profit or loss statement for each fundraising activity. Why would an organization continue to hold fundraisers (such as bingo) if they are not profitable? Chances are someone IS profiting. Unfortunately, it is not always the nonprofit organization.

Finally, it is a good idea to consider background checks of the personnel handling cash and bonding.

Larceny

The second manner of cash receipts theft occurs when volunteers steal the cash after it has been recorded on the books – larceny, aka theft. The difference between skimming and larceny is whether the cash has been recorded on the books. If it is skimmed, it is stolen before being recorded. A cash larceny involves the theft of cash after it has been recorded.

Receipt of Checks

While theft of cash is most common, do not let your guard down if your organization receives checks. Many donors believe checks cannot be stolen. Wrong. Dishonest treasurers have fraudulently opened a bank account in the name of the organization and then deposited the diverted funds into the unauthorized account. Then, to complete the concealment, some have gone as far as issuing the donor a receipt on similar looking organization stationery.

Many organizations publish the names of donors to publicly thank them. This is also a good internal control. If a donor’s name is not listed, they may inquire to someone other than the treasurer as to the omission—such a simple inquiry may be what tips off the fraud.

Proving who is responsible for a cash theft can be complicated. First, there can be a number of people who have access to the cash, from the time of receipt to the deposit. Second, deficient internal controls can often be the culprit and hinder an investigation.

Having adequate internal controls, involving many volunteers and instituting a financial oversight committee are all invaluable in mitigating the theft of cash. Proactive steps are critical in preserving the revenue stream in small nonprofit organizations. Our team of experienced professionals can help your organization establish effective internal controls.

Do you have questions about preventing or investigating fraud or want more information about matters relating to Litigation Support? Contact Frank Suponcic at 440-449-6800 or email Frank.

 
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