John P. Martin of the Newark Star-Ledger reported yesterday that Leroy Brown, the onetime financial manager for the charity’s Newark office, was sentenced to 37 months in prison for stealing $385,000 from the Salvation Army. See John P. Martin, Salvation Army Embezzler Gets Prison: $385,000 Stolen Housing Aid Buys Newark Staffer 37 Months, Newark Star-Ledger, November 7, 2006.
Just last week our very own Jack Siegel had a debate with a member of the group he was speaking to about financial controls. The audience member complained that all the controls that Siegel mentioned in his speech cost a lot of money. Siegel responded, “So do away with the organization and just leave the money on the...
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porch with a sign that reads 'Needy People Should Help Themselves.'” The audience member responded that Siegel was being absurd. Maybe so, but Siegel is absolutely right. It costs money to protect charitable assets and charities that fail to do so are simply transferring social service money from those who need it to thieves. As Siegel pointed out in his speech, “Most nonprofit fraud is anything but clever. For the most part, these are crimes that are easily preventable with even rudimentary financial controls.”
According the indictment, Brown’s scheme worked as follows:
It was the standard practice of the Salvation Army to require that potential recipients of rental assistance provide documentation to support the issuance of checks on their behalf. Such documents would include, for example, driver’s licenses and other identification, lease agreements, Complaints for Eviction, and Warrants for Removal. Salvation Army caseworkers would maintain copies of these documents in a file for each client. If appropriate after reviewing the client file, caseworkers would seek approval from their supervisors to provide rental assistance for the client.
If approved by the supervisor, a Check Request Form and second set of client documents would be forwarded to defendant LEROY BROWN. In his capacity as Financial Manager for the Salvation Army, defendant LEROY BROWN had the responsibility to issue checks for intended recipients of rental assistance.
Before issuing checks, defendant LEROY BROWN was required to obtain the approval of the Salvation Army’s Area Coordinator. The checks that defendant LEROY BROWN generated contained both a Power of Attorney signature line and countersignature line. The Area Coordinator was authorized to sign at the Power of Attorney signature line and defendant LEROY BROWN was an authorized countersignatory.
It was standard practice of the Salvation Army to mail rental assistance checks directly to its clients’ landlords and make such checks payable to the landlords.
It was a part of the conspiracy that, in his capacity as Financial Manager with the Salvation Army, defendant LEROY BROWN generated checks that were made out to, or on behalf of, fictitious individuals or individuals who were not otherwise entitled to receive funds from the Salvation Army (hereinafter the “fraudulent checks”). The fraudulent checks were drawn on Salvation Army accounts that contained either HOPWA or FEMA funds, or both.
It was further part of the conspiracy that defendant LEROY BROWN created false documentation to support issuance of fraudulent checks. For example, defendant LEROY BROWN created fake client files containing falsified Check Request Forms and fraudulent court documents such as Warrants for Removal and Complaints for Eviction. In some instances, defendant LEROY BROWN used the false client files to obtain the Area Coordinator’s authorization to issue fraudulent checks. In other instances, defendant LEROY BROWN forged the Area Coordinator’s signature on certain of the fraudulent checks.
It was further part of the conspiracy that defendant LEROY BROWN would meet Co-Conspirator No. 1 outside of the check-cashing business located in Newark, New Jersey, and give Co-Conspirator No. 1 the fraudulent checks.
It is hard to be critical of the Salvation Army in this case. They had a dual signature requirement. They required identification and documentation. They issued checks directly to the landlords.
We can only speculate about other financial controls like bank reconciliations. However, the following controls, if not present, might have caught the fraud sooner:
A. When reconciling the bank account statement, someone independent of the check writing process should have reviewed the signatures against a signature card—assuming bank statements were reconciled on a monthly basis. We are assuming Brown had no part in the reconciliation process and that reconciliations were performed monthly.
B. There should have been sufficient controls in place to keep Brown completely outside of the process authorizing payments on behalf of clients. Somehow Brown was able to add names to the list, suggesting the need for tighter controls over who had authority to add names to that list.
C. There should have been greater review of landlords to make sure that they were not ghost entities—here we assume that the checks were payable to landlords, but that may not have been the case with respect to all the checks. This sort of verification is no different than vendor verification before a vendor becomes an approved one. The Salvation Army might have gone so far as to send someone independent of the process out to the landlord’s office to verify that the ostensible landlord was in fact a true entity.
To the Salvation Army’s credit, they had some sort of fidelity insurance in place that covered the losses. The most recent report by the Association of Certified Fraud Examiners shows that in over 60% of the cases, the charity recovers 25% or less of the amount stolen.
By the way, do you think external audits protect organization's against fraud? Assuming they were conducted here, apparently not. The scheme went undetected for seven years, with hundreds of fraudulent checks being written.
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