Mountain State Justice: A True Story

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

In April of 2017, a former Mountain State Justice office manager was sentenced to 54 months in prison for embezzling $1 million using a check tampering scheme. By opening a secret bank account in the organization’s name, the employee diverted checks intended for the main account. She used the money to pay credit card bills, rent, and other personal expenses.

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

You might think check forgery, identity theft, or another financial crime could never happen at your nonprofit, but that’s probably how the folks at Mountain State Justice felt. However, there are steps you can take to protect your organization, including learning the risks and mitigating them using a secure fund accounting software.

Financial Losses from Check Forgery

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 Report To The Nations On Occupational Fraud And Abuse released last year by the Association of Certified Fraud Examiners (ACFE). Religious and charitable organizations are particularly high-risk targets, second in frequency of occurrence only to service firms.

What Are Your Risks?

Are you at risk of check forgery? Let’s pause for a quiz with a few questions from the Check Tampering Schemes questionnaire from ACFE:

  • 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?

If you answered “no” to any of these questions, your organization could be at risk for check fraud.

The Fraud Triangle

In most cases, three conditions, known as “the fraud triangle,” must exist for a person to commit fraud, including the individual:

  1. Perceives there is an opportunity to commit fraud
  2. Is experiencing pressure
  3. Rationalizes that committing fraud is justified

What creates opportunity is when the same person also has access to more than one cash function, such as writing checks, depositing checks, and reconciling bank statements. My MIP Accounting students have shared tragic stories with me all too often. One student, noticeably distressed in class, said his nonprofit’s bank informed them that multiple checks for amounts over $50,000 were clearing daily. An employee had opened a shell company in a name similar to the organization’s name, for which the employee was the owner, and then wrote multiple checks to that organization.

In this case of check tampering, the victim organization bought plain check stock and printed the entire checks, including the signatures, 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 Fraud

With today’s scanning technology, committing check forgery by stealing a check and scanning it to produce duplicate fraudulent checks is easy and all too common. Clever fraudsters alter the payee name or forge signatures on checks to divert funds to themselves. In another scheme, fraudsters pay an invoice twice, ask the vendor for a refund, and then intercept the refund and forge an endorsement to divert money from the organization. A list of the most common fake check scams is available from Fraud.org.

How to Practice Check Fraud Prevention

Most fraudsters do not plan to be caught! Thieves know they are risking their careers, reputations, and freedom when they engage in misconduct. Increasing the threat that they will be uncovered is often deterrent enough. However, using these check fraud prevention tips can help you further protect your assets:

  1. Maintain tight check security by locking away new checks, canceled checks, and signatory stamps, restricting employee access, including to the cleaning crew, and destroying unused checks from closed bank accounts.
  2. Implement Positive Pay with your bank, 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.
  5. Reconcile bank statements immediately.
  6. Separate responsibilities for handling checks so that signers do not reconcile the statement and those processing checks are not also signers.
  7. Use a nonprofit fund accounting software to monitor financial activity by employees and catch irregularities early.

For most employees, their integrity prevents them from committing fraud. However, keeping everyone honest means implementing controls that reduce the opportunity for fraud and increase the chances of early detection.