Tag Archives: litigation

What to Do If Embezzlement Occurs at Your Nonprofit

Last time, we discussed how you can protect your organization from embezzlement or other misappropriation of funds. But what if the theft has already occurred?

Gathering Evidence of Theft

If you have funds or property that can’t be accounted for, it’s time to investigate what happened. You’ll want to make sure that you know 1) you want to make sure that embezzlement actually occurred, and 2) who committed the theft. The investigation should begin as soon as possible. Delays can invite additional theft and make recovery of stolen property harder.

If you suspect a particular person, limiting his or her access to funds and other property during the investigation is probably a good idea. Another approach would be to leave the person in the position and watch for continued theft, but I don’t like that idea much. It continues to put the organization’s property at risk, and if word gets around that an investigation is underway, it’s not likely to be all that helpful. Confronting the person at this stage might be premature; I’d wait until you have pretty clear evidence that the person is actually stealing.

Punishing the Thief

Once you have clear evidence of who committed the theft, now it’s time to deal with the thief. It’s difficult for me to imagine a situation where no punishment would be appropriate; generally, I consider embezzlement to be fireable offense. Surprisingly, it doesn’t always work out that way. The Chronicle of Philanthropy reports that in one study, only 72% of organizations fired employees that stole from them, and 7% did nothing at all.

Why do so many organizations do so little? According to the Chronicle of Philanthropy, there are a few reasons:

  • Thief’s Remorse. Sometimes the thief is sorry for what they’ve done. A person that shows genuine contrition and returns the stolen property may be able to remain in the organization. Even in those cases, however, I cannot see levying no punishment at all. At a minimum, the person should not be allowed to handle organizational property again.
  • Embarrassment to the organization. Sometimes, organizations are embarrassed to admit what happened. Often, embezzlement exploits a flaw in the organization’s internal controls.
  • Loss of donors. It’s possible that donors may stop giving to an organization***It’s better, I think, to admit what happened and explain how the organization is improving its controls than to try to cover up what happened.

Additionally, you may want to consider filing a police report, particularly for large thefts. The police report is helpful in any future employment actions that might be filed by the thief and in recovering any stolen funds. Additionally, if your organization carries insurance against embezzlement, you may need to file a police report before making a claim–of course, you should check your insurance policy to make sure.

Recovering Stolen Assets

Recovering stolen assets, particularly cash, is difficult. However, that’s not to say that it isn’t worth trying. In some cases, you may be able to work out repayment with the person, and in other cases, you may need to take legal action. Just like with the investigation, it’s important not to delay the process of recovery. This is especially true if you have to file suit, because your organization will have a limited amount of time to do so.

Doing Better

Next, use this as an opportunity to improve your controls. What vulnerabilities in your system did the thief exploit? How can this sort of thing be prevented in the future? Leaving a known vulnerability in place is absolutely unacceptable–the problem must be identified and solved.

Making these needed changes doesn’t just protect your organization, but it also helps to restore the confidence of your donors, clients, volunteers, an other employees. Handling embezzlement is an enormous drain on the organization–it takes time and energy to deal with, in addition to the financial damage. Creating solid internal controls and improving them if you ever (unfortunately) need to is vital to keeping your organization focused on accomplishing its mission.


Tea Party Class Action Wins in Federal Appellate Court

Last week, the U.S. Court of Appeals, Sixth Circuit (which covers Michigan, Ohio, Kentucky, and Tennessee) ordered the IRS to produce discovery (the pre-trial exchange of information between the parties in a lawsuit) required by the trial court in an ongoing legal battle with a class of conservative and “Tea Party”-related organizations.

If you’re new to this story–or if you’ve forgotten about it, because it’s been off the radar for a while–Forbes contributor Kelly Phillips Erb (or “taxgirl,” as she’s often known) has a pretty good timeline here. The short version is that after the Citizens United decision, there was a dramatic increase in applications for tax-exemption under Section 501(c)(4) of the Internal Revenue Code. That’s because Citizens United held that the government cannot prevent a nonprofit corporation, for-profit corporation, or a labor union from making “independent political expenditures,” which are expenditures on statements supporting or opposing a political candidate but is made independently of any candidate’s control or cooperation. (Note: That’s not the same as requiring the government to subsidize that speech with a tax exemption, though, which is why 501(c)(3) organizations can lose their tax-exempt status for political speech. Even with 501(c)(4) organizations, political activities must be an insignificant part of their activities.)

These organizations allege that the IRS treated applications from conservative groups unfairly. The IRS specifically looked for applications with terms such as “Tea Party,” “9/12,” and “Patriots,” as well as those advocating positions on taxes and government spending. Those applications were either delayed or subject to pretty heavy requests for information from the IRS. Indeed, the Treasury Inspector General for Tax Administration found that the criteria used were inappropriate. As the Sixth Circuit points out, charges that the government has targeted its own citizens for mistreatment based upon those citizens’ political viewpoints are a serious matter.

As part of the discovery process, the plaintiffs (the organizations alleging mistreatment) wanted to find out what organizations were screened out by the IRS’s “Be On The Lookout” lists, which the IRS has, up to this point, resisted turning over. The Sixth Circuit rejected the IRS’s request to avoid turning over this information in clear terms:

“The lawyers in the Department of Justice have a long and storied tradition of defending the nation’s interests and enforcing its laws—all of them, not just selective ones—in a manner worthy of the Department’s name. The conduct of the IRS’s attorneys in the district court falls outside that tradition. We expect that the IRS will do better going forward. And we order that the IRS comply with the district court’s discovery orders of April 1 and June 16, 2015—without redactions, and without further delay.”

As Nonprofit Quarterly explains, this most likely opens the door for depositions of IRS officials involved in this matter, and depending on the facts that come out of those depositions, this controversy may find its way back into the limelight.

Photo credit, Siyan Ren, via Unsplash.com, licensed under CC-0