Q:  Not too long ago our board discovered that our CEO was embezzling funds. There was a disagreement about how to handle it, so we hired a top lawyer in the community who advised us to keep it quiet to protect our reputation. He wrote out an agreement whereby our CEO would resign and agree to pay the organization back over a defined period of time. As long as the checks keep coming – and they have been coming regularly – we will keep the situation under wraps.

Our former CEO has gotten another job. We heard that the nonprofit that hired him did a background check. Because we did not make our experience public, there was no negative information to be found. A few of us are not comfortable with this or how the embezzlement was handled in the first place. We are interested in your viewpoint.

 

A: You would think that someone working for the public good would never take money from the mission. Unfortunately, it happens all too often – especially when that someone is trusted, has access to funds, is faced with pressures or incentives to dip into the till, and is able to – at least initially – rationalize the theft, such as, “I’m just borrowing this to get over this financial hump. I’ll pay the money back next month.” Because so many of us in the sector are goodhearted people that can’t believe someone would steal from our organization without a very good reason deserving of our understanding, the typical way discoveries of this sort are dealt with is exactly the way your lawyer approached it.

I don’t like to second-guess another professional, however I personally would have suggested that you immediately report the theft to both the police and your insurance company. Let me tell you why. Yes, by keeping it quiet you protect your reputation – as long as the situation remains quiet. But too often it doesn’t. Then your reputation suffers more. You are no longer a victim – you are complicit in the crime. You knew money was missing – money your donors entrusted you with – and you chose to cover it up. You could have donors leaving in droves.

The complicity is far more than a public relations nightmare, though. It’s a legal one. And, it could result in your organization losing whatever insurance monies it may be counting on to make up the shortage; to say nothing of losing the ability to even keep your coverage or buy it in the future.

Further, if your former CEO chose to, he could go public saying that the board blackmailed him by saying it would not make the theft known as long as he paid up. It doesn’t matter that your intention was to protect him and the organization and that you were only seeking your own money back. Technically, it’s blackmail.

Yet another issue is that you could be sued by the organization that hired this individual if that organization has a similar experience. As I write this column, the newspapers are full of stories about parishes suing other parishes that, without warning, passed on priests with histories of sexual abuse.

Given what I’ve written here, what is your recourse if this person decides to stop paying your organization back? You would be hard pressed to go after him without repercussions.

Finally, over a defined threshold, you are required to indicate on your Form 990 if – in the words from the form – your organization became “aware during the year of a significant diversion of the organization’s assets.” I don’t know how much you lost, but if it was in excess of $250,000 or five percent of your receipts, this mandate refers to you. Since your 990 is publicly available, you can’t keep this secret.

In the early years, I, too, drafted those discrete agreements when faced with theft within organizations I led. I’ve learned a lot since then. Find another attorney that can help you with your next moves. Call the authorities. Let your donors know that you are taking action. You will be stronger for it down the line.