Preventing Fraud: It's More than Adequate Financial Controls
By: John T. Murdock, President, Greek Resource Services, Inc.
There has been a good bit of press recently concerning financial fraud committed by alumni volunteers of fraternities and sororities. Two high profile cases involve volunteers of Chi Omega and Gamma Phi Beta who have pled guilty to stealing more than $1.5 Million from their organizations. Both perpetrators are currently awaiting sentencing.
These cases have resulted in new requirements for clients of at least one insurance broker covering the claims. The new requirements include: 1) House Corporation Boards must have at least two board members. 2) Dual control over bank and vendor accounts. 3) Appropriate oversight of budgets and spending plans. 4) Adequate documentation of decision making during financial management. All of these new requirements are good advice for every non-profit board, but is it enough?
My firm worked with Gamma Phi Beta House Corporation since its inception in 1988. The board president had been in her office for 6 years. We talked with her several times a month, sometimes almost daily. In the planning for their new $14 Million building on the campus of The University of Alabama, we met countless times to review business plans, construction plans and budgets and even assisted with the oversight of the construction of the new building. We knew our client or so we thought.
On the morning of April 1, 2015 I received a call from a bank security officer from an obscure bank in Raleigh, NC. We didn’t have clients or bank accounts in Raleigh at the time and her phone call made no sense to me. She said they had some money that belonged to our client and she was returning it. Bank security officers are extraordinarily secretive and she offered virtually no information. However on a subsequent call she said “we can’t bank this customer any longer”. I serve on the board of a local community bank and I knew immediately what that meant – either someone had committed fraud or was suspected of doing so.
GRS is a financial management firm. We have ‘adequate internal controls’ in place. There are many people who touch each transaction and we keep good separation of duties between the staff. Essentially all of the fraudulent invoices were approved by two members of the local HCB. Even our internal controls did not detect the elaborate scheme, perpetrated by a determined criminal who had gained the trust of her local organization.
So what can you do to avoid this situation? The sad truth is you can’t fully protect yourself against criminal activity. This person went to great lengths to defraud her sorority. Someone who is determined to steal from your organization will find a way to do so.
First, the recommendations mentioned above are a good first start and I would suggest these as basic requirements. Dual signatures on bank accounts are not enough. Many people will simply pre-sign checks to meet the requirement or get around it in another way. Additionally, most banks don’t offer dual signatures or don’t check signatures closely anyway.
We suggest your organization adopt very strict guidelines for reimbursement of expenses incurred by members of your board or organization. Under no circumstances should the organization allow board members to charge items on their personal credit cards simply to take advantage of credit card loyalty programs or ‘points’. Original credit card receipts should be submitted for reimbursement along with a copy of the credit card statement to check for accuracy.
We also recommend creating detailed travel policies including the amount of reimbursement allowed for flights, rental cars, hotels, mileage, meals, alcohol, etc. Be sure to include the reimbursable service level allowed where choices are available. i.e. economy vs. first class.
Detailed spending plans should be voted on by the board of directors in advance of each year. Material changes to the plan should also be voted on based on requirements of your organizational by-laws and policies. Reputable vendors should be used when purchasing furniture, equipment and performing maintenance.
In addition to continuity, financial service firms such as ours provide a valuable service in protecting the assets of our clients. We went the extra mile in managing the situation when it was discovered. We contacted Federal authorities, engaged the services of a local CPA firm to perform a special audit of the books and records, and notified all the pertinent parties. As far as we know, our client recovered all of the funds that were misappropriated which isn’t normally the case. However, you cannot simply drop off the checkbooks and hope for the best. You must remain involved in the management of your organization to ensure its success and protect the assets of your organization for future generations.
Source: RPMA News | Fall 2016, Volume 40