Unthinkable? The direct theft of grant funds? If you read the headlines, you know that misuse and theft of federal grant funds happens with frightening regularity.
We believe that most organizations do not intend to misuse funds and put processes into place to avoid the risk of unintentional misuse of funds. But what should you do to protect against deliberate theft of grant funds?
Organizations must always act with the understanding that direct theft or embezzlement is all too common and take appropriate steps to protect grant funds and the assets of the organization.
What is the difference between theft and misuse of grant funds?
Misuse of funds is using funds outside of the grantor’s specifications. Direct theft occurs when someone within the organization, or with access to the organization, diverts funds for their own personal gain.
Simply stated, direct theft is most usually made possible by a lack of, or inadequate, internal controls within the organization.
Unfortunately, processes designed to protect an organization from direct theft are often viewed as a low priority and often as time- consuming “paperwork” that gets in the way of the organization’s ability to serve its mission.
Additionally, many organizations are experts within their scope of interest, service, or mission – but lack necessary expertise in financial controls.
There are things you can do to prevent theft of grant funds!
Strengthen your internal controls:
Internal controls not only deter theft, they protect both the integrity of the organization as well as the investment the grantor has made in the organization. For grant recipients, internal controls also protect taxpayers.
Start with segregation of duties
The first, and most effective, means to prevent direct theft is for the organization to require segregation of duties.
Segregation of duties is a system of checks and balances. Organizations that implement segregation of duties do not allow one person to accept, spend, keep accounts, and make fiscal reports. Rather, each process is performed by separate individuals.
Additionally, there are multiple parties within the organization or outside parties responsible to review financial activity.
Think you are too small for segregation of duties?
It’s a common dilemma. Everyone is trying to do more with less people. Especially people who are not working directly on the federal program. However, the need to protect the grant funds from misuse and theft are part of what you signed up for when you received federal funds.
Here are a couple suggestions for small organizations:
Get more outside help
Organizations can hire outside experts such as accountants and CPAs. An outside expert is often better able to identify inadequacies and make recommendations. Outside experts can have expertise to identify risky situations and suggest compensating controls for the lack of sufficient segregation of duties.
Get more inside help
Organizations can also amp up their internal review process by having financial personnel review bank statements and other fiscal documentation along with another source such as a trustee, board member, or chairperson.
Prevention includes knowing what questions to ask
In order to prevent direct theft, organizations must review internal controls often. The following are useful questions for organizations exploring the strength of existing internal financial controls:
• Does the organization practice segregation of accounting duties?
• Does the organization have separate processes to control payroll, vendor payments, credit cards, and cash?
• Does the organization have a policy that prohibits payroll advances?
• Does the organization avoid and/or disallow employee reimbursement for unapproved expenses?
• Does the organization adequately review Federal and State payroll withholding accounts?
• Does the organization routinely review performance of and adherence to internal control procedures by employees?
Start reducing risks today
Ultimately, preventing theft requires a combination of strong internal control procedures that reduce the opportunities for theft, and include ways to catch misuse and theft of funds when it happens. But procedures alone are not enough.
Organization staff needs to be trained to know what to watch for, and what to do if they suspect grant funds are being misused.
Start today by asking the question: What would you do if something didn’t “look right?” Not sure? Get started changing that today. Don’t wait to be the next shocking headline!
Lucy Morgan CPA, MBA