Nonprofit Fraud: Selling Donated Goods

By Charles Hall | Asset Misappropriation

Nonprofit fraud is real. Hard to believe? Yes. But it happens.

Sometimes nonprofit embezzlers sell donated goods. Today, we examine how nonprofit employees can steal assets rather than cash and how you can prevent such thefts.

Nonprofit Fraud

Several workers at a California Goodwill pled guilty to taking over $15 million. Their scheme involved the selling of donated goods by the barrelful to private dealers who sometimes wheeled tractor trailers up to the rear of Goodwill stores.

The dealers sold most of the goods in Mexico. The thefts–involving seven primary culprits, four of whom were sisters–occurred over a twenty-year period that started in the mid-70s.

So how were the fraudsters caught?

One culprit went through a bitter divorce, and the husband disclosed the scheme to authorities.

Nonprofit Fraud Control Weakness

The article describing this case did not provide details of the store operations, but it appears–at the time–inventories of donated goods were not properly documented. When assets, of whatever form, are not inventoried, they are more likely to disappear.

Lessening Nonprofit Fraud

Account for all inventories. Also, clothing that is sold in bulk should be documented. So each time a truck backs up to a store, the activity should be recorded—who received the goods, the sales price, who approved the sale, why the goods were sold in bulk. The store should have a policy that cash is not to be received for such sales.

Consider adding a whistleblower hotline. Nonprofit employees sometimes see signs of theft. Make it easy for them to report fraudulent activity. Doing so creates the camera effect. 

Also, install a security camera that records all loading dock activity.

Note–This case was adjudicated in the 1990s, and Goodwill has, since that time, made significant improvements to its controls.

Cash Receipts Theft: Supervisor Steals

By Charles Hall | Asset Misappropriation

In this article, I discuss cash receipts theft and how you can lessen this threat.

Sometimes the person you hire to prevent theft is the one stealing. This is one of the dangers of a trusted bookkeeper. Below I provide a real-life story of a cash receipts supervisor on the take.

Cash Receipts Theft

Is your cash receipts supervisor taking your cash? I once worked on a case where this person took over $300,000.

Cash Receipts Supervisor

Many businesses funnel cash receipts to a supervisor who counts the money from each cash drawer and compares the funds to the daily receipts. The purpose of this step is to ensure no front-desk clerks are stealing.

The cash collections supervisor has usually worked a cash drawer in the past. So she knows all about how the receipts enter the system and how they are deposited.

Typical Deposit Cycle

The collections process often works as follows:

1. Money is collected at the front cash-collection desks and placed in the cash drawers that are assigned to each clerk; receipts are written for each payment
2. These clerks tally their collections at the end of each day and reconcile the monies in their cash drawers to the receipts written
3. The daily reconciliation for each cash drawer goes to the cash receipts supervisor who recounts the funds received and reconciles collections to the receipts written (performing the same reconciliation as the front desk clerks)
4. The cash receipts supervisor creates a deposit slip for all funds collected (if there are seven cash drawers, then the deposit slip represents the total collections for all seven cash drawers)
5. The cash receipts supervisor gives the checks and cash and deposit slip to a courier to take to the bank
6. The courier receives a bank deposit receipt from the bank
7. The courier provides the bank deposit receipt to the cash receipts supervisor (so she can compare the bank deposit receipt with the copy of the deposit slip–to ensure the courier did not steal any funds in transit)

Cash Receipts Supervisor Theft

So how can the cash receipts supervisor steal funds in the above scenario?

In the case I worked on, the supervisor also reconciled the bank statement. After step 3., but before step 4., she would steal the cash and then lessen the deposit slip accordingly. So, if she took $2,200, the deposit slip would reflect the total daily collections less $2,200.

You’re thinking, “But then the bank account would not reconcile since the computers have recognized the front-desk collections?” You are correct—unless someone monkeys with the bank reconciliation. And that’s what she did. The supervisor adjusted the reconciling items–on the bank reconciliation–to cover up the stolen funds. The scheme worked until the annual audit.

When the auditors tested the outstanding items on the bank reconciliation, they could not tie substantial amounts to the subsequent bank statement. Generally, outstanding reconciling items clear the subsequent month’s bank statement—but large amounts on the year-end bank reconciliation could not be accounted for (because they were fictitious).

When confronted, the clerk confessed to her theft and method.

So what was the control weakness that allowed the cash receipts theft?

Cash Receipts Theft Control Weakness

The weakness was the cash receipts supervisor who had custody of assets (cash) also performed the reconciliation of the related bank account.

Correcting the Control Weakness

The person reconciling the bank statement should not also handle cash. It’s also a good idea to perform surprise tests of the receipting records. Doing so puts everyone on notice. The receipt employees know someone can appear at any time and review their work.

For additional assistance, see my article about how to audit cash.

Receipt Fraud: Would Andy Griffith Steal?

By Charles Hall | Asset Misappropriation

In this article we take a look at receipt fraud. 

Would Andy Griffith steal? Maybe not. But other law officers do. Thankfully, most don’t.

The Theft: Receipt Fraud

If you’ve watched Andy Griffith as much as I have, you may find it hard to believe a (small town) officer would steal–but it happens.

