Sunday, February 17, 2013

5 Steps to Protect Associations from Embezzlers



Why is it embezzlement doesn't go away?

I wrote this original blog back in May ... when my golfing partner learned I formerly managed associations, he said his wife – a co-founder of a nonprofit for women – had just received an email saying that the organization’s financial manager had embezzled about $150,000 from the organization. Then, he said, “You just can’t trust anyone can you?” 

Now another local story embezzlement story surfaced and one of the cases (below) has ended in jail time.

Claims Adjuster Pleads Guilty to Fraud

Because of his years of experience, Brian Michael Behl had authority to approve insurance claims under $10,000 without the prior approval of a manager. Between March 2010 and September 20, 2012, Behl falsified damage claims and caused Allianz to make substantial monetary payments to a fictitious salvage company. In furtherance of the scheme, Behl opened a bank account in the name of a fictitious company called B & M Salvage Repair. From his office in O'Fallon, Behl re-opened old Allianz accounts that had previously been closed and made false damage claims on those accounts. In all, Behl fraudulently diverted more than $400,000 to himself over the course of the scheme.

It reminded me of two other embezzlement stories: 
Nonprofit executive pleads guilty in embezzlement case
After the group's director of finance separated from the non-profit, Rice, originally from LaGrange, took over financial responsibilities for four years. During that time, Rice wrote almost $300,000 in checks to herself -- in addition to her allotted payroll amounts. She also wrote several checks to her medical association Visa card to pay for personal expenses. She was able to hide these payments from the board of directors and accountants by making fictitious entries in the company's bookkeeping and forging several co-signatures on checks.

Federal Prosecutors Say Small Town Bookkeeper Embezzles $30 million
Federal prosecutors say Rita Crundwell, 58, who handled all of the city's finances, embezzled a staggering $30 million in public funds from Dixon. In a criminal complaint, they say they've obtained bank records that document each step she took in shifting taxes and other public funds through four city bank accounts before hiding them in a fifth account no one else knew about. Still, they are trying to figure out how she kept the scheme a secret, even from outside auditors, for at least six years. It unraveled only when a co-worker filling in for Crundwell while she was on an extended vacation stumbled upon the secret bank account. 

Here's a New York Daily News update regarding the Crundwell case:
Dixon, Ill. ex-comptroller Rita Crundwell sentenced to 20 years for stealing $53 million in public funds

What’s an association to do? 

How can we protect our financial assets from embezzlement? Especially if we are a “small” association with very few staff?

I asked Mary Jane Pieroni, CPA, ACFE, a Certified Fraud Examiner, and audit manager with Huber, Ring, Helm & Co. here in St. Louis, to give us key steps to avoid and/or detect embezzlement.

Here are her five suggestions: 

  1. Organizations should establish and enforce good segregation of duties. No one person should control all aspects of any transaction. For example, the person responsible for writing and recording checks should not be able to sign checks and should not receive the bank statement before it has been reviewed by a manager (or volunteer leader if you are a “small staff association”) without access to the accounting records. Periodically, the organization may want to have an outside public accountant review controls and make suggestions for improvement. 
  2. Audits won’t uncover all frauds: Bernie Madoff’s firm was audited every year. However, having some type of independent annual check-up increases employees’ perception that theft will be detected. 
  3. Every organization should consider having an anonymous reporting method available to its employees, customers and vendors. Approximately 26 percent of frauds are initially discovered through information provided by a tip. Studies show that many frauds would have been detected much earlier if employees had known how to report their suspicions. In one recent case, a controller stole more than $31 million over four years; her fellow employees were uncomfortable with some of her procedures, but did not know with whom to discuss their concerns. 
  4. Management and the Board of Directors should be aware of the warning signs of employee embezzlement and immediately investigate suspicious behavior. Not every employee who appears to live more lavishly than their pay check would support is an embezzler; however, driving expensive cars or owning multiple homes when earning a small salary can be a red flag for embezzlement. For example, Rita Crundwell’s expensive hobby of breeding quarter horses while working as a small-town controller certainly seems suspicious in retrospect. 
  5. Most importantly, however, no fraud prevention techniques will help to deter fraud without the proper tone at the top. The largest frauds occur in organizations in which upper management is either unethical or careless in the performance of their duties. When management does not hold itself to the highest ethical standard, employees will invariably adopt a lower standard for themselves. 
Please take time now to establish systems that will protect the funds of your organization … when done properly, this also helps you sleep at night!

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