Don’t Cry “Wolf!” But Take Action What To Do if an Employee is Suspected of Fraud

It can happen to any organization: Someone calls your whistleblower hotline and says she has information incriminating a member of your staff in a fraudulent act. Or, one of your bookkeepers contacts the board chairman to tell her that he thinks the executive director is embezzling the organization’s funds.

Unfortunately, fraud and other financial misdeeds happen regularly at businesses — and nonprofits — across the nation. The question is, what will your not-for-profit do if an employee is suspected of fraud?

Proceed quickly, but carefully

What you don’t want to do when you first suspect wrongdoing is throw your arms in the air, yell “Fraud!” and go into panic mode. What you do want to do is think rationally and take fast, but careful, actions.

Consult your fraud policy. Your nonprofit should have a policy that will guide you in handling the suspected fraud. The course of action will, of course, depend on the details: who’s involved, what type of fraud may have taken place, and any other particulars that can shed light on the situation.

Involve the board. The chief executive should immediately notify the board of the suspected theft or embezzlement, and together they should decide how to proceed. Fraud can never be ignored — part of the board’s fiduciary duty is to ensure the financial health of the organization. Contacting the media or answering their questions is also best handled by the board. Additionally, your not-for-profit whistleblower policy will likely require an investigation. The board may decide to do a preliminary investigation into the allegations before launching a full investigation.

Seek legal counsel. Contact your attorney right away. And consider retaining an employment attorney if a full investigation is launched — the employee’s rights must be taken into consideration throughout the investigation and subsequent disposition of the matter.

Preserve the evidence. Documentation will be key during the investigation. One of the first things your board should do is preserve the evidence — for example, by making copies of accounting or bookkeeping records as of the date the suspected fraud was discovered. Your CPA can assist you in this process.

Contact the police. At some point in the investigation — often when the suspected fraud is first substantiated — you’ll need to file a police report. Insurance companies frequently require this step if you’re going to later file a claim for the loss.

Consider getting further expertise. If the fraud is complex or longstanding — for example, in a complicated embezzlement scheme — the board should consider hiring a certified fraud examiner or forensic accountant to determine how much has been stolen.

Confront the suspect. Often it’s the board chair, along with a second leader of the organization, who will confront the alleged fraudster with initial proof of wrongdoing. It’s important to hear, and document, the suspected employee’s side of the story.

Investigate carefully. Was the fraud discovered by the nonprofit’s executive director? If so, he or she — or the top human resources manager — is the likely person to lead the investigation. But the board will need to handle the investigation if the suspected employee is the executive director. Whoever is leading the investigation must work in the best interest of the nonprofit while demonstrating “informed and independent” judgment. An experienced employment attorney will be able to offer guidance through the various investigative stages.

Report and prosecute. Your organization owes it to its donors, staff and other constituents to report the suspected fraud and keep them abreast of the investigation. The board, under advisement from your attorney, will decide whether to prosecute the employee who violated your trust. The IRS also requires an explanation on Form 990 of any “significant diversion” of the organization’s assets amounting to more than $250,000 or 5% of assets or revenues.

Learn from your mistakes. The board and top management should get to the root of what enabled the fraud to take place. Where were the blind spots? What new controls should be initiated?

A touchy subject

Fraud is a touchy subject at nonprofits, which typically have “identities” linked to good deeds and intentions. But if fraud rears its ugly head at your organization, be prepared to show your community it won’t be tolerated.

Sidebar: When it comes to fraud, did you know . . . ?

The recently released Association of Certified Fraud Examiners’ 2014 Report to the Nations on Occupational Fraud and Abuse provides insight into the nature and impact of frauds committed in the past biennial period:

Median loss. The median loss caused by frauds in the study was $145,000. Additionally, 22% of the cases involved losses of at least $1 million. The smallest organizations tended to suffer disproportionately large losses.

Median duration. A length of 18 months was the median amount of time from when the fraud was initiated until it was detected.

Detection methods. More than 40% of all cases were detected by a tip. That’s more than double the rate of any other detection method. And organizations with hotlines were much more likely to catch fraud by a tip.

© 2014