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Fraud Future: Fraternity Embezzlement and 5 Tips to Prevent It

     

It’s a stick-up.

Did you know that embezzlement is actually pretty common? In fact, it’s so common that it costs the U.S. economy about $400 billion every year as a direct result of employee theft and fraud.

And that’s not a small drop in the bucket.

Particularly when it comes to small businesses and organizations; even more particularly when it comes to Greek organizations. For your inspiration (and protection), Omegafi is here to break down the Fraud Future: Fraternity Embezzlement and 5 Tips to Prevent It.

 

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Embezzlement at Work

In a sleepy South Florida suburb at Florida Atlantic University, one Greek fraternity’s chapter learned a hard lesson in just how much trust they can place in one of their own.

Boca Raton, Florida, more affectionately known as “Rat Mouth,” was the unfortunate setting for a significantly large case of fraternity embezzlement. Here’s the summary:

Joshua Caleb Dalton, who we’ll hereby refer to as the “Worst Fraternity Brother Ever” or WFBE for short, is currently facing theft charges after allegedly stealing $18,000 from his chapter. Although he wasn’t the original treasurer (red flag here), he took the position when the former treasurer stepped down. Within a short time, the WFBE would be given a debit card and tasked with deactivating it. Assuming the power and responsibility of being the fraternity’s sole financial surrogate, he took the trust bestowed in him, traveled to the bank, and requested a second debit card.

And that’s where the spending really started.

It’s unclear how long it took the WFBE to amass the final tally he stole, but by the end of his spree, he had stolen $18,212.91.

But why? Why would he do this?

Unfortunately, when large sums of money are taken in crime, it’s rarely for anything positive. And in this case, you can probably guess that the motivation was drug-related. In the WFBE’s case specifically, the drug of choice was heroin.

He’s 25.

The key lesson in this story is the fact that it isn’t uncommon or crazy. As we’ve mentioned above, this kind of embezzlement happens all the time. And sadly, in most cases, it isn’t even reported.

 

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So, What is Embezzlement?

Simply put, embezzlement is the act of withholding a company or organizational asset(s) for the purpose of theft. These assets most commonly come in the form of cash or physical property.

Currently, the top forms of embezzlement include:

  • Vendor invoicing & False Billing (10%)
  • Check Fraud (25%)
  • Outright Theft of Funds (36%)
  • Payroll Fraud (7%)
  • Credit Card Fraud (12%)

How bad Is It?

To start, it’s seen in nearly all industries that handle cash in some form, particularly in places with a high level of trust associated amongst staff, such as a fraternity or sorority. And the effects on the growth of the business or organization aren’t negligible. Rather, the size and scope of these gradual and incremental thefts can have huge consequences on an organization’s ability to thrive and grow.

Affecting organizations both big and small, 82% of fraud cases took place in organizations with fewer than 150 employees, and 16% of fraud cases involved a non-profit organization. One report by the Association of Certified Fraud Examiners states that a typical organization loses 5 percent of their revenue each year due to fraud and embezzlement.

This statistic is compounded when it occurs within a non-profit. Today, nonprofits lose 13% of the total amounts they collect in donations each year due to embezzlement. And it’s difficult to catch, too.

Across the country, 3/4 of all employee theft goes undetected. If and when it is discovered to be embezzlement, often many organizations and companies simply terminate the perpetrator quietly rather than risk an issue of negative PR. In taking this light approach to discipline embezzlement, it ultimately encourages its perpetrators

 

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Circumventing Embezzlement Through the Use of Internal Controls

In short, internal controls and the separation of duties are the most common (and effective) methods to stop embezzlement. Following these practices, it is best to move monetary funds from one entrusted individual to another often, in order to ensure that more than a single individual’s eyes are over the organization’s accounting practices.

Things to Look For

  • Uneven income flows
  • Changes in patterns of income or ret profits
  • Odd tipping patterns on credit cards
  • Accountant or treasurer who is alone in their duties and refuses to take a vacation
  • Sudden changes in a member’s lifestyle

Internal and Compulsory Controls: Best Practices

  • Monitor your members and ensure a system of oversight to lessen the chance that a member will embezzle from you based on an opening of opportunity.
  • Establish a positive corporate culture and code of conduct.
  • Have financial management roles working in tandem.
  • Establish a budget then electronically document review and approval by board members.
  • Produce a balance sheet and income statement. Document the semiannual review process.
  • Establish minimum thresholds requiring electronic approval from at least two authorized individuals before making a purchase of $5,000 or more.
  • Reconcile bank statements with online/vendor management tools designed for this function.
  • Maintain records and an account history on all house corporation vendors. Use third-party verification of the vendor’s legitimacy before issuing payment.

Things to Implement:

  • Utilizing a purchase card
  • A Division of Labor
  • Have bank statements sent to the home
  • Have President and Vice President open bank statements together
  • Purchase fidelity insurance
  • Positive pay procedures offered by banks
  • Don’t leave blank checks out, lock them up.
  • Use a shared cash box when collecting donations; no personal envelopes.

 

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Final Takeaways

Being embezzled sucks. It just does. It hurts to have a brother lie and steal from you, and that hurt is compounded further when you have to hold that brother legally responsible. It’s best to just avoid putting a brother in that position in the first place.

Temptation can be corrupting.

What about you? Have you heard or experienced any issues relating to embezzlement within your fraternity? Let us know in the comments and what you handled it.

 

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