A True Story

What would happen to your mission if you lost $1 million from your budget? That’s exactly what happened to Mountain State Justice, a nonprofit organization that provides legal advocacy to low-income West Virginians.

In April of this year, a former Mountain State Justice office manager was sentenced to 54 months in prison for embezzling $1 million, via a check tampering scheme. By opening a secret bank account in the organization’s name, she diverted checks intended for the main account into the secret account. She used the money in that account to pay her credit card bills, rent, and other personal expenses.

The Mountain State Justice case is a classic case of weak internal controls. As office manager, she had access to the documents necessary to open bank accounts. She hid bank statements, had check writing and signing privileges, and she issued false quarterly financial statements to the board of directors.

The Cost

Of all the asset misappropriation fraud schemes, check tampering is the most costly, with a median loss of $158,000 annually as reported in the 2016 Global Fraud Report released last year by the Association of Certified Fraud Examiners (ACFE). Religious and charitable organizations are particularly high-risk, second in frequency of occurrence only to service firms.

Your Risk

Are you at risk? Let’s pause for a quiz.

Are your unused checks stored in a secure container with limited access?

Have you established positive pay controls with your bank?

Are employees who prepare checks prohibited from signing the checks?

Are your bank reconciliations up to date?

Are two signatures required for check issuance?

These are just a few questions posed by the Check Tampering Schemes questionnaire available on the ACFE website.

Answering no to even one of these questions means your organization may be at risk for check tampering fraud.

Opportunity

Three conditions exist for fraud to occur.  Known by experts as, “the fraud triangle,” these three points on the triangle create the perfect environment for theft:

  1. The individual perceives there is an opportunity to commit fraud.
  2. The individual is experiencing pressure.
  3. The individual rationalizes that committing fraud is justified.

What creates opportunity?  The same person having access to more than one cash function – writing checks, depositing checks, and reconciling the bank statement.  

My Abila MIP Fund Accounting™ students share tragic stories with me all too often. One student, noticeably distressed in class, shared with me that his nonprofit’s bank called to inform them multiple checks for amounts over $50,000 were clearing daily. An employee had opened a shell company in a name similar to the organization for which that employee was the owner. He then wrote multiple checks to that organization.

Significantly, in this case of check tampering, the victim organization bought plain check stock and printed the entire check, including the signature, MICR fields, and check numbers, on the plain stock. By allowing the employee to assign check numbers and signatures, the organization created the opportunity for fraud.

Other Types of Check Tampering

With today’s scanning technology, stealing a single check and scanning it to produce duplicate fraudulent checks is easy and all too common. Clever fraudsters alter the payee name or forge signatures to divert funds to themselves. Leaving signed checks for those who print checks breeds temptation. Fraudsters may pay an invoice twice and ask the vendor for a refund. By intercepting the refund check and forging an endorsement, they divert monies from the organization.

What This Means to You

Most fraudsters do not plan to get caught!  People know that they are risking their careers, reputations, and freedom when they engage in misconduct.  Increasing the likelihood that they will be caught is often deterrent enough. Use these guidelines to implement controls to protect your assets.

  1. Maintain tight check security. Store checks, cancelled checks and signatory stamps under lock and key. Restrict employee access, including the cleaning crew. Destroy unused checks from closed bank accounts.
  2. Implement Positive Pay with your bank. Positive Pay is an automated check matching service that compares checks issued with checks presented for payment.
  3. Use highly secure check stock with at least seven security features.
  4. Do not print signatures on checks, and require at least two signatures on checks.
  5. Reconcile bank statements immediately.
  6. Separate responsibilities for handling checks. Signers should not reconcile the statement, and those processing checks should not be signers.

For most employees, their personal integrity will prevent them from committing fraud. Keep them honest by implementing controls that reduce the opportunity for fraud and increase the chances of early detection.