By: Michele Renz
If you are a parent of a school-aged child in Western Pennsylvania, you are undoubtedly familiar with the seemingly endless amount of choices of teams, clubs, associations, and groups that are available for your child to join. For example, take sports. Not only are there school-related sports teams – there are regional, community, travel, elite, club, in-house, and other special team classifications I’m sure I’m missing and haven’t listed – for each sport – and it’s big business. According to a 2016 article in the New York Times, there are approximately 14,000 youth sports organizations in the Unites States taking in annual revenue of about $9 billion. Add to this the plethora of different non-sports related clubs, associations, and groups – band boosters, drama, dance, art, ski, history, mountain biking, chess, computer, choir – the billions in revenue being brought in is greater than some entire states!
Which begs the question: who is keeping track of all those fees, dues, and expenses you are paying into organizations? At the local and regional level, it’s likely a volunteer: a civic, volunteer-minded, honest parent of a kid in the organization that knows how to manage a checkbook and wants to manage the finances to benefit the overall well-being and purposes of the organization. The majority of volunteer treasurers and boards are good people and have the best interest of the organization in mind. These people – and the countless others that serve – run great organizations and make the experience worthwhile for all involved.
However, there is a definite dark side out there. Take a moment and type “youth sports embezzlement” or “youth sports financial theft” into your search engine, and you will see what I mean: countless stories are documented and millions of dollars are being embezzled from youth organizations each year. What’s even more scary? For every case you hear about, there is one or possibly more, that haven’t been discovered yet or are not ever reported. Reasons that cases aren’t reported include fear of bad publicity; protection of the reputation of the organization; social repercussions for the accuser, accused, and their children; upset of team dynamics; and legal and other professional costs associated with pursuing such an allegation. Another main reason: people are too busy to care or simply don’t want to spend the time it takes to pursue it.
Those of you reading this likely believe that this happens in other youth organizations, but it is certainly not happening in the organization where your child is involved. After all, you know and perhaps are friends with the people in charge of the organization – they are good people. This exact kind of thinking and rationalization has allowed the millions of dollars of frauds to occur in the first place. According to the Association of Fraud Examiners 2016 Global Fraud Study (ACFE Study), 88.3% of fraudsters are first time offenders with no prior convictions and a majority had never been fired from a job for suspected fraud abuse.
When interviewed, most convicted fraudsters say that they did not go into their positions with the intent to defraud or steal from an organization. Typically, there is a pressure upon them (e.g. financial problems, addiction, etc.) which causes them to rationalize (e.g. “I’ll just borrow the money and pay it back before anyone notices,” or “I do so much for this organization. I deserve this.”). When pressure and rationalization cross with the opportunity to steal – you have the perfect storm – the perfect fraud triangle and scenario for a fraud to occur.
How can fraud in youth sports and other extra-curricular organizations be prevented? While every organization operates differently and processes need to be customized to the organization, following are two suggestions that are applicable to every organization:
Recognize the Behavioral Red Flags Demonstrated by Fraud Perpetrators
According to the ACFE Study, the most common red flags identified by respondents as warning signs displayed by the perpetrator before a fraud was detected were as follows:
- Living Beyond Means
- Financial Difficulties
- Unusually Close Association With a Vendor
- “Wheeler-Dealer” Attitude
- Control Issues; Unwillingness to Share Duties
- Divorce/Family Problems
- Irritability, Suspiciousness, or Defensiveness
- Addiction Problems
A specific behavior that I have personally noticed and/or been made aware of in fraud and misappropriation investigations is the unwillingness to share bank statements and other financial documentation (receipts, etc.) with other organization leaders upon request. Another indicator is that while the person is more than willing to share documentation, there “isn’t any” or “it’s missing”. Good financial stewards will not only maintain good records, and even if they don’t, they will be eager to do whatever it takes to demonstrate their honesty and prove that they did not misappropriate funds.
Another unusual behavior that I’ve come across is a volunteer staying involved with an organization after his or her child has left the organization and has moved on to other activities. Yes, there are admirable good Samaritans out there, but I think we can all agree that this kind of “service after your kids leave” is rare as we are busy rushing and finding time to make it to our kids’ own events or serving where our own kids are involved.
