You have finally found someone to take on the position of treasurer within your volunteer fire department, and is this person ever dedicated! He is always working in the position, always at the computer, or at the bank. Your treasurer knows the importance of the job and insists that he take care of everything on your behalf. Will this new treasurer take a vacation? No! He wants to make sure everything runs smoothly. This sounds like an ideal situation—but is it? Although this person has all the traits of a committed volunteer, this situation could also be a “red flag” that embezzling is occurring.
It is difficult for firefighters to imagine how one of our own could perpetrate such a crime against fellow members. To dissect fraud within the volunteer fire service, it is beneficial if we size up the situation. First, consider the definition of fraud and examine a portrait of an embezzler. Once the size-up is complete, study the environment where fraudsters thrive, and make recommendations based on your findings.
If you do an Internet search of “fire department embezzlement,” you will find thousands of examples of fraud from all states and department types. Embezzlement—also known as employee theft—is the act of improperly appropriating funds assigned to your care but which are owned by someone else such as the volunteer fire company or the donating public. Accounting embezzlement occurs when accounting records are engineered to cover the theft of funds.
Embezzlement is considered an employee problem, where a trusted employee steals from the company, but anyone with fiduciary responsibilities, such as the volunteer fire company treasurer, could also be charged with embezzlement. The following four factors must occur for a charge of embezzlement:
- There is an established fiduciary relationship between the two parties.
- The loss is perpetrated by the embezzler.
- The embezzler must take ownership of the property or give it to someone else.
- The embezzler’s actions must be intentional.
There are many examples of embezzling activities including firefighters who keep money for themselves when depositing fund-raising proceeds, have donors write checks to an individual or fictitious company instead of the fire company, and make unauthorized purchases on company credit cards.
Portrait of an Embezzler
How does a person go from a trusted fiduciary agent to stealing hundreds, thousands, or even millions of dollars from a volunteer fire company? The typical embezzler does not wake up one day and decide to steal fire department assets. Research shows that the typical embezzler does not fit the typical criminal profile. He has often been with the company for more than four or five years; is trusted by fellow members; and, nine times out of 10, is a first-time offender. The individual accepted the position not to commit fraud but to help the fire department. Fire department officials may wonder, “How do good people ‘pivot’ and become embezzlers?”
The first part of the answer begins by knowing the different parts of the “fraud triangle.” The fraud triangle consists of three parts: opportunity, pressure, and rationalization. Fire department officials must understand that, in any organization, the three sections of opportunity, pressure, and rationalization work in combination for a volunteer to commit fraud.
The Fraud Triangle
The first part of the triangle is having the opportunity to steal funds. One example of this is when incoming cash is collected. The opportunity is present when the same person is responsible for taking in the cash and for preparing the reports for department officials. The offending member has the opportunity to “pocket” some of the cash that was collected and prepare reports that indicate less was collected than actually was.
The next part of the fraud triangle is pressure. Many pressures in the fraudster’s life work in conjunction with opportunity and realization to complete the fraud triangle. The pressures many embezzlers encounter include personal debt, family expectations of a certain lifestyle (keeping up with the Joneses), and having an extramarital affair. The life pressures are the section of the triangle that will lead to reasoning behind the embezzlement.
The final section of the fraud triangle is the rationalization. This part of the triangle is how the embezzler justifies the theft to himself. Rationalization is the ability to convince yourself that something that you know is wrong is “okay.” Rationalization happens in the fraudster’s mind.
Some reasoning behind this rationalization includes statements such as “I am only borrowing the money, and I will pay it back” or the one many volunteers should worry about, “I do so much for this organization, so they owe me.” The latter statement has been called “wages in kind,” where the embezzler feels he is not being treated fairly and will compensate himself through reallocation of company assets.
In the past 20 years, there have been numerous examples of unethical behavior inside and outside of the fire service. When people think about bad behavior, it is common to think that the behavior is tied to a person with poor character, but analysis shows it is actually the congruence of opportunities, pressure, and rationalization that turns “good” volunteers into fraudsters. Is there anything a volunteer fire company can do to prevent embezzlement? To protect fire companies from a would-be embezzler, we should examine the type of environment that is ideal for the embezzler.
Ideal Climate for an Embezzler
Although each embezzler and each case are different, there are some red flags of which companies must be aware.
Scenario 1: Fire Company A is a small volunteer fire company, where Treasurer B has volunteered to be its treasurer. Treasurer B has a business in the town and is respected for the business that is owned by the treasurer. Treasurer B has just been through a divorce, and the firefighters want to help Treasurer B through this difficult time.
Treasurer B was just what the firefighters had ordered. No one else was interested in recording the money coming in and going out, but Treasurer B was going beyond everyone’s expectations. Treasurer B was always around when money was coming into the company, and he would always take the money to the bank and record all of the receipts for Fire Company A. Not only did Treasurer B do all of this, but he also took the accounting records home and completed them for us; it was a dream come true.
