Published July 5, 2017
A single mom who keeps the books at a small nonprofit organization starts stealing money from her employer to buy her kids clothes as the start of school approaches.
And so an embezzler is born.
Other embezzlers are more professional and take more money, protected by the trust they have built with their employers.
Removing the possibility for that type of theft is the goal of a company in the START-UP NY program that has received significant help from students in the School of Management. FiduciaSolutions has designed a management tool to reduce the risk of embezzlement at small businesses and nonprofits. The company has been embraced by the United Way Worldwide, which is pushing its member organizations to utilize its services.
“Embezzlement is bad for everyone. Bad for the employer and bad for the employee,” says Dan Healy, founder and CEO of FiduciaSolutions.
Fraud and embezzlement cost nonprofits and small businesses an astonishing amount of money. Various studies put the losses at between 2 and 7 percent of annual revenues. Considering the nonprofit and charitable annual revenue in the U.S. is about $1.5 trillion, the annual loss could reach $70.5 billion in the U.S. alone. And most of those found guilty have had no prior run-ins with law enforcement.
Adding to the numbers, about 50 percent of the embezzlement cases go undetected or unreported to avoid negative publicity.
“The losses are staggering,” Healy says. The average embezzlement lasts 18 months and totals about $40,000. “That can be a significant hit to a small nonprofit.”
So how can it be stopped?
After working in corporate accounting and serving on several nonprofit boards, Healy realized the nonprofits were not following basic accounting procedures that could prevent theft. One person was often in charge of all the money.
“We have the tools, but many times they are just not being used,” he says.
FiduciaSolutions starts with a series of eight online surveys that all finance employees take. The information is used to create a flow chart of where money flows in the organization and to point out where theft could most likely occur.
In addition, the program instills a culture in an organization that theft will be reported. More than 43 percent of fraud is discovered by a tip, so FiduciaSolutions offers a free anonymous tip line and posters to any firm, client or not, urging employees to report internal theft. When that is the credo of an organization, thefts decline, Healy explains.
“We think it will prevent people from stealing,” he says.
United Way Worldwide, which oversees 1,150 United Way chapters in the U.S. and others abroad, now requires chapters with budgets of more than $500,000 a year to undergo detailed audits, and they are urged to also do an assessment with FiduciaSolutions. Chapters under $500,000 can forgo audits, but then they must do an assessment every three years, and FiduciaSolutions is the preferred provider.
“The assessments have brought to the attention of the management and the governing body how important this stuff is,” says Kenneth C. Euwema, vice president and controller of United Way Worldwide. “We need to make this an important part of what we talk about in this organization … It doesn’t have to overwhelm the board meeting, but it has to be something you talk about on a consistent basis.”
The types of embezzlers run the gamut, from a CEO padding his expense account and stealing frequent-flyer miles to a clerk who changed the address of a checking account to her home and absconded with $400,000 over 10 years.
“It doesn’t matter what the name of the charity is, every charity loses trust when we get hit by something like this,” Euwema says.
The United Way of Buffalo and Erie County started using FiduciaSolutions more than a year ago, and detailed surveys were sent to everyone in the finance organization.
“They compare the surveys to established internal controls,” says JoAnne Mroziak, controller for the organization. “They map out your process and you agree on items that your organization will work on to enhance your processes.”
Because, “trust is not an internal control,” Mroziak says.
Dan Barry, managing director of FiduciaSolutions, says the company’s goal is not to find and uncover fraud.
“Our real goal is to strengthen financial control systems so the potential for fraud is greatly reduced,” he says.
Healy says volunteer boards that operate nonprofits are relieved to have the increased oversight.
“Our program is based on three tenants,” Healy says. “First is tone at the top. We focus on communication. Second is segregation of duties. How do you make sure each of the duties in finance are properly segregated? And third is having a perception of detection.”
FiduciaSolutions received some valuable help from the School of Management. Seeking new ideas about expanding into new markets, the company linked up with the consumer behavior class taught by Charles Lindsey, associate professor of marketing. Four teams of four second-year MBA students did case studies of the company and examined how it could expand its services into the professional services market.
“FiduciaSolutions was wonderful,” Lindsey says. “They shared company information with the students so they could really understand the business model.”
