BY MICHAEL P. DALLESSANDRO
Money: The word on its own grabs your attention. Utter the word money in a crowd, and I guarantee somebody will turn his head your way. Even a recent hit television show theme song blares “money, money, money, money, got to have some” as pictures of personal jet aircraft, luxurious high-rise apartments, and black limousines flash across the screen. Money can bring individuals, businesses, or organizations wonderful things; on the flip side, it can bring shame and embarrassment. In New York State, some respected leaders and staff of the Roslyn School District were allegedly involved in the theft of approximately $8 million in school district funds. The community and co-workers were shocked and appalled because those involved were supposed to set an example for others to follow and were charged with a very important task in any community, educating our children.
Officers and members of volunteer emergency services organizations, whether they are fire districts, ambulance corps, or fire companies, are also expected to set an example and are also charged with a very important task in a community. But every few months, a news story breaks and another one of our brothers or sisters falls from grace, accused of stealing or misusing funds intended to benefit or operate a volunteer emergency service organization. In 2003, a former treasurer of a volunteer fire department in Louisiana pled guilty to theft and was ordered to repay $25,100 in department money. The treasurer was accused of embezzling the funds over a six-month period, primarily using forged checks. In North Carolina, a former Currituck County fire chief pled guilty to embezzling a total of $218,000 in department funds over several years.
The information offered below covers a broad range of information regarding fire service financial fraud, the scope of the problem, the types of fraud that your organization could encounter, and some warning signs of possible fraud you should watch for. Caution: This article is only a primer on preventing and uncovering financial fraud. My expertise in this field comes from my experiences as a fire company corporate officer, a school district administrator, and an elected member of a public school district’s board of education. I am not an accounting professional.
But if you serve your fire company or emergency squad as a corporate officer, a board member, or a member of the finance committee, take advantage of all opportunities to learn more about financial fraud. If you suspect such fraud exists in your organization, proceed very carefully. Unfounded accusations can permanently damage the reputations of the individual accused and the organization with which both of you serve.
Seek professional assistance immediately if fraud is suspected. Most of the time, the situation revolves around one individual; however, there have been cases in which multiple people are involved. In sharing your suspicions with other officers, you may actually be speaking to people who are also involved in a coverup and tip your hand prematurely.
How bad is the fraud situation, anyway? Aside from the occasional news stories concerning the topic, there are really no hard figures available on the actual amount of emergency service organization funds taken by fraud. Organizations may be running fundraisers, turkey nights, chowder parties, split clubs, and other events; at the same time, funds are disappearing through undetected fraud. The 2004 Report to the Nation on Occupational Fraud and Abuse (published by the Association of Certified Fraud Examiners, available at www.cfenet.com/pdfs/2004RttN.pdf), says that approximately 30 percent of fraud cases in the private and public sectors never get reported to appropriate authorities.
TYPES OF FRAUD
Before we can begin to prevent or identify fraud in our organizations, we need a basic idea of what types of fraud can be found in a volunteer emergency services organization. Asset misappropriation, corruption, and fraudulent financial statements are some types of fraud that can exist and hurt our organizations, their members, and our communities.
Kickbacks. Corruption exists when individuals or organizations receive a benefit or kickback to help influence a business transaction. For example, a board member pushes the department to accept a high bid for a recreation room plasma screen television and votes to approve the expenditure, fully knowing that he will receive a free DVD player for his home from the vendor after the sale. In another, a chief will buy only one type of turnout gear at an inflated price and receives an annual all-expenses-paid trip to a conference from the vendor as a result.
Fraudulent financial statements. Generally, they are accurate statements that are intentionally doctored to cover up missing funds that have been taken by a person or group who has “cooked the books.”
Asset misappropriation. By far the most common type of fraud, it accounts for more than 90 percent of all detected frauds. Cash is the asset most commonly targeted for misappropriation, accounting for 93 percent of all misappropriation schemes. This category includes larceny, fraudulent disbursements, and skimming. Fraudulent disbursements might be receipts submitted for the personal expenses of an officer or member that are fraudulently labeled or coded as legitimate expenses; the individual is thus reimbursed for expenses not normally reimbursable. Forging checks and paying false invoices also fall into this bracket. Skimming simply involves taking cash before it is recorded on the books. For example, a member running a “Las Vegas Night” at the firehouse, working alone and without any oversight, collects $1,000 in cash at the door and turns in $950. In this situation, trust is a key factor. Often, we are so appreciative that the member has stepped up to run the event and that it has been a success over the years that we do not question things in detail about the business end. In our desire to keep the member from throwing in the towel and saying in classic firehouse form, “If you think you can do a better job, then you do it,” we should never put our blinders on or abandon good common sense regarding money matters just to avoid hurting feelings.
REASONS FOR FRAUDULENT BEHAVIOR
Why do firefighters steal or fraudulently obtain funds from an organization they supposedly love or violate the trust and bond between brothers and sisters in the fire service? The answers are difficult to find. The sense of violation fellow members feel is real; often members do not believe the facts before their very eyes. Although answers are hard to come by, they can involve opportunity, pressure, and rationalization.
Opportunity is the only reason we and our organization can prevent. When you take away or restrict the opportunity to steal or commit fraud, you can reduce the chances of its happening by using strict internal controls, such as clearly segregating financial duties. I know it is getting harder and harder to get people to step forward to hold offices in our organizations, especially the financial positions. However, if one person serves simultaneously as a board member, a treasurer, and an audit committee member, it creates opportunity.
In my department, we recently changed the routing of all financial mail to the board. Previously, the mail went to the financial secretary or treasurer. If our officers were committing fraud by issuing checks to themselves, they would be receiving the cancelled checks in the mail and could cover their tracks. That is opportunity.
