Lessons Learned: With Fraud, Nonprofits Need to Follow the Money

As an organization grows, owners or management reach a point where certain operational tasks, even some that are sensitive and important, must be delegated to other employees - employees they trust - including tasks involving access to or control of money. Such is the case with a former headmaster of a Christian Academy who pled guilty to embezzling $9 million from the school and church and was sentenced to 18 months in jail.

After joining the church in 1991, the future headmaster became volunteer treasurer and was given control over all church accounts. By 1996 he was a paid employee of the church. He quickly moved up through the ranks, eventually becoming headmaster of the Academy. Although he outwardly appeared to live a modest faith-based life in a humble trailer home, prosecutors found evidence that he used church funds to build at least two homes. One of the homes was a comfortable 3,140 square feet and the other was an even larger lake house. According to investigators, in order to fund building the lake house, he made all employees take a five percent pay cut and claimed it was due to tough economic conditions.

Court filings allege that in order to hide his theft, the headmaster opened approximately 29 different checking accounts, obtained 26 credit cards, seven loans and created nine limited liability companies. Using those mechanisms, he was able to fund purchases of real estate, gifts for family and friends, watercraft, gold/silver coins, exotic vacations, and live a generally luxurious lifestyle.

The headmaster was undoubtedly a trusted individual, with a tenure of over 20 years. As history demonstrates, inadequate oversight is the leading contributor to opportunity, a necessary element of the Fraud Triangle: financial pressures, leading to victimization of a control weakness/breakdown or other opportunity for asset misappropriation, which is then rationalized by the perpetrator.

This case is a classic example of fraud by a trusted employee gone rogue. The Christian Academy should have adhered to standard internal controls - the checks and balances designed to safeguard resources and provide reasonable assurance that those assets are used as authorized by management, consistent with the organization’s purpose and financial goals.

What are some of the specific lessons other organizations can learn from this case? What should the Christian Academy have done differently to help prevent or even detect this fraud before it became a $9 million embezzlement case? Possibilities include:

  • Rigid adherence to financial budgetary controls, including periodic and surprise reviews, with thorough follow up on negative variances.
  • Stricter controls on funds disbursed, which should always require proper approval by at least two individuals in positions of authority, and could include other controls such as no disbursements until presentation of 3rd party documentation of products received or services rendered.
  • The vetting of all vendors to be paid with organization funds, particularly those likely to receive large payments such as contractors on construction projects, which it appears the Christian Academy had undergone.
  • Internal or external risk management personnel conducting employee fitness and suitability assessments, which in this case would likely have detected a disconnect between the ostentatious lifestyle and assets of the headmaster in comparison with known sources of income.
  • Chief accountability personnel as an additional means of protecting an organization’s resources. In this combination church/school arrangement, such accountability may have been achieved by individuals with assigned responsibility to:
    1. Ensure prudent expenditure of church general giving,
    2. Oversee the uses of funds raised by the school (including endowment funds), and/or
    3. Monitor and evaluate the propriety and causes for any direct-funding of school deficits by the church that, in this instance, likely resulted solely from the magnitude of the asset.

These controls and procedures would have required some time, effort, and expense to implement and appropriately monitor. However, this outlay of money and resources would have paled in comparison to the $9 million cost of the fraud.

Want to know more about how to protect your organization from fraud? Or do you have a case of possible employee theft or embezzling that needs investigating? Contact Mike Rosten, CPA, CFE to set up a free consultation.

Sources:http://www.wsoctv.com/news/local/former-southlake-christian-headmaster-sentenced-after-embezzling-9-million/471667663 http://mediad.publicbroadcasting.net/p/wfae/files/parker_w_sentencing_press_release.pdf?_ga=2.183119855.830912475.1496865266-638625719.1496865266