Fighting Charity Fraud

Groups look for better ways to prevent employee theft

Ten days after Cathy Adcock became chief financial officer of the Capital Area United Way, in East Lansing, Mich., last December she noticed during an internal review that dozens of checks were missing from the organization’s records. When the bank faxed her the checks, her heart started to race.

Each check was made out to Jacquelyn Allen-MacGregor, the organization’s former vice president of finance, who had forged the names of two officers to make hundreds of payments to herself to buy quarter horses, it was subsequently discovered. In June, a judge sentenced her to four years in prison and ordered her to repay more than $2-million to the United Way.

Fraudulent activity — including check forgery, money laundering, and other forms of stealing — has long troubled nonprofit organizations, but people who study it say it has intensified in recent years. Because nonprofit fraud often is prosecuted locally or not at all — some groups fear that donors might stop giving if the crimes are publicized — it is difficult to know how much money organizations lose as a result of it.

Gerard M. Zack, author of the book Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection, which was published in June, estimates that nonprofit organizations lose $10-billion a year to employee theft.

“In the nonprofit sector, there have been more large cases of fraud in the past year than I have ever seen,” says William K. Black, interim executive director of the Institute for Fraud Studies at the University of Texas at Austin.

Charities ‘Left the Vault Wide Open’

Observers say a downturn in the economy during the past few years has been a catalyst for recent nonprofit fraud, spurring a greater number of employees than in past years to steal money, and hampering the ability of nonprofit organizations to adequately protect themselves.

“As the economy has softened, lots of nonprofit groups have given employees more responsibilities and failed to tighten internal financial controls,” says Mr. Zack. “They’ve left the vault wide open.”

For example:

• In July, a former program administrator of the Carnegie Institution of Washington, which performs scientific research and supports science-education programs, pleaded guilty to embezzling $202,000 that was supposed to help public-school teachers increase their knowledge of science.
• The founder of the Thornton Kidney Research Foundation, in Los Angeles, which raises money to fight kidney disease, was sentenced in June to eight years in federal prison and ordered to pay $644,000 in restitution after pleading guilty to committing mail and wire fraud.
• In June, the former chief financial officer of the Indianhead Community Action Agency, in Ladysmith, Wis., which offers literacy training and housing assistance to the poor, was charged, along with two other people, with forging checks valued at more than $1-million.

While stealing cash or forging checks accounts for much of the illicit activity that takes place in nonprofit organizations, computers are making it easier — and more tempting — for people to steal money electronically, says Toby J.F. Bishop, president of the Association of Certified Fraud Examiners, an Austin, Tex., company that trains people in ways to prevent fraud.

“Many nonprofit groups now accept donations by credit card, which puts thousands of credit-card numbers in their hands and makes them vulnerable to theft by employees or outsiders who are able to enter their computer system,” he says.

When fraud happens in nonprofit organizations, it seems to occur most frequently at midsize or small charities. In those organizations, adequate financial controls often do not exist. Job duties such as opening the mail, logging donations, and balancing the checkbook are frequently concentrated among only a few people. And money is tight, discouraging employers from performing background checks on prospective job candidates.

Although charity crooks rarely fit a stereotype, experts say that lower-level employees — people who might be more prone than top executives to experience financial hardships or to feel they are inadequately compensated — are most often the ones to watch out for. However, someone in the executive ranks is far more likely than a lower-level employee to operate without supervision.

The biggest reason fraud goes undetected in nonprofit organizations, experts say, is that few groups protect themselves against potential thieves. The problems often start in the hiring process, where small or midsize charities frequently fail to budget money for criminal background checks on prospective employees.

Margot H. Knight, president of United Arts of Central Florida, an Orlando-area arts-support group, initially was impressed by Steven S. Mason, the father of three young children who received daily e-mails with Jesus sayings and who had worked for a decade as a top financial officer at other nonprofit organizations.

Ms. Knight hired him as finance director in late 2002 without discovering that he had been convicted of unemployment-compensation fraud and receiving stolen property.

In February, seven months after Mr. Mason started working at United Arts, he was arrested and charged with stealing more than $172,000 in connection with his previous position as finance director at Workforce Central Florida, an Orlando nonprofit job-placement program.

