Nonprofit Advisor L
U H Y LLP C e r t i f i e d P u b l i c A c c o u n t a n t s
6851 Oak Hall Lane Suite 300
A Cautionary Tale
Fraud and the Not-For-Profit
by Deborah Crown, Senior Manager
“
O h, everyone
here at ABC
NotForProfit is hon-
est ... They all believe
in the mission of this
organization and
would never steal ...
Most of the employ-
ees have been here for years.”
As an auditor, these are the types of
comments I get when I try to discuss
internal controls and the risk of fraud
in a not-for-profit organization.
Confused about why they need
internal controls, many of my clients
feel that they know their staff very
well and believe that no one internal
would ever steal from their organiza-
tion. I tell them that all it takes is a
major medical bill, a spouse’s job
loss, college bills or mortgage inter-
est rate increases to create incentives
to commit fraud. A person could be
the best employee ever with a long
track record of commitment and reli-
ability, but if there are serious finan-
cial pressures in their lives, then they
are going to be preoccupied with try-
ing to solve that problem.
This preoccupation could result in a
distracted work ethic, but, and more
importantly, it could also lead to tak-
ing a “little bit here, a little bit there”
UHY LLP brings specialists in nonprofit solutions in accounting and tax.
Columbia, MD 21045 410-423-4800
of the organization’s funds. And,
over time, “a little bit here, a little bit
there” can become catastrophic.
Experts say that trusted employees are
the most likely to actually perpetrate a
fraud because they know the organi-
zation so well and because the trust
level they have is so high. It’s not
uncommon, after discovering inter-
nal theft, to hear the thief described
as a good friend, as someone very
well-liked and as one indispensable
to the organization.
Well, let me tell you a cautionary
tale. This is an actual case of embez-
zlement that I read about in a
regional newspaper.
A local IT consulting firm found itself
in a tough situation. With cash flow
down significantly, the owners were
forced to lay off 10 long-time employ-
ees, obtain bank loans and even con-
sider filing for bankruptcy. During
this time the company’s accountant
helped with the loan applications,
said good-bye to co-workers laid off
and watched as the company
declined. All the while he was
embezzling more than $1.1 million!
How could this
have happened?
This well-liked, competent account-
continued on page 2
July 2010
Vol. 3 • No. 4
L
Fax 410-381-5538 www.uhyllp-us.com
Don’t let this
one slip under
your radar
403(b) DOL Audits
I t may seem like ages ago, but start-
ing back in 2009, new Department
of Labor (DOL) rules subjected
403(b) plans to a possible audit.
Just a reminder, you should check
with your retirement plan advisor
to ensure that you are in compli-
ance with the DOL rules. As you
well know, compliance, documen-
tation and audits often rest on
small but significant changes you
do inside your organization’s
accounting systems.
We can help you determine whether
your organization requires an audit
for your 2009 403(b) plan. And we
can usually do so in a telephone
conversation. Please contact Jim
Peacock at 410-423-4800 if you want
help understanding where your
organization sits with this issue.
PREFER TO GET YOUR
NEWS DIGITALLY?
Sign up to receive our newsletter
through email. Just email Kathy
at koconnell@uhy-us.com, and
she’ll take care of the rest.
 July 2010
Vol. 3 • No. 4

A Cautionary Tale person preparing the bank recon- making the rules is only the first
ciliation receive the unopened step. The controls must be imple-
continued from page 1
bank statement and review the mented and monitored to ensure
ant was writing checks to himself for transactions? that the controls are effective. It
amounts between $2,500 and $3,900. sounds like a lot of unnecessary sys-
To cover this he was disguising the • Are the internal profit and loss
tems to install when you already
payments as health insurance benefit statements reviewed by someone
trust your employees, but the fact is,
fund payments. Then he was remov- other than the accountant to see if
you really don’t know them that
ing pages from the bank statements there are unusual or unexplained
well. More importantly, this isn’t
that showed the checks he had writ- expense overruns?
your money. It belongs to the organ-
ten to himself. He also created thou-
• Does management establish a ization, and you have the responsi-
sands of phony computerized
budget for the year and then ana- bility to make sure that the funds are
accounting entries to indicate money
lyze on a regular basis actual managed appropriately.
was being paid to the health insur-
ance carrier. By 2006, he had stolen results to the budget expectations? Some of these systems are easy to
over $300,000 in small increments • Does the accountant, or other install. Others, you might need help
that were hard to detect individually. members of the accounting depart- to implement. We’re here to help if
He continued to steal as his fellow ment, take annual vacations? And you need it. And trust me: we’d much
employees were being laid off. As rather help you set up internal con-
are their duties performed by oth-
they delved into their savings and trols than help you dig out of the mess
ers during their absence?
retirement accounts to stay afloat, he internal theft can create.
was spending hundreds of thou- • Is more than one person involved
sands of dollars on home renova- in preparing payroll and remitting
tions, cars and vacations. payroll taxes? WE HAVE YOUR
It also turns out he had stolen from • Are there two signatures required
FINANCIAL SOLUTIONS
his last employer, too. They had on checks and wire transfers over
made a deal with him that if he UHY has a full staff of account-
a reasonable dollar amount? ing professionals who can pro-
repaid the stolen funds, they would
not press charges. As a result, he • Are checks received in the mail vide excellent support to your
was able to get another job because immediately endorsed by the per- accounting department. If you
the new employer knew nothing son who opens the mail? need to supplement your staff
about his past theft. with accounting clerks, book-
• After the checks are endorsed, is keepers or experienced CPAs,
Why didn’t anyone catch on access to the checks limited to spe- just call us and we’ll help.
to the theft? cific accounting personnel only? We also provide consultation
• Are the endorsed checks taken to services, design of internal
Since we don’t know what specific
the bank immediately by someone controls, operating procedures
controls the company had in place,
we can only speculate as to why, other than the person reconciling and accounting systems.
but here are examples of some con- the bank account?
trols that might have helped stop
the fraud, or at least let manage- • Is the check stock held in a secure
ment discover the theft sooner. Ask location at all times and the
yourself — sequence checked periodically?

Are these controls in place There are many more of these types
of questions management should
in your organization?
ask when determining if internal
• Does someone other than the controls are sufficient. In addition,

The statements contained herein are provided for informational purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal,
state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken
or assumed to constitute legal advice of any nature, for which advice it is recommended that you consult your own legal counselors or professionals.
UHY Advisors, Inc., provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of “UHY Advisors.” UHY Advisors, Inc.,
and its subsidiary entities offer services from offices across the United States. UHY Advisors, Inc., and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent
CPA firm that performs attest services. UHY Advisors, Inc., and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited.