Cash Crunch—or Red Flag?

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

Most nonprofit leaders have been through a cash crunch.  Cash shortages often present a challenge when nonprofits conduct grant-funded programs, especially when the nonprofit provides the program services and then waits to be reimbursed.

So it wasn’t that unusual when cash got tight at Harlem Congregations for Community Improvement, (HCCI) a New York faith-based organization that provided subsidized housing for low-income residents of Harlem living with HIV/AIDS. 

Things got more unusual, though, when the organization’s tenants began receiving eviction notices from their landlords who hadn’t received rent payments for months.  In January 2015, an HCCI employee reported the unpaid rent amounts to the organization’s CEO, saying the tenants were getting worried. 

As it turned out, the CEO knew the situation all too well.  He had been writing the rent checks but hiding them in the safe, only sending them once a landlord complained.  He knew the checks wouldn’t clear otherwise, because he had used the cash on personal expenses like auto repairs, medical bills, clothing, gifts and luxury items including photography equipment costing $125,000. 

To cover up, he approved falsified grant requests, charging the federal government for rent that hadn’t really been paid.  When grant money came in, instead of using it to make rent payments for the tenants, the CEO used it to cover his unauthorized expenses.   

He ended up pleading guilty to embezzling more than $200,000 from the federally funded program.  Just this month, the former CEO was sentenced to home confinement, made partial restitution and was ordered to work to repay the remainder of the money. 

What can we learn?

Think this can’t happen in your organization?  One in eleven frauds happens in a nonprofit. 

Think you’re protected by your trusted employees?  Perpetrators with more than 5 years on the job steal twice as much. *  Not every model employee is concealing a fraud, but most fraud perpetrators look just like model employees.  This CEO was with the organization for more than ten years, starting as CFO in 2002.  He was a church-going grandfather with an upstanding life and a 50-year career spent serving others. 

Too small for fraud prevention controls?  When embezzlements occur, small organizations lose almost twice as much as larger ones. *  This makes sense because smaller organizations have fewer resources for internal controls and internal control weaknesses are responsible for nearly half of all frauds. *

Remember that a cash shortage can be a red flag for fraud.  This isn’t the only fraud that created a cash crunch.  While Rita Crundwell was stealing $54 million from the Town of Dixon Illinois, she explained away cash shortages claiming that the State was late in making payments.

If cash shortages raise your fraud antennae, dig a little further.  You’ll either find out that everything’s ok, or you’ll be glad you kept looking.

You can read more about the latest fraud stats in the 2018 Association of Certified Fraud Examiners Report to the Nations. *

Read more FIT! TIPS

Join our 501(c)(fit!) community.   Sign up for free weekly information and never miss another FIT! TIP.

*yes, it’s true, per the Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse 2018 Global Fraud Study.

© 2018 501(c)(fit!) All Rights Reserved.