Thieves among us - embezzlement in emergency service organizations

It is sad that ambulance services, volunteer fire departments, and rescue squads fall prey to embezzlers as well. Consider these representative episodes reported in newspapers across the country:

The treasurer of a southern New Jersey volunteer ambulance squad admitted to stealing $77,000 from the squad’s ambulance replacement fund. Between March 1994 and October 1997, the embezzler looted all but $100 of the fund. The embezzler used the money for various personal expenses.

A chief officer of a Nebraska volunteer fire department transferred fire company equipment to a private ambulance service where he worked as the operations director. In addition, he purchased supplies with fire company funds reserved for his use as the fire department’s rescue chief then resold the supplies to the private ambulance service.

The director of a tax-supported ambulance district in Missouri embezzled more than $100,000 by forging checks and falsifying documents. He used some of the money to purchase personal clothing and construct a rodeo arena on a relative’s property.

The executive director of a suburban Philadelphia ambulance and rescue organization pleaded guilty to theft of $198,000 during a five-year span. The confessed embezzler forged signatures on 189 separate checks, using the money for personal expenses, a family vacation and home improvements.

Two commissioners of a tax-supported New Jersey fire district admitted embezzling more than $60,000 from the district’s commissioners’ account between April 1994 and March 1995. The embezzlers had submitted false invoices to the entire five-member fire commission for payment. The checks were made out to a dummy company controlled by the perpetrators. When received, the checks were endorsed in the name of the fake vendor for deposit only. After the checks cleared, the embezzlers withdrew the money in their capacity as the company’s proprietors/owners. This is one of the most common scams in the world of corporate theft. Often, the purchasing agent or buyer for one company conspires with an outside person to create phony purchase orders and invoices. The two conspirators then split the illegal payment.

In a bizarre case, an Allegheny County fire company suffered a $12,000 theft by a member. Another volunteer member uncovered the theft and proposed new safeguards to prevent recurrence. This second member became the organization’s financial director. The newly named financial director then bypassed the newly implemented safeguards, forged signatures on 113 checks and stole more than $50,000.

The treasurer of a Florida volunteer fire department was charged with embezzling at least $11,000 during a six-year period. The local sheriff initiated an investigation at the request of fire company officers when an audit revealed inconsistencies in the organization’s financial records. The suspected embezzler admitted to investigators that he had been experiencing financial difficulties.

The treasurer of an Illinois department denied claims that he embezzled more than $4,000. The accused acknowledged forging a second signer’s name to checks five times, even while denying any wrongdoing. Some of the checks carrying the forged second signature were made out to the suspected embezzler. He used at least $3,000 to pay for sirens, lights and other items installed in his personal vehicle — a violation of department policy.

A Virginia rescue squad chief was indicted on charges of forgery and embezzling almost $2,000 from the organization’s good neighbor fund, created to aid needy people with medical expenses and similar needs. The culprit had written two checks to himself for $1,600. Because the checks required two signatures, the alleged thief forged the signature of the treasurer. An internal audit revealed the spending irregularities.

State police also investigated unauthorized withdrawals from another squad account, the Wiley Fund, by a city councilman who is also a squad member. The councilman acknowledged drawing checks from the Wiley Fund for textbooks and training supplies, claiming he had repaid all the money. The attorney who oversees the Wiley Fund reported a $2,000 shortfall. In characteristic hindsight, the current squad chief states that the membership may amend the squad’s constitution to require annual external audits.

In recent personal experience with the Thomasville Rescue Squad, a member was indicted and charged with embezzlement of over $25,000 that has now been paid in restitution following a court decision.

Who is at Risk?

These examples represent only a portion of all publicly reported arrests and indictments of volunteer fire, rescue or ambulance personnel for misappropriation of organizational assets. Many cases are handled internally, with offenders asked to resign and organizations taking their financial lumps without going to law enforcement or municipal officials. Frequently, agencies have inadequate insurance coverage and take a substantial hit. They say little publicly for fear of eroding community support at fund-raising time.