Mr. Mason skipped a court appearance last month, and a judge has issued a warrant for his arrest. Police say they plan to charge Mr. Mason with stealing $148,000 from United Arts of Central Florida. His lawyer did not return calls seeking comment.

United Arts has recovered about half of the money it allegedly lost, Ms. Knight says, thanks to its employee-theft insurance. To make up for more of the lost money, the group cut its administrative budget by $40,000.

Still, Ms. Knight says, “I felt like an idiot. I’ve worked in this business 25 years, and I got taken.”

One of the first changes Ms. Knight put in place after firing Mr. Mason: She now hires a company to perform a credit and criminal-background check on every prospective employee, which costs about $100 per person.

If an organization hires carefully, it can prevent about 80 percent of fraud, says Herbert J. Cleveland, president of Profile Information Services, a company in Austin that performs background checks and investigates fraud. But even if an organization checks out every potential employee, he says, it might overlook problems because many people who steal from nonprofit groups are first-time offenders emboldened by how easy it is to do.

Realizing that her organization might not have properly safeguarded against fraud, Ms. Knight hired a forensic auditor for about $4,000 to look at possible financial vulnerabilities. Few existed, she was told, as United Arts already required two people to sign every check and had a policy requiring two finance executives to sign off on all financial decisions.

Still, checks and balances can be bypassed. When a top finance official at United Arts took an extended leave of absence for a health problem, Mr. Mason allegedly wrote checks to himself and wired money to a personal account he established, disguising the transfer of funds as “operating support” for a local arts group. He also allegedly used a charity credit card to pay for a vacation in the Bahamas, and gave himself an unauthorized $10,000 pay raise, according to police.

Since the alleged embezzlement occurred, United Arts of Central Florida has eliminated wire transfers of money, rewritten its financial-procedures manual, and hired a new finance director.

Ms. Knight acknowledges that United Arts could have done more to protect itself. Indeed, many nonprofit organizations fail to do enough to prevent fraud before it occurs, according to Dan Wetzel, a partner with the forensic-auditing practice in the Washington office of Deloitte & Touche, an accounting and consulting firm.

“Nonprofit organizations are more geared to their cause than anything,” Mr. Wetzel says. “They generally don’t spend enough money to protect their financial infrastructure.”

Preventing Fraud

Some groups, however, have attempted to prevent crime before it happens by upgrading their accounting systems and by making sure that responsibilities are distributed among finance employees. In January, the National Minority AIDS Council, an advocacy group in Washington, hired the Bethesda, Md., office of BDO Seidman, which advises nonprofit organizations on how to prevent fraud, to look for potential financial vulnerabilities in its systems.

As the AIDS organization’s revenue more than doubled, to $8.9-million, during the past five years, it realized that its controls had not kept pace, according to Mark P.S. Edward, the group’s acting finance director. “We were operating like a mom-and-pop shop,” he says, “but we needed to bring ourselves up-to-date as a modern business.”

The AIDS Council has since updated its accounting system to allow it to track grant dollars and employees’ work hours more efficiently than it previously did. The council also reassigned some responsibilities in its finance department to prevent one person from holding too much power.

If the United Way of East Lansing had segregated responsibilities in its finance department, Ms. Allen-MacGregor might have been caught sooner, officials there say. She had sole control over the chapter’s internal accounting system, which tracks pledges, and a computer program that accounts for donations that the organization receives. She had no authority to write checks, but she alone reconciled the checking account.

With little oversight and a 19-year tenure that allowed her great freedom, Ms. Allen-MacGregor began writing checks to herself and forging the names of an executive and a board member whose signatures were required on all checks. She paid herself in amounts that allowed her to avoid triggering an audit. (The East Lansing United Way has since sued KPMG, one of its accounting firms, for failing to notice that Ms. Allen-MacGregor stole money; it wants KPMG to compensate the organization for losses beyond the $610,000 it has recovered from its crime-insurance coverage and from the sale of Ms. Allen-MacGregor’s horses. KPMG’s lawyer did not respond to an interview request.)

