Preventing Nonprofit Theft
This is a subject we wish we knew nothing about. Unfortunately we have learned a tremendous amount about the ways nonprofits are particularly vulnerable to criminal financial manipulation.
Our Story …. And Why We Believe it is Important to Tell it Publicly:
In July of 2005 Free Street’s board and staff discovered that our then Managing Director had been taking organization funds for personal use. Before we share the details of our story, and share what we have learned through our trials and tribulations, we want to explain why we think it is important to be public about a subject that is typically hushed.
1. We want others to benefit from our experience so they do not have to learn the hard way as we did.
2. We believe silencing crime aids criminals. Our auditor told us that nonprofits tend not to prosecute because they fear a myriad of potential consequences. Our auditor has seen thieves get caught at one organization and easily move on to another organization. We think being active in stopping that trend is worth the risk of being publicly vocal. We hope that through our example, we can help other organizations confidently prosecute when necessary, and ultimately lessen the vulnerability for all nonprofits.
3. Free Street is a nonprofit organization and as such exists to serve the community. The community deserves a transparent, open understanding of our work. This includes our pitfalls as well as our successes.
4. We could not have pulled Free Street out of this crisis without the overwhelming outpouring of support from the community. We want to be able to share our gratitude. Ultimately we have emerged as a stronger organization. Sometimes it takes being faced with the question “Why should you exist?” to really discover why your existence matters. We are proud to exist, evolve and thrive.
Major Lessons We Learned:
1. Nonprofits are vulnerable because they are mission driven. Everyone is working based on the belief that the mission is important and everyone in the organization is passionately working for the cause. No matter how deeply you are engaged in your mission, how much you hate dealing with the money, or how short staffed you are, never ever entrust one person to handle all the money matters. (Of course, we didn’t think we were doing that. Read lesson number 2.)
2. Checks and balances need to be effective. We had a bookkeeper, an auditor, and a board who had roles in examining our financial information. There are a surprising number of places in general operating systems that are vulnerable to manipulation if someone aims to harm your organization. Unfortunately, if someone is presenting misleading information to the financial overseers, the assumed checks and balances are rendered ineffectual. (See “What We Do Differently”)
3. Financial matters are the bones supporting the body of programming. Learning to be interested in the financial practices is essential. We came to the conclusion that as artists who are passionate about Free Street, we are the best caretakers of the organization. We accept the challenge of learning the financial management skills we need to be able to support the organization to the best ideals of our mission. The three full time artists who comprise our core staff have worked together for ten years. We have evolved a management style that uniquely contours to our strengths, and we have built a stronger board. We have learned a great deal about creating better accounting practices for our organization through lessons from the Nonprofit Financial Center, private consultations, and public resources. (See “Resources”)
4. Ask for help when you know you need it. There is no way we could have pulled through this crisis alone. Thank you Lawyers for the Creative Arts, Reclamation Committee, Chicago Police Financial Crimes Detective Sergeant Lucky, State’s Attorney William Merritt, Pro-bono legal counsel from Robert Zimmerman and the team of Edward Green, Karl Von Drathen and Karen Kawashima at Foley and Lardner, Chicago funding community, James Mitchell of the Abbey Woods Fund, and all our friends.
Jennifer Bielstein – Former Executive Director of Writers Theater.
Currently Executive Director Actor’s Theater of Louisville
Greg Cameron - Deputy Director of the Museum of Contemporary Art
Pam Crutchfield - Former Free Street board member
Peter Handler - Program Officer of the Richard H. Driehaus Foundation
David Hawkanson - Executive Director of Steppenwolf Theater
Jobi Peterson - Former Executive Director of the Illinois Caucus for Adolescent Health.
Currently Consultant for the Bill And Melinda Gates Foundation
John Quaadman – Free Street board president
Laura Samson - Executive Director of the Alphawood Foundation
Mel Smith - Former Free Street board president
While not an official member of the committee, David Schmitz, General Manager of Steppenwolf
also pitched in a great deal.