Every emergency service organization is a potential target for embezzlement. Agencies that rely on part-time volunteer officers are at higher risk than similar organizations run by full-time professional managers. Several specific factors contribute to the heightened vulnerability of volunteer emergency service organizations:

Reliance on Trust

Trust is a core organizational value of volunteer organizations. Members are reluctant to voice suspicion of fellow volunteers, particularly elected officers held in high esteem by members and the community at large. Members who serve diligently for many years are often considered above reproach. Questioning the integrity or honesty of such people frequently leads to hostility or outright ostracism.

Violation of Trust Defines Embezzlement

If Jones takes property from Smith without Smith’s consent, the crime of simple theft or larceny occurs. If Smith gives Jones property for safekeeping or some specified purpose and Jones subsequently appropriates the property for his own use, then the crime of embezzlement takes place. Broken trust is a central feature in each of the cited examples.

Paradoxically, devotion to duty is a pervasive personality characteristic of successful embezzlers. Embezzlers rarely miss work for any reason, forego vacations and generally share their work with others reluctantly. What passes for diligence is a zealous effort to conceal theft. In a volunteer emergency service organization, the embezzler may assume multiple duties and refuse assistance from others.

Ready Access to Cash or other Negotiable Assets

Volunteer emergency service organizations conduct frequent cash transactions. Fund-raising events, such as bingo, raffles, dinners or carnivals, involve handling cash transactions prior to any formal accounting. Cash in bank checking and savings accounts generally proves easily accessible to an organization’s officers with minimal restriction or oversight.

Officers may enjoy considerable latitude in handling and disposing of inventory. Stolen portable radios, hand tools and similar items may be disguised as equipment lost or misplaced at the scene of a recent emergency incident. The thief may later sell stolen items to other organizations as surplus and pocket the cash.

Inadequate Internal Controls

Due to their informal nature, volunteer agencies seldom adhere rigorously to formal accounting procedures and policies. Individual officers perform multiple-related tasks, creating a fertile ground for embezzlement. Consider an organization where a single officer — a treasurer — makes bank deposits, pays bills and reconciles bank statements. This hypothetical treasurer can pocket receipts before they are deposited, write checks to phony vendors and hide these misdeeds by doctoring records to conceal irregularities in the organization’s financial statements. Embezzlement proves far more difficult if several individuals perform the tasks of receiving payments and reconciling bank balances.

Besides failing to divide work among several people, volunteer emergency service organizations often fail to conduct annual audits. Performed by a professional accountant, the audit remains a powerful tool for ferreting out misappropriation and other financial irregularities. Frequently, it is the organization treasurer who objects the loudest when someone suggests an audit as good business practice. If a treasurer keeps squeaky-clean books and records, they should welcome the opportunity to have an independent auditor validate their numbers. Objections at this level should raise a red flag in any organization.

Preventing Losses from Embezzlement

Embezzlement is preventable when an organization has prudent financial management practices in place and rigorously observes them. Three basic strategies can help your organization control losses from embezzlement: detection, prevention and idemnification.

1. Detecting embezzlement

Auditing, conducted by a certified public accountant (CPA) independent of the organization, is the gold standard for detecting attempted embezzlement. The CPA examines financial records, such as cancelled checks, purchase orders, vendor invoices and bank statements, for inconsistencies and signs of tampering. The accountant may also conduct a spot inventory to identify pilferage. For maximum effectiveness, auditing should take place annually.

In between external audits, trustees or directors not involved in receiving, depositing or spending organizational funds should review checking account reconciliations and bank account balances. Functioning as an audit committee, this group examines and evaluates financial records throughout the year. The committee focuses on identifying overt attempts at theft. Indications include inexplicably low bank balances, payments to unknown vendors or vendors that sell products that appear unrelated to the organization’s primary mission, inability to link purchase orders to payments for goods or services, unauthorized withdrawals or transfers and signs of missing inventory.

To minimize conflicts of interest or fear of reprisal, include one or more individuals from outside the organization on the audit committee. Consider enlisting a representative from local government or the business community. Use of an outside examiner offers convincing evidence of the importance placed on self-examination and commitment to preventing any abuse of charitably donated funds or taxpayer support.

