From: The Adjusting Entry, No. III, 2009, Idaho Society of CPAs
FRAUD FABLES
Written by Nancy Wonderlich Koonce, CPA, MBA, CVA, ABV, CFE
Ataraxis Accounting and Advisory Services, Inc.
The Fable of Fraud at the Symphony
“He’s been such a wonderful supporter for so long. It’s a shame he’s lost interest.” Everyone on the Hill City Symphony Board of Directors nodded sadly.
The Scheme
Jill waited until Jerry left the box office, and then she took $100 cash and replaced it with the donation check. Just one more time she thought, and then she would stop. She just needed a little more to make it to the next unemployment check.
Jill thought about all the changes in her life in the last year, none of which was her fault. The economy was so bad that her husband had been laid off. He had gotten so depressed and had started drinking again after being in recovery for five years. She didn’t want him to think the bills couldn’t be paid because of him — there’s no telling how bad he might get then.
She had been a volunteer for the symphony for three years, and she knew everyone trusted her completely. She opened all the mail, made all the deposits and kept all the books. She provided reports to the officers and board on receipts, donations and expenses. And at concerts she worked in the box office. These were the jobs no one else wanted to do, and everyone was more than happy to let her take care of it all. There was one member of the board, a CPA, who kept mentioning internal controls, but since he wasn’t willing to take over any of the jobs, nothing changed.
Jill recalled the first time she had taken money from the symphony. She had received a notice that her family’s electricity would be cut off if not paid by the next day, and they wouldn’t receive a check for five more days. If she waited and the electricity was cut off, then they would have to pay a fee to have it reconnected. She had picked up the mail that day and found two donation checks for $100 each. Too late to take them to the bank that day, she had taken them with her when she went to work in the box office that night. A man had paid cash for his eight tickets — $200 — and it all seemed a gift. She would pay it back just as soon as the next unemployment check was received. She had even made note of the donors’ names so they could be included on the report.
But she hadn’t paid it back because money was way too tight, and the next time the opportunity came along, she had done it all over again. Oh, she still intended to pay it back, but it wasn’t like the symphony was life or death! The symphony was entertainment; it was a luxury. The symphony didn’t need the money like she did. And if she wasn’t volunteering, the symphony would have to pay someone to do what she was doing, probably a lot more than she took. So the symphony was still coming out ahead if you looked at it like that.
But this would be the last time, and when her husband started working again, she would pay it all back.
The Discovery
Joan had worked in non-profit organizations most of her life. Now that she was retired, she enjoyed being on the board side of nonprofits, and especially being able to combine her knowledge with her love for music. She knew it wasn’t really her job, but it bothered her that the board just accepted when major donors “lost interest” as they called it. She knew that contact with supporters was important, so she decided on her own to follow up with some of the donors who had not renewed their sponsorships for the current season. Those follow-up meetings can provide valuable information.
Her first meeting was with Joe Jones, the longtime supporter the board had discussed at their last meeting. She called Joe and asked to meet with him, and he was very agreeable. When she arrived at his home, Joe welcomed her in and offered her coffee. They talked a bit about his home and then about music in general. Then Joan asked, “Joe, we at the symphony do our best to provide quality performances and top musicians. This does take substantial funding, and we rely on our supporters to provide that.”
Joe was nodding and smiling while she talked, and she was encouraged. So she continued, “We have sincerely appreciated your past sponsorship, and we’re wondering why you chose not to support us this year.”
Now Joe looked confused. “I did support you this year. In fact, I increased my donation. I thought you were here to tell me thank you.”
Now Joan was confused. Maybe there had been a mix up in the reports or something. Maybe the check got lost. “Did that check clear the bank?” she asked.
Joe got up and left the room. A few minutes later he returned with the cancelled check. “Do you mind if I take this to check it out?” she asked.
“Not at all,” he said. “Let me know what you find out.”
