Our firm began working as an outsourced accountant for the subject of our paper in 2009. This non-profit organization was just getting started and utilized our firm for accounting services and business start-up guidance. As any new business is prone to, there were hiccups along the way. However, they were usually pretty easy to iron out.

As a non-profit organization there was a rotating cast of players serving on the Board of Directors. While some member had experience in running a business, or even understanding the organizations mission, some did not. The Executive Director saw an opportunity to fill this Board with members that did not have business experience, and because they did not truly understand the mission, allowed the Executive Director to change the operation of the organization without follow up to the regional oversight organization in the State capital. As we witnessed what was taking place, we approached the Board about our concerns only to be ignored and left out of future Board of Directors meetings. The Board felt we were interfering with the business of the organization and undermining them, and their Executive Director.

In a cost saving measure, this organization would often have contractors pick up payments at our offices so they would not have to pay for postage. Over the years, we got to know many of them pretty well. As time went on, and the Executive Director put the fraud into action. The contractors they were working with were slowly phased out to other contractors. Payments to some of these contractors were mailed out, always to a Post Office Box. Other payments, the Executive Director picked up and would “deliver” to the contractor. Eventually, in another cost saving measure, the Executive Director convinced the Board to remove the accounting oversight on Accounts Payable and would issue all payments themselves.

With the new-found responsibilities of processing the payables, the Executive Director needed an employee. The Executive Director convinced the Board to allow for an employee, which turned out to be a family member of the Executive Director. In addition to receiving payroll through the organization, the new employee also began running personal auto-pay expenses through the organization such as utility bills and rent.

Let’s take a step back to those new contractors and vendors that were coming in. It turns out, the Post Office Boxes that the payments were going to were setup under the modified names of family members of the Executive Director. In addition, payments that were going to legitimate vendors were often accompanied by an invoice that was “doctored” by the Executive Director for an amount that was higher than what the vendor initially invoiced the organization for. While the vendor received payment for their services, the difference went into the bank account of the Executive Director. Further, all Accounts Payable and Payroll were supposed to be signed by either the Accountant, Treasurer or Board President. The Executive Director forged signatures at times to get around this requirement.
There were two activities our firm remained involved with that led to the unraveling of this fraud. The first was the processing of the year-end reporting. The second was the preparation of the organization’s tax return.

As we began to prepare the year-end reporting we analyzed the bookkeeping program to find what vendors were going to need to receive a form 1099. Once we compiled that list, we examined what information we were missing in order to process the reporting. As we were asking the Executive Director for information, we would get stalled as the information was not available or was being requested from the vendor. As forensic accountants and investigators we have access to a program that allows for us to look up information on a vendor or address. What we found were that many vendors that we were receiving push-back on were under modified names of family members of the Executive Director, or were using a family member address, or were going to Post Office Boxes under the name of the Executive Director. As we pulled up information on the vendors from the Secretary of State, we found that many of these vendors were setup by the Executive Director.

As we were examining the financial records in the bookkeeping file to prepare the tax return, we also found discrepancies there. First, the electronic records were unorganized, which required a rebuild of the records and transactions. In doing so, the fraud started to take shape. We would request hard-copy documents to support transactions in the bookkeeping file, only to not receive them. We began contacting vendors directly to procure backup documents which started to expose the fraud further as the information on the invoice did not match the transaction in the bookkeeping file. The Executive Director also would not provide bank statements and it was clear a reconciliation of the accounts had not been done in some time. Through one of the Board members we were able to procure bank statements directly from the bank which exposed more fraudulent transactions.

Although we had clear information that something was amiss at the organization, the Board of Directors would not remove the Executive Director. What finally led them to do so was the forgery. Once the Treasurer and Board President saw the Executive Director was forging their signatures on checks, the Board of Directors moved forward with the removal of the Executive Director. However, being the “good guys” that they are, they allowed the Executive Director and the “employee” back into the offices unsupervised to remove their personal items. In addition to removing personal items they removed and shredded items that detailed their fraudulent activities.

In our review we found over $700,000.00 of embezzled funds through the non-profit organization by the Executive Director. Law Enforcement and the Federal Bureau of Investigations was able to confirm over $500,000.00 of that number through their investigation that was prosecutable. The family members that participated in the fraud were investigated, prosecuted and forced to pay restitution. The Executive Director paid the $500,000.00 restitution through the sale of personal property and received a 5-year prison sentence. The organization was awarded economic damages and legal fees of $1.7 Million.

The Board of Directors are good people with good intentions. However, they allowed themselves to be misled by the fraudster. In the spirit of “cutting costs” they removed internal controls and oversight that allowed the fraudster to perpetrate the fraud scheme. Further, once the fraud was brought to their attention their willful blindness ignored the facts that were presented to them, repeatedly, which allowed the fraud to continue longer than it should have. It was only once they were exposed that they sought to close the loophole. However, by then the damage was done. Although very profitable and successful the organization was exposed through newspaper articles and televised news stories about the fraud.

This non-profit organization provided a tremendous service to those in our community. Because of this fraud, the organization has been unable to serve its target market. Local, State and Federal funds have dried up, as have donations to support the program. The Board did not resign, but rather finished their terms and a new Board has been seated to try and resurrect the program.