NYS Charity Bureau Chief: Auditors, Volunteers Share Responsibility in Preventing Embezzlement

Chris Gaetano
Published Date:
Dec 1, 2016

New York State Charity Bureau Chief James Sheehan, speaking at the FAE's Exempt Organizations Conference on Dec. 1, said that charities and other nonprofit organizations remain particularly vulnerable to embezzlement and fraud, citing a simple lack of expertise and interest within their leadership as a major factor. 

To illustrate, he used two volunteer groups as examples that he said have been particularly troubling to the bureau over the past year. The first is youth sports leagues. While such organizations may not seem like ripe targets for embezzlement, Sheehan said these leagues have actually become big money makers over the years, with budgets that can run into the hundreds of thousands of dollars. He cited a New York Times story this past year about a volunteer who was found guilty of pocketing $120,000 from the bank accounts for a Pennsylvania youth soccer club as but one instance of what he felt was a disturbing trend. A large factor in this, he said, is that many people who volunteer for youth sports leagues aren't as interested in providing oversight as much as they are in things like coaching or providing support during games. 

"In a large part, I think when people sign up to volunteer for sports leagues, sometimes they sign up to run the hot dog stands, but not always [to be] the treasurer," Sheehan said. 

The second group that he said has had problems lately is volunteer fire and ambulance departments. While these organizations are not required to register as a charity under current law, Sheehan said they still have the same obligations under state statute as any other charity, which includes the need to submit audit reports to state agencies concerning their activities. Like with youth sports leagues, though, these types of organizations don't necessarily attract people interested in financial management, which means that controls aren't always that strong. 

"People don't volunteer with the fire company to make sure debits and credits add up. They join because they want to do something that's an unalloyed good for their families and communities and themselves, so we have seen a number of fire company embezzlements that have been problematic," he said. 

Beyond just the lost money itself, Sheehan said that these events can carry significant human and organizational consequences. Organizations, he said, need to take seriously the possibility of embezzlement and the necessary financial controls to prevent these problems from happening in the first place. The auditor, he said, can play a vital role in helping these organizations understand the necessity of these controls and help them comply with the regulations that require them. 

"The key to us is identifying and supporting the role of auditors, asking challenging questions on the occasions when the organization ignores the auditor's advice," Sheehan said. 

However, this means that it is incumbent that the auditor actually be effective in performing its oversight of the organization, something that doesn't always happen. Sheehan said that board members are oftentimes inclined to let management pick the auditor. While this isn't always a bad thing, he said that even in this case the board must take an active role in making sure the audit is objective. Similarly, he said that within many organizations there is a temptation to defer to management when designing the audit work plan. It is the auditor, however, who should be designing the plan and the audit committee members should be the ones to review it. 

"We have seen instances where this doesn't happen, and some are catastrophic, Sheehan said. 

It's also incumbent upon the auditors themselves to make sure that the work they do is consistent with professional standards, particularly when it comes to supporting the assertions the auditor makes. He said it's "painful" to see that someone is not taking their professional role seriously in making sure proper standards are applied. 

Sheehan said that the bureau understands that different auditors might make different professional judgments, and they can respect that as long as those judgments are supported. He also said that the bureau understands that not everyone in an exempt organization may have the sophistication to prepare a financial statement but sometimes this can result in a "same as last year" approach that he said should raise red flags with the auditor.  

"If you have the same footnotes, the same language and the same results, especially when the statutes have changed, that's a hint we should take a closer look, as should the board members," he said. 

Sheehan said that he's not very surprised when embezzlement happens in and of itself. adding that smart people can find all sorts of ways around controls. He said he is amazed, though, of instances in which there were no controls at all in place. 

He understood that there can be some hesitation on the part of organizations, due to potential costs. In contrast to private sector businesses, there's less cash and fewer people at charities and nonprofits. He admitted that "it's always a tough fight," but it's one that he said won't seem as bad once the proper structures are in place. 

"Part of what is happening in the country is you build these systems in and if you build them on the front end, the initial change is radical, but after that it becomes part of the culture," he said. 

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