Ms. Allen-MacGregor also lied to the organization’s board of directors, telling it that the charity was experiencing a shortfall in revenue because many donors weren’t fulfilling their pledges. Because thousands of local-government employees had recently opted for early retirement and would presumably have less money to give, the United Way board did not question her.

According to three employees of the United Way, all of whom asked not to be identified for this article, Ms. Allen-MacGregor also kept a low profile, allowing her to escape notice. Because she never socialized with fellow employees outside of work, nobody in the office knew about her horse hobby. One person says that if she was sitting in a beige room, no one would even know she was there.

Once Ms. Allen-MacGregor’s crime was discovered, the United Way of East Lansing hired an accounting firm to begin reconciling its checking account, for about $200 a month. The organization also segregated the responsibilities that Ms. MacGregor held to ensure that no single employee could oversee as much of the group’s financial activities as she had. And to protect itself from losses that might occur from future theft, the United Way of East Lansing increased its crime-insurance coverage to $2-million, from $610,000, at an additional $7,000 per year.

Lasting Damage

Even if a group has adequate employee-theft insurance, damage to its reputation can be far-reaching and lasting. Charity officials say that they are far more concerned about how donors will react than they are about the short-term money they lost.

“Our upcoming campaign definitely concerns us,” says Ms. Adcock, of the United Way of East Lansing, which plans to start its fall fund-raising campaign this month — a month early — because of concerns surrounding the embezzlement. “Even if no one ever stole money from us, the economy would still make this an extra-challenging year.”

Within days of contacting police about the crime, the United Way of East Lansing invited reporters to an emergency board meeting to discuss what had happened and what policies the organization was adopting to prevent further fraud. One change: The organization’s chief executive officer and its senior vice president both resigned.

The United Way of East Lansing then mailed letters to all of its donors to apologize for the fraud and to explain what it was doing to fix the problem. It also began to post weekly updates about its internal investigation on its Web site. And it adopted a slogan in an attempt to bury its past: “A New Day. A New Way.”

“Our main objective now is to tell donors how important it is for them to continue supporting us so we can keep giving to charities during a time of increased need,” Ms. Adcock says. “But what’s happened to us could give some donors extra pause. They might say, ‘I’ll just give directly,’ and then they might not give.”

Ms. Knight, of United Arts of Central Florida, is more sanguine about her group’s fund-raising outlook. United Arts has continued to give as much money to arts groups this year, Ms. Knight says, because it has experienced only a small decline in fund raising.

Like many groups, she says, United Arts has received less state money this year. “But I don’t believe we’ve seen a significant fund-raising drop-off because of what happened to us,” she says.

In sharing news of the scandal — United Arts also sent letters and made personal phone calls to donors who felt like their money might have been stolen — Ms. Knight says she discovered that her organization is not alone when it comes to theft. “Every one of our major corporate donors had their own story to tell about employee theft,” she says.

While United Way of East Lansing and United Arts of Central Florida face an uncertain fund-raising future, Goodwill Industries of Santa Clara (Calif.) County, which was defrauded of $16-million to $20-million in the late 1990s, has already dealt with long-term fund-raising effects.

Seven people have been convicted and imprisoned for stealing money from 13 Goodwill stores in the Silicon Valley area. In June, a former president of the organization was indicted on federal charges that he stole $804,602 from the charity by wiring money to accounts in Switzerland and Austria.

Being forthcoming with donors and spending $400,000 in annual security improvements have helped Goodwill increase its annual donations by 5 percent since the controversy surfaced.

But Goodwill Industries International, in Bethesda, Md., continues to encourage Goodwill organizations everywhere to remain vigilant about possible abuses.

“Loss control is not an inoculation — you don’t do it once and hope it holds for 10 years,” says Reneé Weippert, director of retail services for Goodwill International. “It needs to be an everyday focus.”

Despite such good intentions, however, Goodwill — like all nonprofit groups — remains susceptible to new episodes of fraud. Just last week the former financial controller for Goodwill Industries of North Central Wisconsin, in Menasha, was charged with embezzlement. Her alleged take: $399,805.47.