For a volunteer fire company, the scenario seems perfect. However, some conditions make this scenario ideal for embezzling. For example, one person depositing the funds and recording the transactions offers an opportunity for embezzlement. Additionally, if someone takes the records home, it is difficult for others to detect what is going on. Finally, and as part of the triangle, there are outside pressures such as divorce and family expectations.
Scenario 2: Fire Company B is a suburban department, and Member C has just joined the fire company. Member C is always willing to help whenever assistance is requested. After a few years, Member C is trusted by the membership and has agreed to take the position of treasurer. He writes the checks when bills come in. To make it easier for the administration, he will bring in a handful of checks to be signed. Treasurer C has also brought to the fire company the idea of having corporate debit cards, which can be used for purchases to pay for them faster rather than having to wait to write a check. Treasurer C has even offered to reconcile the bank statements for Fire Company B. That is Treasurer C—always willing to help out!
Again, this seems like a dream to have someone who is willing to go the extra mile, but this could also be a red flag that Treasurer C is embezzling from the fire company. One thing to look out for is that the individual has checks presigned. Because there are no invoices or purchase orders with the checks, is the treasurer truly paying bills or taking the checks to the bank and cashing them? Another red flag is the use of debit cards; the person reconciling the accounts could be the person stealing from the fire company.
What these scenarios have in common is a lack of accountability and oversight by others. It is very easy to have someone else taking care of the work, but this leads to an opportunity for an embezzler. Another idea to consider is that a lack of accountability or oversight is a leadership team problem. A leadership team that does not see the importance of accountability in all realms of the company is a team that could lead the company down a dangerous path.
Other leadership problems that could lead to fraud within a company are apathy and dissatisfaction in the membership ranks. Apathy and dissatisfaction could lead to rationalizations by members, while feelings of being underappreciated and overworked lead a fraudster to believe that the fire company treats him unfairly, so he feels he is just getting what he is owed.
A final issue that could lead to department fraud is the actions of the leadership team. Is the leadership team spending money with zero accountability and no one is questioning the fraudster’s actions? If so, it could lead fraudsters to rationalize that it is fine to steal money because the department already wastes money on other things, so why not to make his own life better? Any action that indicates to other firefighters that financial accountability is not important is a red flag that could lead the volunteer fire company to become a victim of fraud.
Tips to Prevent Fraud
Now that we have examined which type of environment is disposed to fraud, let’s examine what we can do to prevent fraud. One of the key points to take away to guard against embezzlement is to ensure there is a system of checks and balances; this ensures that there is always an additional party watching over the others. Some common checks and balances include the following:
- Always have two signers on a check, which should also have the entire backup attached and approved by the appropriate parties.
- Signers should not sign blank checks or checks without a backup.
- Someone outside of the treasurer should complete monthly bank reconciliations.
- When cash is received, at least two people should count and record the cash.
- The person who records the transactions in the computer/accounting system should be different from the person making the cash deposits.
- The fire company should not issue debit cards to any members.
- The fire company should establish a purchase order process. The process should consist of a request for goods that is properly approved; a purchase order issued to the vendor; and, once the goods are received, paperwork forwarded to the treasurer, who will then compare the purchase order to the invoice prior to payment.
- The fire company should establish a credit card purchasing policy.
- Establish a code of ethics for the board of directors, line officers, and administrative officers. A code of ethics is helpful in deterring fraud because it establishes the expectations and tone at the top of the organization. When volunteer officers see the board members, chiefs, and president honoring and following the company’s code of ethics, they will be much more likely to follow it themselves. They will also be more likely to report any misconduct that they witness.
- Ensure there is oversight outside of the treasurer. The board of directors should be analyzing monthly financial information. Board members should also be cognizant of issues such as vendors complaining that payments are not being credited to their accounts, expense reimbursements without the proper receipt, and an explanation for an expense that does not make sense. Returning expense requests that do not make sense is imperative in the deterrence of fraud because it indicates to others the seriousness with which expenses are examined.
There will be individuals who believe this level of examination of embezzlement is overkill, but the first fraudulent submission that is not detected is how the vicious circle begins. For example, if a volunteer submits a fraudulent request to reimburse $3.48, and no one questions the expense, the next submission will increase, say, to $34.80. If that fraudulent reimbursement is not questioned, the next request will be for $348.00, and so on.
Most embezzlers will tell you that they did not wake up one day and decide to take thousands of dollars; it all began with one submission that was not questioned, and from that point on, it got easier and easier. And as it got easier for the embezzler to take the money, the embezzler began to take larger amounts.
It is important to note that even with the best-established controls and oversight, preventing embezzlement is not guaranteed. However, by establishing the appropriate ethical conduct, having internal controls in place, and having board oversight, you can minimize embezzlement. Stay diligent, and you will be able to curtail such activities.
TAMMY GORMAN is a 16-year member of and secretary with the Grand Island (NY) Fire Company. She has also served as a department officer for 13 years, including four years as president, four years as a lieutenant, and four years as treasurer. She has a bachelor’s degree in accounting and a master’s degree in executive leadership. She has worked for the past five years as a corporate accountant for a nonprofit organization, working with individuals with developmental disabilities.