Overview of What We Do Differently Now
We have a detailed fiscal controls policy that includes:
1. All financial duties are shared between two staff members.
2. A board member opens the bank statements and reconciles our computer records.
3. We have developed a more experienced board.
4. We have a payroll service issue checks for the staff and pay the required taxes.
5. Bryn Magnus and Anita Evans have taken part in many financial training sessions to continually deepen their understanding of accounting practices, budgeting, and recommended checks & balances.
CPAs for the Public Interest
Illinois Nonprofit Principles and Best Practices
Lawyers for the Creative Arts
Nonprofit Financial Center
The Nonprofit Quarterly - "How to Steal from a Nonprofit: Who Does It and How to Prevent It"
New York Times - "Report Sketches Crime Costing Billions: Theft from Charities"
Our Story. Abridged
.In July of 2005, Free Street’s staff and board came to the horrifying realization that the then Managing Director had neglected to pay payroll taxes. Soon after, we discovered our accounts had been drained to the extent that we could not cover payroll. Free Street was thrust into the daunting task of rescuing our indebted organization.
Upon conducting a forensic audit of all transactions during Rodney Terwilliger’s two-year tenure as Managing Director, Free Street discovered a multitude of fraudulent activities. Free Street delivered the evidence to the Chicago Police Department’s division of Financial Crime and the State’s Attorney. He was charged with felony theft.
As we began asking for help, we were told to expect recovery to take two years. At that time, we existed day to day and two years sounded like an eternity. Sure enough, it is now two years later and we have recovered. Here is a brief description of the phases that occurred in those two years between the horrifying discovery and the establishing of new stability.
Phases of Recovery
1. Shock. (July 2005 – Dec. 2005)
We discover the payroll taxes hadn’t been paid and begin to investigate. We find out that our accounts have been drained and begin the task of emergency fundraising and crisis management. We are determined to met payroll for the teens in our jobs training program. The Lawyers for the Creative Arts are provide valuable assistance including connecting us with the law firm of Foley and Lardner, which offers pro-bono legal counsel. We conduct a thorough forensic audit and present our findings to the State's Attorney. We form the Reclamation Committee and are determined to keep Free Street alive.
2 – Gratitude (Jan. 2006 – March 2006)
Bryn and Anita have the opportunity to attend a six-week Bookkeepers Institute Class at the Nonprofit Financial Center. The Reclamation Committee helps to arrange and prepare us for meeting with our key funders to explain what happened and appeal for extraordinary support. At that meeting, James Mitchell of the Abbey Woods Fund offers to take care of our IRS tax liability. Rodney Terwilliger is arrested and charged with felony theft.
3 – Grind (April 2006 – July 2006)
The adrenaline wears off and it is just hard. We are working with a barebones budget trying to keep programming from suffering. Despite the challenges, Free Street performs in Germany and Poland and opens the National TCG Conference in Atlanta. We are going to court regularly and are frustrated that we can’t tell our story to publicly appeal for support because we don’t want to jeopardize court proceedings.
4 – Cresting the Mountain (July 2006– March 2007)
We have worked hard and now it begins to get easier. Cash flow is strong. We can focus on new programming. We have our last Reclamation Committee Meeting. Some members transition on to our board. Peter Handler becomes board president. Board development is priority.
5 – Moving On (April 2007 – July 2007)
With the help of State’s Attorney William Merritt, prosecution is successful. On April 19, 2007, Rodney Terwilliger pleads guilty to misdemeanor theft charges, and pays restitution of $30,000. He is sentenced to 18 months probation. Free Street’s Board is strong. Our programming is strong. Our budget is back to a healthy $375,000. We can finally tell our story, and move on.
If you would like to contact us about our experience we would be happy to answer your questions.
Originally published on Free Street's website in 2007. I believe it is important to keep this information public for the same reasons I believed it was important to share it at the time. So here's the new contact info: firstname.lastname@example.org