May 22, 2014
via Nonprofit Quarterly, written by Clifford Perlman
One of the most difficult situations I’ve encountered while counseling nonprofit boards over the years is when they have discovered that the organization’s funds have been embezzled, most commonly by an insider. Two real-life situations are particularly noteworthy. In the first instance, the executive director stole more than a million dollars; in the second case, a former executive director and board member conspired to steal $4,000,000 from the organization. In each instance, the other board members approached me after the thefts had been discovered to ask about their fiduciary duties and potential personal liability.
While there are few precedents for establishing the limits of a board’s liability when organizational funds have been embezzled, it is generally clear that if board members have acted within their fiduciary capacity and have not been grossly negligent in their oversight of the nonprofit’s funds, they cannot be held liable for the stolen funds. That does not prevent a state’s attorney general from laying the blame on a board, however. I recall an assistant attorney general contending that the organization’s treasurer (an unpaid officer) had been negligent in his responsibilities because he should have discovered the fraud much sooner than he had.
So what should a board do once it suspects or has discovered evidence of embezzlement?
Determine the Extent of the Embezzlement
The board’s first responsibility is to investigate the alleged crime. The organization’s treasurer, legal counsel, and forensic accountant and/or auditor should make a good faith attempt to determine the extent of the theft, examining all records available to marshal whatever evidence there might be. Although the initial instinct may be to call the police when a criminal activity is suspected, such early reporting raises the risk that the report may turn out to be an unsubstantiated accusation against an innocent employee. It is therefore a good idea to undertake a diligent audit of the firm’s records (even if it will require incurring some expenses to do so) prior to getting law enforcement involved.