Joan called her fellow board member Jack, the CPA, and asked the best way to follow up. He had her give him the information off the back of the check indicating the date and account number of the deposit, then said he would take it from there. He checked the list of donations and noted that its total matched the financial statements. Joe Jones wasn’t on the list, but the check had been deposited into the symphony bank account. He then went to the bank and asked for a copy of the deposit that included the check. At one glance it was obvious that the deposit was of concert night receipts. But he knew that one of the controls he had suggested — reconciling tickets to receipts — had been done. So how had this check slipped in there? Or maybe it wasn’t the fact that the check was there, but that there was little cash in the deposit that was of most importance.
Jack took the list of supporters who had “lost interest” and started making phone calls indicating that there had been a virus on the symphony computer and he needed verification of their donations in order to reconstruct the records. He found several others who had made donations. Jack had a pretty good idea what was happening, and there was only one person who could be taking the cash — Jill.
Jack contacted the president of the symphony and told her what he believed was happening.
Lessons Learned
In uncertain economic times, fraud schemes escalate. Many folks are too stubborn or proud to adjust their lifestyles when they should, and they end up short of funds. Pressure from family members or embarrassment about their situation can be enough to push them over the line into fraud if given the opportunity.
And nonprofit organizations that operate mostly with volunteer help are notoriously lax when it comes to internal controls, just being thankful if there is one person willing to do the jobs. CPAs who often serve on the boards of nonprofit entities can provide one of the most useful services by insisting that internal controls and policies be put in place and enforced.
A few recent “cases in point” – both NFP and Government (from a newsletter called “The Nonprofit Imperative” compiled by Gary R. Snyder, 248/324-3700, www.garyrsnyder.com)
1. Rev. F. Norman Sullivan, who for two decades had been running Most Holy Redeemer Catholic Church in Cheektowaga (NY), pleaded guilty to systematically ripping off his parishioners of more than $213,000.
2. A Cape Cod man who admitted embezzling $647,016 from September 2003 through April 2008 while serving as volunteer treasurer from the church. (boston.com). He has been sentenced to 15 years in federal prison. (Boston Herald.com)
3. Another church: A former Christ Episcopal Church secretary who embezzled an estimated $300,000 from her employer over the course of a decade was sentenced to almost five years in prison. (smithfieldtimes.com)
4. A former grants specialist, for 9 years, at the Virginia Commonwealth University Health System will serve five years in prison for embezzling $782,600. (Richmond Times-Dispatch)
- The Grand Rabbi of Spinka, a Brooklyn-based Orthodox Jewish group, pleaded guilty in an $8.5 million tax evasion scam. The Rabbi admitted using a charity to avoid paying federal taxes. (JTA). He helped solicit millions of dollars in contributions to five Spinka charitable groups by promising to secretly refund up to 95 percent of the donations. That way, the contributors could falsely claim higher tax deductions.
6. For six years he hit three Idaho nonprofits--- United Presbyterian Church, Lee County Historical Society and Keokuk Community Fine Arts Council---by stealing $233,800. He was the treasurer of all three. After getting caught he pleaded guilty and asked the Judge for probation. He is awaiting sentencing in late September. (The Hawk Eye)
7. A philanthropic adviser for the Tides Foundation, pleaded guilty to stealing $132,600 from the foundation from 2005 to 2008.
- The Cancer Fund of America. The salaries and benefit packages are astronomical but their commitment to charity, other than themselves, approaches criminality. They admit to raising $17 million in cash and another $3.3 million in non-cash donations. They take pride in their giving. The Cancer Fund of America reported it donated $54,000 in cash to unrelated groups or individuals – or about 3/10 of 1 percent of that which was raised. It donated over-the-counter pain and cold medications (most of which had expired) to organizations that had little direct connection with cancer causes. It spent $8 million in fundraising (with a shady company that was restrained from doing business in MO. And was fined $100,000), $3 million in professional services. It is part of an elite group including the Children’s Cancer Fund of America, Cancer Fund of America and Cancer Fund of America Support Services are all considered national charities by the BBB. All three failed to provide information to determine if they meet the BBB’s charitable “Standards of Accountability.” They have startedThe Breast Cancer Society in Mesa, AZ. Be aware! (Atlanta bbb.org) (Atlanta Journal Constitution)
9. A Indiana pastor and his three adult sons were charged with securities fraud after the men convinced about 11,000 congregation members to invest $120-million in church building projects but then used the money to buy planes, cars, and vacations. They urged their parishioners to fulfill their “Christian responsibility” by investing in the ruse.
