The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern. Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General.
Only two factors are needed for embezzlement to occur: 1) a volunteer or employee with a motive and opportunity to steal; and 2) loose or nonexistent financial controls within the organization. Of course, organizations cannot prevent trusted people with financial motives from thinking about embezzlement. But organizations, even very small ones, can adopt simple financial procedures that discourage would-be embezzlers by removing temptations and increasing the likelihood of detection. An added benefit of adopting effective financial controls is that they protect innocent employees and volunteers by shielding them from false suspicion if funds are found missing. Below are a few simple financial controls any organization can put in place.
First, in order to minimize the chance of embezzlement, establish a culture of transparency and responsibility. A board of directors has a fiduciary duty to the organization and a responsibility to diligently manage its finances. Therefore, directors should actively monitor the organization's books and records. Financial records should be kept current, so that they are ready to be viewed at any time. A red flag should go up if officers or employees will not share the financial records or supporting documentation, refuse to answer questions about financial transactions, or require a significant period of advance notice before allowing the financial records to be viewed.
Next, an organization should establish written internal financial policies and practice them on a consistent basis. Everyone handling money should be accountable and know exactly what is expected of them. Examples of effective procedures include using numbered tickets for events and raffles, maintaining a current inventory of goods and equipment, keeping supporting documentation for all payments or reimbursements, and giving duplicate receipts from a numbered book to donors or buyers of goods and services (whether requested or not). Remember that embezzlement may include not only the theft of money, but also the theft of goods or services. For this reason, item descriptions in inventory records and in receipts should be sufficiently detailed to allow the item to be identified using these records alone. Receipts pertaining to sales or donations should also include the name or employee number of the member of the organization who conducts the transaction. Further, when someone handling money passes it on to another, it should be counted and both persons should have a signed record of the amount that changed hands.
For bank accounts, organizations should adopt and maintain a system of checks and balances. At a minimum, a person other than the person writing checks and making deposits should regularly receive, review, and reconcile the bank statements and promptly ask questions if any irregularities appear. In addition, if feasible, requiring two signatures for all checks is a valuable standard practice (provided, of course, that checks are never pre-signed). When using electronic or computerized recordkeeping systems, each user should have a unique username and password, and the password should be known only to the user.
Security means considering where your data lives and what kinds of security protections are in place. Cloud technology allows outsourced bookkeepers to access your data without storing it on their desktops. If you outsource bookkeeping, ask how the provider stores your records and how it controls access to your data. If you maintain paper or hard copy business records, consider storing these records under lock and key; only key holders should be permitted to access the records.
Finally, even with proper safeguards in place, embezzlement may still occur. In such an instance, the board should take appropriate steps to recover diverted funds and report the theft to authorities, and effective safeguards should assist an organization in identifying possible perpetrators and relevant time periods. It may be necessary, or at least helpful, to retain the services of a forensic accountant to identify the amount of the total loss and the time period for the embezzlement. This audit would assist the board and law enforcement. Failing to take action in the event of missing funds or property may amount to a breach of directors' fiduciary obligation to protect and preserve an organization's assets.
This is certainly not an exhaustive list of good financial practices, but adopting procedures appropriate for your organization will help minimize the risk of embezzlement. While it is often inconvenient to follow standard procedures, being consistent in responsible practices will protect your trusted volunteers or employees and give the public a positive view of your organization as a transparent and capable entity.
For general consumer questions or to file a complaint, you may reach the Attorney General's Consumer Protection Division at:Consumer Protection Division