Fraud: Like a Punch in the Face

Keely Thompson, a well-known D.C. professional boxer, had noble intentions a decade ago when he noticed a dramatic increase in gang-related violence in certain parts of the District of Columbia. Keely, through an initial $40,000 grant from a city-funded anti-gang program, opened a boxing and physical fitness center to provide a safe space and outlet for at-risk youth. Thompson had his eyes set on change, and he planned to use the money to help kids “get something out of life.” His resources for doing so were plentiful between 2004 and 2010, when the center received more than $1.5 million in city government and private grant funds.

On June 26, 2013, the Washington Post reported that Keely Thompson had pled guilty in federal court to charges of fraud. He admitted to diverting $200,000 in government and private grants meant for the Keely’s District Boxing and Youth Center, to pay for gambling on a cruise ship, concerts, clothing, expensive meals and speeding tickets. He currently faces anywhere from 33 months to 22 years in prison (depending on plea deals) when he is sentenced later this year.

Board Oversight

Keely Thompson’s story is an excellent example of occupational fraud committed in the not-forprofit workspace. Occupational fraud, which is defined by the Association of Certified Fraud Examiners (ACFE) as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets, is more common than you might realize and can have a potentially devastating impact for any organization involved. The ACFE 2012 Report to the Nations reported that 10% of all reported occupational fraud cases involve not-for-profit organizations, with a median loss of $100,000 per incident.

The goal of fraud prevention is not just a front-line manager’s responsibility, however. In fact, it is one of the ultimate responsibilities of the Board of Directors. In the Keely case mentioned above, it appears that there was very little (if any) Board oversight. This crime could have been prevented or caught earlier if the Board had made fraud prevention a priority in its three major areas of oversight: policy, planning, and fiscal management. A failure to do so caused heartbreak, financial loss and the closure of a potentially life-changing organization for many youths. As you think about your role as a director, it is critical to think about how policy, planning and fiscal management work together in your organization to create a healthy and fraud-free workspace.

Policy

Policy plays a large role in the prevention and deterrence of fraud, as does an effective ethics and compliance program. The board should constantly challenge management to ensure that the entity has implemented antifraud programs and internal controls designed to identify potential fraud. Additionally, the board should be cognizant of the organizational chart and its potential impact on internal controls.

For example, segregation of duties is a key ingredient in fraud prevention, and this applies to both employees and management. Open-door policies and anonymous whistleblower hotlines for staff and vendors are also an excellent way to allow people to safely voice concerns.

One of the most important concepts in deterring fraud is “tone at the top.” Tone at the top refers to the ethical atmosphere that is created by the organization’s leadership. The concept is that whatever ethical tone is set at the top (i.e., the Board of Directors) will trickle down to management and employees, creating a workplace that is not conducive to fraud, but rather filled with integrity and honesty.

Planning

An aspect of planning that is critical for all non-profit organizations is to develop a fraud response plan. Allegations or actual instances of fraud can literally destroy an organization, both in form and in reputation. Having a plan to deal with this situation is important because it proactively sets up a response system that can be implemented immediately if there is potential fraud or misconduct.

Although a fraud response plan will differ from organization to organization, confirming that fraud has been committed, engaging legal counsel, and having a solid communication plan are all aspects of a well-thought-out plan.

Another aspect of planning that should include consideration of fraud is in strategic planning and leadership/succession issues. A strong leadership team that understands the importance of fraud prevention is one of the best front-line ways to prevent fraud. This includes future leaders who will continue to nurture an ethical atmosphere after the current leadership has moved on. As your organization grows and changes, strategic planning that includes a discussion of fraud prevention is necessary.

Fiscal Management

The fiscal oversight role provides an opportunity for board members to have direct hands-on involvement in the fraud prevention process. For example, actively participating in the budgeting process can alert you to unreasonable assumptions, odd variances in year-over-year budgets and accounts that may raise questions.

Financial statements should be also be reviewed and scrutinized on a regular basis. Ask for statements that present comparative data so that anomalies will be easy to spot. Ask a question if anything seems unusual, keeping in mind that there is usually a perfectly reasonable explanation for the anomaly in question. For smaller organizations, or those with little or no segregation of duties, board members might also want to regularly review bank records as well for unusual activity.

Finally, as part of fiscal oversight, it is the duty of the board to safeguard resources. This is probably the most relevant reason of all to make sure that you are monitoring for fraud.

The story of Keely Thompson represents just one of hundreds of non-profit  fraud cases reported each year. It is disheartening to think that fraudulent activity is so common, and probably very difficult to imagine it happening in your own organization. However, there are not any organizations that are immune to financial crime, which is why it is so important for you to actively engage in your organization’s fraud prevention process. As a board member, this occurs within your roles of policy making, planning and fiscal management. Together, these three roles give you the opportunity and authority to generate ideas, take action and manage the organization’s risk for fraud.

For more information about fraud in general, or if you would like to download a free copy of the 2012 ACFE Report to the nations, be sure to visit: www.acfe.com.