Another important step is to reduce the number of cash transactions or activities in your fire company as much as possible-loose cash presents opportunity.
Pressure is another human motivational factor leading to fraud among volunteers. I will offend at least one reader; please understand that is not my intent. During my years in the volunteer fire service, I have found that members come from all walks of life. In most cases, though, the people who give the most of themselves to their community, such as volunteer emergency workers, many times have the least to give when it comes to cash. I believe there are far more volunteer firefighters with a mortgage and three or four children to support who are living paycheck to paycheck than who are earning six figures or more. In many cases, these are good people living under severe financial pressures. Add to that the loss of a job, gambling issues, family illness, holiday gift needs, or high property taxes, and even a good person can go wrong.
Rationalization is the perpetrator’s way of justifying illegal activities. So often fraud begins with one small mistake. Possibly the firefighter who runs the department’s weekly bingo night needs to pay an electric bill and takes $80 until payday “just to get through.” Even if that $80 is paid back, the downward spiral has started. The personal cash advances become more frequent and get larger as they switch from funding their most vital household basics and turn to paying for wants instead of needs with department money. Eventually, the amount taken becomes too large to pay back, and the member has to cover his tracks.
Entitlement is another form of rationalization-the firefighter feels he is entitled to it. He may put in a large amount of time at the department or be angry about a decision made or how the organization is run. Recently, my department cut annual stipends for most administrative positions, including the financial officers. I was surprised by how a feeling of entitlement had crept into these positions over time and how aggressively these individuals fought to keep the stipends, threatening to quit if they were cut.
WARNING SIGNS
The warning signs can take many forms, but there are some statistics regarding financial fraud. It should be no surprise that the higher up in the organization the perpetrator is (e.g., chief or president), the higher the dollar amount of the fraud. The same rule applies to that person’s personal income. In most cases, the higher the income, the higher the amount of fraud. Although the fire service in many areas is still a men’s club, in both the business world and not-for-profit world, fraud is equally divided between men and women.
The following list provides additional warning flags to note when examining your organization’s vulnerability to fraud. These are attitudes and behaviors sometimes found in people involved in fraud. Note that one or two of these points may pertain to you or somebody you know. Don’t panic! One or two items are not a clear indicator of fraud or of the potential to commit fraud, but multiple points, particularly those involving finances, should be considered a higher-than-normal risk.
- An extraordinary commitment to work; never misses a meeting.
- Never takes a vacation away from the fire company/emergency squad.
- Refuses to take or run for a new office and refuses additional assistance.
- Under stress-has marital problems, a sick child, or a wedding or college costs that need significant funding.
- Control freak-refuses to allow anyone else near the financial center of the organization or largely dominates the financial offices.
- Tendency to work well only with lax or submissive assistants.
- Easily annoyed or outraged by reasonable questioning about the department finances.
- Resents modest size of a stipend or compensation package.
- High-end lifestyle-large house, expensive vacations, expensive cars, or a large boat.
- Lack of financial document sharing or access.
- Reluctant to provide accurate information to board members or auditors.
- Disputes with auditors or an unduly close relationship with auditors.
- Attempts to direct auditors to one side- e.g., revenues instead of expenses.
Where do you and your organization go from here? My mission is accomplished if you have started thinking about improving financial controls or possibly questioning current practices in your organization. In most organizations, the treasurer and financial secretary answer to the president, who answers to a board of directors or board of commissioners. Convene a meeting of all of those stakeholders to review financial controls currently in place and how they can be improved. Some officers may be hesitant to rock the boat; however, all parties must eventually agree that the organization’s financial stability must be paramount.
Among the best steps an organization can take is to move out of the cigar box and into a computer-based accounting package. There are a number of out-of-the-box “not-for-profit” accounting software packages that handle multiple accounts, fund drives, inventory, assets, and purchase orders.
Additionally, your organization can establish policies that require two signatures for all checks and that a member of the board review all check runs weekly or biweekly, depending on your check cycle.
ORGANIZATION
Organization is key to preventing fraud. If your emergency service organization issues checks as needed, this makes check writing almost routine-cutting checks one at a time never looks out of place to members or officers. Establishing a regular check-writing cycle, such as on the 15th and 30th of the month, will draw attention to checks written outside of that cycle.
Never issue checks or money based solely on a verbal request. Written checks or purchase requests should be funneled through a limited number of officers for final approval, accompanied by detailed quotes, invoices, or receipts. Beware of paperwork that lists only part numbers or a request that simply states “meeting expenses” and a total. Nobody should be offended if a request for money is sent back asking for more detail. If this is a problem for a member, something may be afoul.
Education is also important and can relieve stress for members who do purchasing. Use time at a drill or company meeting to carefully spell out new purchasing procedures, financial controls, and the reason they have been instituted or tightened. Getting member support and “buy in” will only benefit the financial integrity of the organization in the long run.
Lastly, financial officers should make monthly financial presentations or updates to the board. Documentation of check runs, bills paid, and running balances of accounts and budget lines should be available. These officers should also be prepared to answer questions about the data provided.
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I hope I have provided department leaders and members with some basic fraud education and prevention information. Continue to learn more about this topic and the other financial aspects of your organization. A fraud situation in your organization can rattle it to its core and undermine public trust and opinion. All volunteer emergency service organizations should take all steps possible to prevent that type of public scrutiny.
MICHAEL P. DALLESSANDRO is a 22-year veteran of the volunteer fire service and a life member of the Grand Island (NY) Fire Company, serving on its board of directors. He is a conference speaker and trainer for the fire service and the public transportation industry, a certified commercial vehicle driver trainer, and a public school administrator.