10. Idaho State U softball coach will be on probation for seven years after embezzling $70,000 from the University. (Idaho State Journal)
11. A preacher at a Church of Nazarene congregation in Sayre (OK) has entered a guilty plea to a charge of embezzling over $100,000, after his thefts forced the church to shut down. (Tulsa World)
12. A Detroit (MI) Police officer has been charged with stealing money intended as a reward for anonymous tips provided by residents in investigations of auto thefts. He received HEAT reward checks in excess of $26,000, which he deposited into his personal bank account. (Freep.com)
13. The longtime Parkersburg (WV) finance director has been charged with embezzling about $10,000 in city funds. (Charleston Daily News)
14. The Native Village of Tatitlek is suing its former tribal president claiming she drained village bank accounts of more than $560,000 while in office. She is also president of the Chugach school board and that board removed her. She also pleaded no contest to a recent drug charge.
15. A Georgia state employee has been arrested and charged with taking more than $20,000 (wrcbtv.com)
16. A former school district bookkeeper in eastern Missouri's Montgomery County has been sentenced to 14 months in prison for embezzlement of $140,000 (AP)
17. A judge issued a judgment to former mayor of Rio Rancho (NM) for misappropriation of funds, embezzlement and conversion from The Family Lifeline Inc., formerly known as Best Choice Educational Service, Inc. The amount will be determined at a later date. He is currently in the Erie County Prison for violating a protection order filed by his wife and on charges of burglary, criminal trespass and simple assault.
18. After pleading no contest, the former city treasurer in Standish has been sentenced to pay more than $20,000 in restitution in an embezzlement case.
19. A Baltimore pastor who worked with developmentally disabled people as an operations manager for the Arc of Baltimore was charged with befriending a blind and disabled man in his care, then paying a hit man $50,000 in church funds for an execution so he could collect on a $200,000 life insurance policy. The pastor had policies in his name as beneficiary worth nearly $1 million combined. (Baltimore Sun)
20. After a five-month trial, Former State Senator Vincent J. Fumo was sentenced to 55 months in prison for defrauding two nonprofit groups and taxpayers of $3.5 million. He was also ordered to pay $1.29 million in compensation to the State Senate. (NYT)
- All is not well on the charter school front. Waste and fraud may take down the flourishing movement. In Colorado, an audit of Cesar Chavez charter schools revealed excessive executive salaries and bonuses for the owner Dr. Lawrence Hernandez ($260,000) and his wife ($135,000) and mismanagement of its finances. There has also beenevidence, and a scandal,of student state test tampering and improper recruitment. A study confirms that teachers at Cesar Chavez Academy were not licensed, rather were working toward a teaching license through National Educational Training Services, a company owned by the same Lawrence Hernandez, director of Cesar Chavez Charter School. (NYT)
22. Another example charter school chicanery is in MN. Oh Day Aki/Heart of the Earth school is where the executive director is charged with embezzling $1.38 million from the school for American Indian children and spending it on houses, cars and nights at strip clubs. At the Kansas City charter school, Allen Village School, the president of the board of directors was indicted by a federal grand jury for embezzling about $50,000. At the Philadelphia-based Raising Horizons Quest Charter School is where the founder and CFO were ordered to make restitution of a total of $24,282 after pleading guilty to the theft. At the Harrisburg, NC Carolina International School is where the finance officer is charged with embezzlement of more than $137,000. At Milwaukee's New Hope Institute of Science and Technology is where the former director of the public charter school was charged with embezzling more than $300,000.