Preventing embezzlement requires faithful application of an entire set of financial policies and procedures. The examples presented represent tactics employed to deter embezzlers. Depending on the nature of the organization and its complexity, more extensive guidelines might be needed to define all relevant rules and regulations.

2. Preventing embezzlement

Use a lockbox for payments or donations: A lockbox is a post office box used exclusively to receive payments. An employee of the organization’s depository bank opens all mail, directly deposits any payments and sends a full accounting of all deposits to the organization’s designee. Lockboxes virtually eliminate any opportunity to filch payments or donations before bank deposit. The lockbox also offers an accounting of receipts independent of any volunteer emergency service organization officer. Variances between the bank’s deposit records and the organization’s accounting records offer an additional warning of an attempted theft.

Never sign blank checks: Sign checks only when the payee, amount and date are filled in on appropriate lines. Refer to copies of original invoices and purchase orders that validate the payment at the time of check signing. The purchase order must confirm that the product or service stated on the invoice was ordered and received. In addition, checks for more than a normal amount (e.g., more than $100) should require two signatures. Under no circumstance should any officer pre-sign a blank check, regardless of the reasons the requesting individual gives.

Never permit a payee to sign checks: While seemingly obvious, this rule is routinely broken. To guarantee independent verification, check signers must never be the recipients of a payment. This rule is particularly important for expense reimbursements, wages or other stipends.

Limit consecutive terms in office: Successful embezzlement schemes require the criminal to monitor financial transactions constantly to hide their theft. Forcing officers to step down from office periodically offers the organization the opportunity to disrupt any criminal conspiracy.

Pay attention to signs of unusual behavior: Otherwise unexplainable wealth or spending by an officer with access to organizational assets may signal theft. Purchases of homes, automobiles, boats, vacations or other items inconsistent with the person’s known financial capabilities form grounds for suspicion. Consider indications of drug addiction, gambling or similar behaviors alarming. These can motivate a historically honest person to embrace embezzlement.

Promptly update bank account signature records: Banks compare endorsement signatures with file copies of authorized signatures. Failure to notify the organization’s bank of changes in authorized signers eliminates a valuable control measure. Immediately notify bank officials when an officer resigns or is removed from office.

Control use of petty-cash accounts: Petty cash is a convenient way of paying low, nonrecurring expenses. These accounts also provide easy targets for embezzlers. A check signer must never serve as the petty cashier, as this position permits the removal of petty cash and replacement by writing a check.

Organizations can minimize the need for petty cash by using postage meters, which eliminates the need to purchase stamps. A general-purpose credit card with a low credit limit can be used to cover meal, travel or related official entertainment expenses. Each mechanism presents an electronic trail of expenses that can be tracked at a later date.

Use purchase orders: Purchase orders can deter submission of false or padded invoices. A purchase order lists the vendor’s name and the estimated invoice amount and describes the good or service purchased. The purchasing agent verifies the legitimacy of the vendor and confirms receipt of ordered merchandise. No bill should ever be paid unless a valid purchase order accompanies the invoice.

3. Insuring against loss

In spite of all efforts to prevent embezzlement, some criminals will succeed in stealing money or other assets. When the firewall is breached, the last hope is idemnification: the use of insurance to recover the value of stolen assets.

A fidelity bond is a special type of insurance used to reimburse businesses suffering losses from embezzlement, forgery or fraud. Bonds come in several varieties. Some cover named individuals or specific position titles such as president, treasurer or director. Alternatively, insurance may cover all individuals who handle money without respect to position title. Insurance is inexpensive relative to the potential loss. The annual premium for coverage on losses up to $500,000 can cost less than $1,000.

Protect Your Agency

Emergency service organizations are just as susceptible to embezzlement as any other business. Your agency should not suffer a financial loss from embezzlement. A combination of sound internal controls, annual professional auditing and adequate insurance is the best guarantee of the organization’s integrity and good name.

Remember that a bankrupt or publicly discredited emergency service organization cannot fulfill its mission and is of no service to anyone. The community entrusts these volunteer agencies with the tasks of saving lives and property. We must do everything possible to prevent tarnishing our reputation or losing the community’s trust.