A friend of mine (we’ll call him John) audits a small Georgia city (this is a true story). One year he was reviewing the planning analytics for the audit, reviewing five years of comparative data. In scanning the comparisons, he noticed the police fines had fallen off significantly. So John asked the police chief why the fines were down.

The police chief (we’ll call him Robert) responded, “I took it.”

John laughed and said, “I’m serious, why do you think the fine revenue dropped?”

“I said I took it.”

John was stunned. It was hard for him to absorb what he was hearing. After all, fraudsters don’t generally confess on the spot–but this one did. And the chief was well-known and well-liked, a man known for his integrity.

The discussion continued as John inquired about how the chief took the money. Here’s the deal.

Robert had two receipt books, one for cash and one for checks. When checks were received, he would write a receipt from the checks receipt book–those funds were turned over to the city clerk. When cash was received, he wrote receipts from the cash receipts book–those monies went into his pocket. Simple, but effective, as he stole over $50,000.

The Internal Control Weakness

So, what control weakness allowed this receipt fraud?

No one was controlling the issuance of the city receipt books. Also, the city clerk should have noticed the lack of cash payments being received for fines.

Correcting the Receipt Fraud Weakness

How can we remedy this receipt fraud problem?

When governments use physical receipt books, assign the duty of purchasing and issuing receipt books to a particular person. He or she should maintain a log of the receipt books and who has each one.

Surprise audits of those receiving funds is another way to combat theft. These reviews can be performed by the government’s internal audit staff or by an outside CPA or Certified Fraud Examiner.

White-collar crime is real, so stay vigilant. (Even so, I still can’t believe the real Andy Griffith would steal.)

Stealing Unaccrued Receivable Checks is Easy

By Charles Hall | Asset Misappropriation

Stealing Unaccrued Receivable Checks

Some fraudsters steal unaccrued receivable checks and convert them to cash. In this article, I explain the mechanics of the theft and how you can prevent it.

The Theft of Checks Not Accrued

Susan is an hospital executive that has the authority to approve purchases of medical devices. She commonly receives rebate checks from vendors. Since she negotiates the purchase contracts, the vendors mail the rebate checks to her. Some of these checks are north of $50,000.

A while back she received a rebate check and placed it in her top left-hand drawer, thinking she would take it to accounting the next day. But she forgot.

A month later she opened her drawer, and there it was. Oops! She hurriedly took the check to the receipting department and said, “Gosh, I must be losing my mind.” They all laughed, knowing it was an innocent mistake. But in the course of these events, she realized that no one knew she had the check. Why would they? Susan approves the purchases, and she provides the rebate information to no one. So, the rebates are not accrued in the general ledger.

Not long thereafter, Susan decides to retain two of the rebate checks totaling over $100,000. She places them in the same left-hand drawer, but this time, she does so on purpose. And then she waits—several weeks. No one calls about the checks. It’s obvious that no one knows she has them.

Susan converts the checks to cash by depositing them into a new bank account that she has opened in the name of the hospital. She is the sole authorized signer for the new bank account.

Now, let’s see what the control weaknesses are and how we can remedy this problem. 

The Control Weakness 

The weakness is that no one is tracking or accruing the rebate checks.

The Fix 

How can we cure this weakness?

Determine what companies provide rebates checks (and any other checks commonly received and not accrued). Send confirmations to the paying parties and compare the confirmed amounts with activity in the general ledger.

A master list of rebate companies should be maintained by someone in accounting, and the related activity should be monitored by comparing receipting information to this list. When possible, accrue rebate receivables.

White-Collar Crime

This is one more example of white-collar crime. Click here for many more articles about theft. For a detailed article about auditing receivables, click here.

Splitting Payments to Circumvent Approval Requirements

By Charles Hall | Asset Misappropriation

Some fraudsters split payments to circumvent approval requirements. In this article, I show you how this type of theft works and what you can do to prevent it.

The Theft

The maintenance supervisor, Billy, wants to make a fraudulent payment to ABC Hardware for $9,900. (ABC Hardware is owned by his cousin.) So, Billy wants to avoid his company’s review process. He knows that all checks over $5,000 require the physical signature of the finance director. All checks below $5,000 are signed by the computer. What’s a boy to do? Well, Billy can split the transaction–two checks for $4,950 each. That will work.

Billy asks his cousin for two ABC Hardware invoices of $4,950 rather than the one for $9,900. Afterwards, Billy approves each invoice, and the payments are made.

So, Billy tries the scheme again, and it works. Then, he does so repeatedly. His cousin rewards him with free trips to South Dakota, his favorite hunting destination.

The Weakness

No one is querying the check register for payments just below the threshold. Also, bids were not obtained.

The Fix

Download the check register into Excel (or any database package). Then, sort the payments and look for repeated payments–just below the threshold of $5,000–to the same vendor.

Require bids for significant expenses, and retain the bids as support for the payments.

Difference in Bribes and Gratuities

Learning tip: The hunting trip is referred to as a gratuity rather than a bribe. Why? Bribes are inducement payments made before the purchase decision. Gratuities–free trips in this example–are given after the vendor payments. The purpose of the gratuity is to reward the complicit person (Billy). Then, in the future, Billy knows the drill and expects more of the same.

White-Collar Crime

Splitting payments is a form of white-collar crime. There are many ways that professionals steal. Click here for more fraud-related examples (some of which are hard to believe).