By Don Keelan
Once again, two nonprofits, one in South Royalton, Vermont and the other across the border in Lebanon, New Hampshire, have fallen victim to embezzlement.
ValleyNet, a nonprofit bringing broadband to central and eastern Vermont communities, was victimized by the theft of $560,000. The loss was reported last year, and it took until recently to locate the alleged embezzler, hiding over eleven hundred miles away in Brunswick, Georgia.
The alleged embezzler of the Lebanon nonprofit, Listen Community Services, is being charged with stealing $230,000, and not unlike the ValleyNet thief, it was also done over several years.
I wonder if any of these stolen funds were covered by insurance, which, if not the case, represents sizeable losses to the nonprofits. ValleyNet did win a judgment against the theft, but it remains doubtful if it collects. An even more significant loss is the loss of faith and trust placed in the hands of the 72-year-old ValleyNet accountant and the 42-year-old executive director of Listen Community Services.
And therein lies part of the problem regarding embezzlement, especially here in Vermont, where we place so much trust in those accountable for the funds of the state’s 6,000-plus nonprofit entities.
There is absolutely nothing wrong with placing trust in those who are the custodian of nonprofit funds, but it must come with verification. As the experts have consistently reminded us, trust is an emotion and by no means an internal control over the financial affairs of an organization.
While studying the Vermont embezzlement causes with the State’s former State Auditor, Tom Salmon, it was discovered that in countless cases of municipal organizations, the presence of trust and only trust provided the opportunity for embezzlement. What had occurred in Ira, Vermont still remains a textbook case.
The over-reliance on trust is not the only barometer; there are others. One can spot an organization vulnerable to embezzlement.
For many embezzlers, it is an addiction fed with stolen funds. The addiction can satisfy the need to gamble, to meet an illegal drug habit, or convicted embezzlers often give the run-up of debt due to uncontrolled spending as to why they raided an organization.
There is a graphic often used to describe embezzlement: the Triangle of Embezzlement and its three components. At the apex, ‘Opportunity’ followed at the left and right base with ‘Perceived Pressure’ and ‘Rationalization.’
Unfortunately, Vermont nonprofits are an oasis for fraudsters seeking to embezzle funds. Not only is there so much trust, but there aren’t enough internal financial controls or highly trained financial folks on staff. Engaging in a costly annual audit is just out of the question for many.
The ‘Pressure’ component truly exists. Most embezzlers are first-time fraudsters and have to satisfy an addiction. The element of ‘Rationalization’ is “no one will miss the money, the organization has too much money, the organization can ask their large donors to make up the stolen funds, or it is covered by insurance.”
One area of little progress in curtailing embezzlement is the judicial system. Embezzlement in Vermont has a 10-year maximum sentence if found guilty, but rarely will anyone ever serve more than a few years. Getting the offender to make restitution is almost impossible.
No one wants to see a 72-year-old or, for that matter, a 42-year-old alleged embezzler serve ten years in prison. This can be avoided if organizations pay closer attention to their financial affairs and apply the Triangle of Fraud to their organization.
Don Keelan writes a bi-weekly column and lives in Arlington, Vermont.