You read about these occurrences, or see a news story on television, seemingly once a week. Many of us, at some point, have been involved in the management of some type of youth athletic organization.
This month a story broke about a Northeast Ohio lacrosse league that fell victim to at least a $90,000 theft, allegedly committed by the league president over a four-year period.
As a result of inquiring parents and volunteers, the scheme came to an end. In this instance, parents, not board members, asked to see the league’s financial records and were denied. A nonprofit that does not open its books for inquiry and inspection is likely hiding something—and that something is probably an embezzlement by whomever is handling the books.
The mode of theft and red flags in this case are fairly typical in frauds involving smaller organizations that usually lack adequate internal controls and checks and balances:
- Checks were made payable to “cash”
- The league had a debit card tied to the operating bank account
- League fees were found to have been paid to an individual and not in the name of the league
- The president refused to share the league’s financial information
- The president prepared the tax return himself
Board members have a fiduciary responsibility to protect the assets of the organization, and they are the ones that should ensure some form of accounting internal controls. If they don’t, parents should demand such accountability.
Sound accounting policies for a small organization would prohibit payments to cash and not allow anyone to have a debit card tied to the league bank account, or a credit card with an automatic withdrawal payment. Each disbursement should be evidenced by an invoice.
League application forms should clearly state that checks should be made payable to the name of the league. Taking cash payment should be discouraged, but in smaller leagues this is difficult. Whenever cash in involved in smaller organizations, there are usually vulnerabilities.
The league books should be open to any board member or parent. Why not? What is someone hiding? Failing to open one’s books to an interested party is like announcing to the world that there is an issue that merits examination. It is one of the largest red flags, and in this case, probably the final straw that broke the camel’s back.
Every nonprofit organization should have a reputable accountant prepare the income tax returns since most board members, or even league treasurers, are not versed in nonprofit income tax return preparation. In this case, the thief surmised, “The fewer people who see the records, the better.”
Frank A. Suponcic, CPA, CFE, CFF, is a partner in Skoda Minotti’s Valuation and Litigation Advisory Services Group where he regularly assists clients with fraud assessments, forensic investigations, economic damage claims, commercial disputes, divorce and labor relations. In addition, he frequently represents privately held business, nonprofit entities and individuals in an array of financial statement and income tax preparation and planning matters.