Editors’ Note: One of our favorite publications is the Grassroots Fundraising Journal . We read the following article in the March / April issue of GFJ and found it to be just the kind of article our readers appreciate. We have reprinted the article in its entirety, if you like it as much we do, you may want to subscribe. Thanks to the folks at GFJ and to the author for allowing us to reprint this.
Original publisher’s note: I am a long-time and unabashed admirer of the Northern Plains Resource Council and by extension, of its staff, including the author of this article, Executive Director Teresa Erickson. When Teresa called to tell me about the embezzlement she describes in this article, like many of the people Teresa talked to, I immediately reassured her that these things happen in the best-run organizations, that this crime was not her fault, and that it did not reflect badly on the organization.
Nonprofits and small businesses operate on a high level of trust among staff, along with a number of common sense financial controls. Most of the time the combination of trust and controls works well. This is the story of a time when the controls didn’t work and the trust was betrayed.
What often doesn’t happen when a crime is committed at a nonprofit is the willingness that Teresa demonstrates here to tell other nonprofits about what happened so they can perhaps save themselves from having to learn the hard way. So many organizations add to the burden of the crime their own silent embarrassment. Teresa shows us that this is neither necessary nor helpful.
For me, a key lesson of this story is that the pressure nonprofits face from donors and funders to keep overhead costs down is what often allows a clever thief to operate for months and sometimes years.— Kim Klein
The test of an organization’s mettle is not during the good times. Rather, it is when facing great challenges—and last year our mettle was tested. I am the Staff Director of a Montana nonprofit organization, Northern Plains Resource Council. For the past 33 years, we have organized citizens to protect water quality, family farming and ranching, and our quality of life. In this article I share our experience of discovering and surviving a terrible embezzlement, explain how we responded to it and as a result, how we became stronger for it. I certainly hope that no other nonprofit will have to go through such a painful experience and that the insights we learned might help others avoid having to do so.
In the first few days of January 2004, our organization discovered, by accident, that our trusted bookkeeper had been embezzling money from us for three years. Our discovery of the theft was a huge blow and a terrible shock to all of us on many levels. First, the thieving might have gone on much longer except for the fluke discovery; second, the extent of the loss was huge; and third, and perhaps most devastating, there was a deep sense of betrayal from someone with whom we had worked side-by-side for three years. This woman, a sixty-something grandmother, had seemed to be a true supporter: she donated items to our silent auctions, she even taught some of our employees how to knit and crochet. Unknown to us, she was also addicted to gambling.
Struggling to get past the shock, we began to work to simultaneously to determine the scope of the theft, put safeguards in place against future occurrences, and recover from the circumstances with as much of our work intact as possible.
At a special meeting, our board adopted a strategy and took on many of the tasks to ensure our safe recovery. In essence, the strategy involved the following actions:
- Immediately instituting internal controls to prevent embezzlement from ever happening again;
- contracting with a CPA firm to conduct an audit;
- assembling a team of volunteers to review and reconcile all bank statements during the period of the embezzlement;
- implementing a complete recovery plan.
The recovery plan needed to help us ensure that we could continue operating while dealing with the realities of the embezzlement. The plan set out the following steps:
- Delay or reduce non-essential expenditures so we could continue with issue work.
- Communicate to our membership, leadership, donors, and allies what happened, that the organization was going to be okay, and that we have protected ourselves from this happening again.
- Institute internal and external controls.
- Step up grassroots fundraising efforts.
- Seek restitution through our bonding insurance policy, a civil suit against the embezzler, and negotiations with our bank.
The personal dedication of the Northern Plains Resource Council’s board and staff made the difference in how we responded to the embezzlement.
Although we found out as we went along that embezzlement is far more common than we realized, we also learned which of our own practices had left us open to it.
First, like many nonprofits, we feel a tremendous pressure to get the most for our donors’ dollars. We constantly worked to reduce overhead and administrative costs in order to put more money into program work. When it came to financial controls, spending less money was not a good strategy.
Second, for thirty years bookkeeping had not been a problem at Northern Plains. Like many nonprofits, we had traditionally operated at a high level of trust. We did have internal controls in place—our bookkeeper didn’t handle money, couldn’t sign checks, and couldn’t transfer funds. Even with these safeguards, however, she managed to carry out the embezzlement by forging checks, falsifying important financial documents, and generally creating a maze of systems to cover her tracks. We found that we did not have enough independent verification of the general ledger and financial statements.
During the time we were being embezzled, we had two financial reviews done by two independent CPA firms, one in 2000 and one in 2002. Neither detected the theft because of the limited nature of a financial review as opposed to a full audit. We chose financial reviews over audits because of the large difference in cost. This choice turned out to be pennywise and pound foolish. We thought financial reviews would detect a problem, but nothing short of a thorough audit would have caught this well-disguised embezzlement.
And while it wasn’t much comfort, we learned from the County Attorney fraud specialist that as many as 50 percent of nonprofit organizations, small businesses, and churches in Montana are vulnerable to the kind of theft we suffered. Our own experiences bore this out: After reporting the theft to our membership and the public, several organizations that contacted us to find out how we did our books were employing similar bookkeeping methods to those that had left us at risk.
We were dismayed to discover in this process that embezzlement is actually rather common. We began to notice articles in the newspaper describing embezzlement at other nonprofits, including a church, a United Way chapter, a Girl Scouts affiliate, and small businesses. At one Montana nonprofit the embezzler even burned down a building in an attempt to destroy evidence of the crime.
As we made personal phone calls to major donors to inform them of the embezzlement, we were surprised when the great majority told us of their own experiences confronting fraud in their businesses and in other nonprofits with which they had been involved.
Implementing the Recovery Plan. Once we had the recovery plan outlined, we immediately set about implementing it. Many things had to be done virtually simultaneously: revising the budget, communicating with staff and supporters, instituting better internal and external controls, and ramping up our fundraising.
Tightening Our Belt. We first carefully created, adjusted, and monitored a cash flow projection. This became the guide that told us when we could spend, that let donors know when our need was greatest, and that helped us through the ebbs and flows of the cash inflow and outflow.
We were determined to continue our work.
Northern Plains has a long history of getting a lot of impact out of every dollar. We are skilled and experienced at being frugal. After reviewing the 2004 budget carefully, we found several areas that could be trimmed without materially affecting our work.
Rather than cut program, we made changes that included producing our publications in black and white instead of full color, reducing the number of newsletters we produced, and asking our contract attorneys and expert witnesses to work pro bono or for greatly reduced fees during through this extraordinary time.
We are proud that not one of our 15 staff positions was cut, our field travel budget remained intact, and we continued to fund all programs and affiliates. We were able to move forward without making draconian cuts because of the diversity of our fundraising: we had lots of reliable membership money coming in every month, we had several foundation grants in the pipeline, and we had time left on a couple of two-year grants. Moreover, we had slowly built up a reserve fund over the years, which we decided to spend to keep program and staff going. We looked carefully at our cash flow and saw that if we really tightened our belts and dramatically stepped up our fundraising, we would be able to raise our budget—though not restore our cash reserve—over the next year.
Telling Our Members. Telling our members was an immediate and high priority, as well as a huge task that none of us looked forward to. Here are the steps we took:
- We held a staff meeting to announce the news to the staff. We assured them that we had looked at our financial situation and would do everything we could to prevent layoffs. We asked them to continue on with their work. We outlined with them how to talk about the embezzlement with our members and the public.
- We called all the board and committee members and explained what happened.
- Within 10 days of discovering the embezzlement we sent a letter to our entire membership–we wanted them to hear it from us before they read about it in the paper.
- We made personal phone calls to key community leaders, major dono