Reduce or Eliminate the Opportunity for a Fraud to Occur or Go Undetected
Earlier in this blog, I referred above to the fraud triangle: it is where pressure, rationalization, and opportunity meet to allow a fraud to occur and potentially go undetected. An organization ultimately doesn’t have control over one’s internal pressures and rationalizations. However, the organization has significant control over eliminating the opportunity for fraud. Sadly, as is evidenced by the millions of dollars stolen from our youth programs, many fall way short of eliminating opportunity; as a matter of fact, many actually unknowingly encourage it.
The biggest way that your organization can significantly reduce – and potentially eliminate – the opportunity for fraud is to implement what we auditors collectively refer to as internal controls. Internal controls are processes and methods put in place by an organization to ensure the integrity of financial and accounting information. In other words, good internal controls is an executed system of checks and balances to ensure accuracy.
By far, the most important internal control in any organization – or business for that matter – is to ensure that there is segregation of duties throughout financial processes. Segregation of duties means having more than one person be involved in a task. The opposite of segregation of duties is allowing one person to control a process from beginning to end. Let me stress it again: SEGREGATION OF DUTIES IS THE MOST IMPORTANT INTERNAL CONTROL IN ANY ORGANIZATION!!!
Yet, so often, as I’ve seen in person and as is the case in many of the examples that you can pull up in your search engine, organizations allow one person – typically a highly respected, trustworthy person with the title of president or treasurer – to control the organization’s bank account and cash processes. They allow the same person to collect money, deposit money, write checks, receive and pay invoices, be the sole signatory on the bank account, and receive and balance the bank statements. Then, somewhere in the course of life while that person has sole control over your organization’s finances, he or she experiences a personal financial pressure, rationalizes that he or she will borrow and pay it back, and you have no controls stopping that person from helping himself or herself to your funds. Easy. Just like that, a fraud has occurred. And many times, because it was so easy and no one found out, he or she does it again. And again. Before you know it, your organization and its participants are out hundreds of dollars – often more.
This type of fraud is so common and yet, it is so easy to prevent, or at least significantly minimize, with these practical tips:
- All checks and payments made from the organization’s bank account by the treasurer must have supporting documentation such as a detailed invoice. All invoices should be approved by another person (e.g. president, vice-president, or person requiring the goods or services).
- Registration fees and player/member payments should be tracked and totaled by someone other than the treasurer. The treasurer should be responsible for depositing the funds.
- Two people from different families should be involved in cash collection processes such as a gate or admission receipts. A written form should be provided and should be signed by both people involved verifying the total cash being submitted. The cash should be placed along with the form in a sealed envelope. The envelope should be opened, counted, and verified by the treasurer and another member of leadership who should sign-off that they verified the totals.
- Always have two signors on an organization’s bank account. Both signors must have access to view the account activity, including check images, and statements, via online banking inquiry. The treasurer should be responsible for writing the checks, making deposits, and recording the checkbook while the other is responsible for preparing bank reconciliations and verifying deposits, check payments, and cash withdrawals to supporting documentation. If possible and practical, having a third person involved in performing the verifications to supporting documentation is even better. At least two people with access to the bank account statements is a non-negotiable must.
- The checkbook, bank statements, and reconciliations should be presented for review by the governing body (board of directors or equivalent) of the organization. All supporting documentation for any deposits or expenditures should be made available upon request of members of the governing body.
- A member of leadership not listed on the bank account should verify supporting documentation for all payments or reimbursements to the two signors on the organization’s bank account as well as registration fee payments for the signors’ children.
- If you do not have volunteers willing to perform the documentation verifications or want the added assurance of the involvement of an independent third party in your verification processes, consider hiring a local CPA to assist you.
- A best practice is to have organization by-laws or rules require periodic rotation of at least one signor on the bank account. If this is not a requirement, involvement of assistance of a local CPA is highly encouraged.
The key takeaways from the tips above are a good system of checks and balances (internal controls) and transparency. By implementing even one of the tips above, you reduce the risk of a fraud happening to your organization. Implementing multiple tips exponentially reduces fraud risk.
If you are an honest volunteer who is donating your time to a worthwhile organization for the benefit of youth in your community, thank you, and I hope that you find these suggestions helpful to your organization and share it with your leadership and the leadership of other organizations. If you are a volunteer reading this who is currently defrauding an organization you are involved with, please understand the ramifications to you personally after you are caught are less now than they will be if you continue doing what you are doing.
In conclusion, preventing fraud from happening in any organization is not rocket science – it’s common sense and good business.
If our firm can be of any assistance to your organization, contact us.