“The minute you think you've got it made, disaster is just around the corner.” - Joe Paterno

Keeping the Public’s Trust – How to Minimize the Risk of Fraud

Agenda

• Ripped from the Headlines!• Overview Of Fraud• Specific Nonprofit Challenges• Plan to Address

Tone at the Top Segregation of Duties Perception of Detection

• Plan to Sustain

April 22, 20232

Presenters

Daniel P. Healy, CPA Director - Operations & Controllership Genworth Foundation (Richmond, Virginia)

Ken Euwema Director – Member Financial Accountability United Way Worldwide (Alexandria, Virginia)

April 22, 20233

April 22, 20234

Ripped from the headlinesThe stories you are about to hear are real…

hopefully they are not about you

The “Great Unpleasantness” – United Way of America

April 22, 20235

April 22, 20236

Capital Area United Way (Lansing, Michigan)

April 22, 20237

What were the warning signs? • Campaigns were good but yet bills were not being paid

– Board asked long time CFO to determine why cash flow was bad but she couldn’t give a good explanation

– CFO and CEO agreed that it was time for the CFO to “retire”

– New CFO (a former auditor) was directed to “get to the bottom” of the cash flow situation as her first priority

• Bank Reconciliation seemed like the obvious place to start– Found no reconciliations except those right around audit time, but

those seemed to balance– Requested from the bank the missing bank statements for past

12 months and immediately found:Checks clearing the bank that were not on the check registerMonthly deposit journal entry didn’t tie to sum of individual

deposit slips

April 22, 20238

• The plot thickens– Found canceled checks but unrecorded checks

were conspicuously absent– Requested copies of missing checks from the bank

• The truth comes out– All checks for odd amounts under the audit testing threshold of $10,000– All checks made out to CFO (with variations on name) or horse related

entities– CEO was supposed to be looking through bank statement and canceled

checks but CEO “trusted” her and didn’t follow control policy– CFO had full control over General Ledger entries, Accounts Payable

entries, Check stock, Deposits, and Bank Reconciliation– Only other control was that checks over $5,000 needed two signatures

but, all signatures on checks were forged

April 22, 20239

• How bad was it?– Approximately $1.88 million misappropriated over 7 years… the largest

theft from a non-profit ever to that date– United Way only insured for $600,000 of loss.– Former CFO sentenced to 4 years in prison and to make restitution,

(including $1,000 per day in boarding costs incurred by the United Way while trying to sell off the horses)

• “She just loved horses”– Owned full or partial interest in 72 thoroughbreds– Owned a 100 acre ranch with barn big enough to

care for 26 horses– Attorney said that “her perfect day would be one

where she could spend at least 8 hours in the barn with the horses”

April 22, 202310

April 22, 202311

A United Way “somewhere in the middle” of the USA…“Our campaigns are growing, how come we don’t

have any money?”

• Board was missing the “red flags”– Audit for 2005 took 13 months to complete– Finance Committee and Board rarely received financial reports

because admittedly “staff could not produce them”– Campaigns were growing but receivables were aging

• CEO deflected mounting problems – CFO always had excuses (software conversions & incompatibility, too busy with

day-to-day, etc.)– CEO blamed other UWs (withholding designations, slow

payments, etc.)

• Board insulated from agency complaints– Designations only paid out when agencies cried foul– Allocation payments delayed due to “missing paperwork”

April 22, 202312

• A changing of the guard– CEO resigns to “seek other leadership opportunities in the

community”– New CEO immediately sees the red flags, starts to

investigate, and reaches out to UWW for help

• A Grim looking situation– Board had to be lobbied hard to convince them that a Forensic Audit

would be needed to determine the extent of the problems– No substantial internal controls on campaign or general accounting

systems – Unsubstantiated pledges were frequent and write offs growing– Operating expenses increasing while cash flow decreasing– Estimated that the organization spent $900k more than it really took in

over a period of two years

April 22, 202313

• Cleaning house– Forensic Audit found “inconclusive evidence” of criminal activity by staff

but ethical problems abounded– Forensic Audit cites Board for lack of financial

oversight… Board Chair & Vice-Chair resign to help UW rebuild its reputation

– Summary of the Forensic Audit released to the public and UWW Public Relations team works with local PR consultant to manage media coverage (on the edge of one of the top 25 media markets)

– Story picked up only by local divisions of national media so far

– Community leaders and agencies supportive UW’s efforts to restore itself to financial viability

April 22, 202314

United Way of Central Maryland(Baltimore, Maryland)

April 22, 202315

• $400,000 stolen over 7 years by the Accounts Receivable Clerk• Not “Rocket Science”:

Small, unrecorded checking account Instead of closing the account, address changed

to home address Unexpected incoming checks deposited into

account

• Found only after clerk went to another employer and overdrew the account

• Auditor did not know about the account because its activity was never recorded on the organization’s books

April 22, 202316

Where did we fail?• Did not require at least two people to be present

when making changes to bank accounts• Did not require a log of all incoming checks and

reconciliation to deposit records• Auditor were not made aware of all organizational

accounts so that they could verify that approved changes were properly made

Staff and Board respond properly to situation:• Investigated quickly and thoroughly• Instituted stronger internal controls and implemented

them quickly• Coordinated public announcement of arrest and corrective actions

taken internally with UWW and legal authorities, in advance• Full transparency resulted in a focus by media/public on the

“shaming” the perpetrator rather than United Way

A United Way that is still investigating…“Where did all the construction money go?”

• A change in Leadership– New CEO hired and bookkeeper soon resigned– CEO discovered that audits had not been done for two years

and the records were a mess

• Investigation– New book keeper began reentering all transactions for prior two years and

started noticing some “odd” things– $300,000 that should have been in a separate account for the costs of the new

building construction was gone– What construction bills there were on file looked suspicious (15,000 feed of wire

for a 1,300 square foot office?)– Duplicate payroll checks issued to the bookkeeper– Weekly checks written to a grocery store chain, all for the same amount, used to

purchase gift cards but no record of a program to give out gift cards to community members in need

April 22, 202317

• In the absence of a CEO:o The bookkeeper convinced the board that audits were too costly and

not necessaryo The bookkeeper was left all alone with all the money and no oversighto Board simply was too small and not at all focused on their fiduciary

responsibility

• With the oversight of UWW membership staff:o Board hired a forensic auditor to build a case for the authorities but no

arrest made yeto Board re-engaged with financial statement auditor to do missing year

audits and corroborate the forensic auditor’s findingso UW disclosed misappropriation of assets on their

amended IRS Forms 990o Board considering whether or not to proceed with

a civil case against the former bookkeeper

April 22, 202318

Lessons LearnedThe Board must exercise their “duty of care”

by asking questions and having a mission that aligns with the rest of the UW network

The Board needs to pay attention to the financial indicators

The Board needs to hold Senior Management “accountable” for protecting the organization’s assets rather than “trust” them, because they have been there a long time and have always seemed “as honest as the day is long”

Be concerned when someone can’t explain why cash is in short supply

Control Policies don’t do any good if no one checks to see if they are being followed

When the “S#!@ hits the fan” (and sooner or later it will), call UWW for help in managing the situation

April 22, 202319

April 22, 202320

Dan’s slides start here…

April 22, 202321

Thank you!Dan HealyW 804-484-3915C 804-399-0445