Dan Verrico, chief marketing officer for the company, says the students’ input was extremely valuable.
“They gave us some terrific ideas which we are going to use,” he says. “They also helped with our billing models.”
Rhonda Frederick, CEO of People Inc., recently received a review from FiduciaSolutions and was very pleased with what the company found and what it taught.
“It was a little different from what a typical audit might look at,” Frederick says. “They did a day in the life of a dollar … They gave us a good feeling. We’re not perfect, and the bar is pretty high. It gave me a better understanding, too, of how things should be separated out.”
The Internal Revenue Service gave FiduciaSolutions a tremendous boost when it changed the 990 form for tax-exempt organizations. In section 6, line 5, the government now asks if the organization has suffered a significant diversion of funds.
“If someone stole money in your organization, you have to put that on your tax return,” Healy says. And that also means that if a charitable foundation granted money to a group and that group had money stolen, then the granting foundation must include that on its tax return.
That kind of scrutiny of embezzlement increases the urgency to prevent it.
The program is priced on a sliding scale, from about $2,500 for small organizations to $25,000 for those with more than $100 million in revenues. The prices drop in succeeding years because much of the work is done in the first year.
Healy is a Buffalo native now working in Chicago at the financial company Guggenheim Partners. He set up representatives of FiduciaSolutions in six U.S. cities, and the staff in Buffalo far exceeded all others.
“The people in Buffalo grabbed this and are running with it,” Healy says. “And the University at Buffalo has been phenomenal.”
Healy says he expects the company will be expanding soon in Buffalo and doing some hiring.
With 41 clients, “we’re at the precipice now,” Healy says. “People are liking it. They are calling us. We have people telling us that this solves a problem that has been unsolvable for years.”
Prior to my UB employment, I worked for seven years for the New York State Department of Health dealing with financial fraud, waste and abuse cases. I am a certified fraud examiner. I love what START-UP NY is trying to accomplish, but I am seriously worried about this one particular project.
Any accounting student at UB knows that it takes much more than a separation of duties to have an efficient system of internal controls. Hint: "Paid Tips."
And it takes more than an online survey to learn the client's business. Hence, consultants charge so much.
Fraud is a complex issue. I can imagine that to properly design a product that would deal with it at the mid-size organization level it would be necessary to build it on artificial intelligence concepts and use forensic accountants and specialized law enforcement personnel expertise -- not UB MBA students.
That said, I see two groups of clients who may be interested in purchasing the products: small business owners who do not trust their own cashiers and bookkeepers and who will spend $2,500 to get some sort of additional reassurance, and certain mid-size organizations unable or unwilling to hire internal control staff that are looking for a piece of paper stating they have proper internal controls in place (in case they are audited by the government or local newspapers publish something). At a bargain price of $25,000.
It might be a tough sell to a client who is somehow aware of what it really takes to prevent fraud.
I wish FiduciaSolutions all the best but I am still worried. This whole concepts has "trouble" written all over it.
I hope START-UP NY has sufficient liability insurance coverage to satisfy any legal claims that may be filed in the future.
Thank you, Ilona, for reading the article and adding your thoughtful comment. You’re 100 percent correct: Fraud is very complex and multi-layered, and the term covers lots of different nefarious activities.
Our process evolved to help mitigate breach of trust embezzlement, a specific subset of "fraud.” As a CFE, you know breach of trust embezzlement is very different from other forms of fraud, such as financial reporting fraud, lying on a mortgage application, corruption and data theft, for example. Embezzlement deals with a breach of trust crime typically within an organization or some financial trust. So, we are working on embezzlement, then narrowing further to focus on specific types of organizations — small to midsize nonprofits and physician’s practices.
While I absolutely agree, and you are 100 percent correct to point out that our methodology would not be sufficient to mitigate all types of fraud — which is not a claim we have ever made — I can say that for the specific target set we are hoping to help, focusing on a manageable set of key controls is typically sufficient to mitigate this type of risk to an acceptable level. Our 50 or so clients also agree.
We just completed a case study for the Secretary of State of Mississippi detailing a very complex embezzlement we were asked to help investigate that included collusion and a $500,000 embezzlement of a $2.5 million nonprofit.
Give a shout and we can send it to you.