Stopping Embezzlement: Not REALLY That Difficult

Just about every day, our team clips yet another news report of a sports league losing thousands of dollars to embezzlement.  We started tracking this issue from the very beginning: the two largest youth sports nonprofits in our hometown had almost half a million dollars embezzled just over three years ago.  What saddens me more than the tragedy of stealing from kids is that most of these crimes are utterly preventable.  Heck, I’m amazed at how many embezzlers simply write checks to themselves.  How hard can that be to prevent?

A recent article suggested that nonprofits should alter their bylaws, conduct annual audits, and consult attorneys to secure their finances.  I’m all for making sure bylaws are in order, audits are an effective tool, and certainly attorneys need to be consulted at times.  But most nonprofits need months to change their bylaws, while audits and attorneys are costly and don’t provide day-to-day protection.  What nonprofits need are practical procedures that guide behavior and actively prevent corruption.

I recommend nonprofits look at three key issues as they consider improving their internal controls:

Budgeting & Authorizing: Every expenditure should be pre-approved in some way.  The Board should pass a budget each year that identifies how money will be spent.  As other needs arise during the year, the Board can approve new expenditures.  The Board can even delegate its authority to a committee, provided it receives reports on the expenditures made.  However an expenditure is eventually made, it should be anticipated in some way.  That makes unexpected transactions easier to spot.

Approving & Documenting Payment:  Paying any bill should start with an actual bill.  Almost everyone who likes to get paid is more than happy to submit an invoice to make that happen (if not, it’s a big red flag).  From there, online bill approval and payment services are widely available and provide a great way to have multiple people approve an invoice.  This is true even if those people are busy volunteers who rarely come in to the nonprofit’s offices. In short, it is both easy and inexpensive to conduct a formal review of each and every expense and to document that approval.

Oversight:  The Board is ultimately responsible for the finances of the organization, so it is fitting that the cycle ends back in the board room.  Hopefully, your Board is already receiving monthly financial reports.  If  it’s not already part of the package, I’d suggest adding a check register to the regular financial reports.  A simple list of all the payments,  including check number and budget category, provides a quick and easy check on suspicious spending.  Can you imagine how odd it would look for your Treasurer to have written a check to himself?  And how easy it should be to spot it?

Again, I think the recommendations made in the article referenced above are solid.  I think every organization should examine its bylaws.  Annual audits, if the organization can afford them, are a phenomenal way to root out corruption and, better yet, improve efficiency.  And there are certainly times when only an attorney’s advice will do.

But the suggestion that nonprofits should have to stomach massive costs and suffer time delays just to combat embezzlement is just flat wrong.  There are common sense actions that can be taken right away that will allow your nonprofit Board to spot the overwhelming majority of suspicious activity.  And, just as important, taking those actions will deter most of that activity before it even takes root.

For more information, visit the SportsOrganized.Com website, which hosts resources to help youth sports organizations pursue organizational excellence.  Or drop us a line at help@sportsorganized.com with any questions, comments or suggestions you might have.  We especially love to hear from organizations about best practices that work well.  Share your knowledge with others!