Recent Investigation of a Not-for-Profit Organization

A former CFO embezzled in excess of $445,000 from her not-for-profit employer.  Although this situation is something the Forensics group deals with routinely, the method she employed was unique.

The office environment was small, but segregation of duties was enforced.  The former CFO was not an authorized signer on the bank account and a separate payables department handled the processing of checks for payment.  Even with these controls in place, she was still able to embezzle over $445,000 through a fraudulent check disbursement scheme.

Although fraudulent check disbursement schemes are not uncommon, the fact that every check she embezzled was made payable to a legitimate vendor of the NFP was unusual.  In order to facilitate her scheme, she would secretly obtain blank check stock from the CEO’s office.  She would then generate checks to legitimate vendors for relatively low dollar amounts.  In fact, of the approximately 400 fraudulent checks that were written, the average check was less than $1,100.

After generating the checks, she would forge the signature of an authorized check signer.  She would then forge the endorsement of the payee on the back of the check and deposit the check into an account she controlled.  In order to avoid the scrutiny of the endorsement on the back of the checks, she utilized ATMs to make the deposits.  She was able to conceal the fraud because she had the ability to post transactions and was solely responsible for reviewing the bank statement activity and reconciling the bank account. 

She had been employed with the NFP for 10 years when the embezzlement was discovered, but the scheme had been ongoing for at least 8 years.  She was ultimately sentenced to 4 years in prison and her CPA license was revoked.

Key Points That Provide for Opportunity:

  • Trust.  CFO was considered a trusted employee by all.
  • Red flags were ignored.  Even though it was widely known that she had gone through a bankruptcy, her daughter was in a prestigious private school, she took expensive vacations, and she often talked about a lifestyle seemingly beyond her income, these red flags were never questioned.
  • CFO’s system access was too broad and did not match the controls in place.  Even though she was the CFO, her ability to generate and post checks in the system should have been disabled.
  • Check signing was relied upon as an effective internal control.  When it comes to cash disbursement fraud, the risk is not with the checks that are being signed, but with those that the check signer never sees.  Banks are not comparing the signatures of authorized account signers.

Check stock was not adequately secured.  Even though it was secured in the CEO’s office, ample opportunity existed for the CFO to enter her office and obtain blank checks.

If you would like to learn more about the specifics of this scheme, or if you would be interested in a member of our Forensics group presenting on occupational fraud, please contract Richard Livingston in the Charleston, South Carolina office.