We recently had the opportunity to sit in on a board meeting where one board member asked whether the organization required two signatures to withdraw amounts from certain reserve funds. The answer from the de facto CFO “Don’t you trust me?”
In our view, the CFO looked a little bit like
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Alfred E. Neuman: “What, me worry?” Well, if you have the sole signature authority there is no need for you to worry. But what about the rest of the board? The board rightfully continued to pursue the matter.
When pressed, the CFO first pointed to the $1 million fidelity insurance policy. That does provide some comfort. However, would the premium be lower if there were better financial controls in place? Probably. Even if the premium remained the same, insurance is not the ultimate answer. Insurance companies have been known to dispute claims. For example, there have been disputes over whether the claim was timely made. Moreover, there is always the question of the deductible.
Next came the “Trust me” line. “I could have gone to Las Vegas years ago.” The problem with that argument is that the 2004 Survey by the Association of Certified Fraud Examiners indicates that 45% of the cases of occupational fraud that were included in the survey involved people who had been employed by the organization for more than five years. It is also worth noting that the median loss increased as the perpetrator's tenure with the organization increased. People who steal from nonprofits don’t come to work with a silk stocking over their heads and a gun. The thieves often are people you eat lunch with everyday. In short, trust, but verify.
Next the CFO noted how inconvenient a two-signature requirement would be. After all, he works in a different location then the treasurer. One board member responded, “We aren’t looking for every check to have two signatures, just ones over a certain amount—maybe $5,000. That would protect the large balance while still letting the regular transaction flow to proceed unimpeded. The CFO responded by asking what a reasonable threshold should be and then sort of grumbled.
The discussion continued. Next the CFO argued that financial controls are expensive. He noted that the outside auditors had commented on the check writing procedures. He said that they wanted different people to authorize the check, prepare the check, sign the check, mail the check, and reconcile the bank statement. “Isn’t that overkill, and expensive overkill at that?” Yes, but we aren’t talking about five different tasks. We are talking about the most basic control when it comes to bank accounts—two signature authority for checks over a certain amount.
Not to be deterred, members of the board pressed on. In response, the CFO pointed out that the board receives extensive financial reports each month showing the balances and all expenditures. Ah, but who prepares those reports? The CFO. One board member correctly pointed out that the monthly reports were therefore worthless in terms of protecting against fraud.
The discussion continued, with several board members becoming impatient with this control rot. The CFO argued that there was an independent audit, with checking and investment account balances being confirmed by the outside auditors. He even dragged out SAS No. 99, the auditing standard that requires auditors to look for fraud as part of their annual audit. Yet, one board member noted, that audit is conducted once a year. That gives the CFO 11 months of opportunity.
In the end, the board agreed to continue this discussion and requested a description of the existing accounting system. So we will see what happens. But note what transpired. Nobody accused the CFO of any wrongdoing. In fact, everyone agreed that the CFO does an excellent job and is trustworthy. Yet, the CFO resisted the most basic of controls as being inconvenient and unnecessary. As a CPA, he knew the board was absolutely right in asking about the merits of two-signature authority. Yet, as a human being, he hated what that implied. This led one board member to half-jokingly suggest, “Maybe we could adopt a two-signature requirement, but apply it prospectively when a new CFO replaces the existing CFO.” No hurt feelings.
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