How Could This Happen to our Nonprofit? – Fraud Protection

If you Google the phrase “nonprofit fraud prevention”, you will get thousands of articles and presentations, primarily from the accounting world, discussing the far too often occurrence of fraud or embezzlement in nonprofits of all sizes.  These articles are full of excellent suggestions on how to prevent fraud, embezzlement, or theft by valued employees, yet there is no indication that there is any decline in the amount of fraud and embezzlement in the nonprofit world.  

While much of this type of fraud takes place in small nonprofits, with annual receipts of less $100,000.00, by no means are the examples limited to such small entities.  For example according to an article published at Bloomberg on August 9, 2011, http://www.bloomberg.com/news/print/2011-08-09/jpmorgan-chase-sued-by-ellis-institute-over-money-transfers.html, the chairman of the Manhattan Chamber of Commerce resigned on August 9 amid allegations that he stole $2.5-million from an unrelated nonprofit organization whose board he headed.  A lawsuit filed in federal court Tuesday by the Albert Ellis Institute, a psychotherapy charity, against JP Morgan Chase, alleges Jeffrey Bernstein shifted funds of the Institute into bank accounts he owns or controls while serving as director of administration of the Institute. Bernstein was appointed director of administration in early 2010 after serving for 3 1/2 years as president of the Institute’s board of trustees.  Bernstein had told the Institute that he had closed a former operating account with JP Morgan Chase, right after he started as director of administration.  Approximately one year later the Institute discovered the account had not been closed.  The lawsuit alleges that Bernstein misappropriated the funds and used them for personal benefit.  Bernstein had previously resigned from the Institute.

While the Bloomberg article does not discuss any specifics of what took place, it certainly intimates a glaring lack of controls, where one employee, albeit the former chair of the board, alone had the responsibility to close an operating account. 

 Some questions to ponder:

•  Did the board itself, its audit or any special committee or any other responsible employees make any effort to confirm the closing of the JP Morgan account?
• What sort of evidence was requested to prove the funds from the JP Morgan Chase account had been transferred to other accounts at the time of the alleged closing of the account?
• Was an audit or other special committee of the board charged to review these transactions on a monthly basis?
• Had the board worked with its regular or perhaps special forensic accountants to make sure adequate antifraud controls and policies were in place?
• Did the board have an antifraud policy, either by itself or as part of an overall ethical policy or code of conduct?
• As a nonprofit board member; how do you oversee responsibility to assure that fraud, embezzlement and misappropriation of funds do not occur within the nonprofit you serve? 
• What actions should the board and each individual director take to assure that all reasonable steps are being taken to prevent fraud and misappropriation within the nonprofit entity?.

I welcome your thoughts and comments here or email: lewgrafman@bloommetz.com