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Given today's stressful economic times, more and more people are coming under increasing financial pressure. Sadly, this trend can precipitate lapses in judgment, both intentional and negligent. In times such as these, a renewed emphasis on proven principles can mean the difference between success and failure, prosperity and ruin, happiness and despair.
Recently, our office received notification of a loss which illustrates this point all too clearly. An executive director of a large, non-profit entity who had occupied a significant position of trust for many years encountered financial reversals. Because of this individual's long-standing relationship with the organization, over time the board relaxed common sense procedures and safeguards. For example, the executive director was allowed to assume full check writing authority. The board required no audits, even internal audits. Despite express bylaws calling for regular detailed financial reports, the board allowed the frequency and quality to such reports to degrade over time until they ceased altogether.
Finally, at one fateful board meeting, the executive director, wracked with guilt, admitted that he had for several years been diverting the entity's funds for personal use. He had always intended to pay back every cent that he had "borrowed". Nevertheless, the realities of his financial situation, gradually, but inexorably, overwhelmed his good intentions.
In reflecting on this sad episode, several points stand out. First, the malefactor was a trusted, reputable individual, well known in his professional community. Second, he did not initially set out to cheat or steal. Third, he allowed himself to be seduced by rationalizations until it was too late to undo the damage that had been done. Fourth, the board relaxed its due diligence standards because of the nature of the long-term relationship.
Had the board adhered to sound business practices the loss could have potentially been avoided or at least mitigated. Such practices include: (1) dual signatures on checks; (2) regular account reconciliations; (3) annual audit; and (4) fidelity insurance coverage.
With regard to this last point, a fidelity bond, sometimes called a crime or employee dishonesty policy, protects business owners from losses resulting from embezzlement, counterfeiting or outright theft by an employee. Minimal employee dishonesty coverage may be included in a Business Office Package (BOP). Separate stand-alone crime policies, which can accommodate higher limits, are also available for purchase and typically offer much broader coverage. For example, normally a stand alone policy would have a broadened definition of employee to include non-compensated officers, board members, volunteers, student interns, etc. Also the form would cover not only money and securities, but other types of property as well. Coverage for property of clients located off your business premises can also be included.
Generally, a stand alone policy would have no "manifest intent" or "conviction" requirements which may well be included in your BOP policy. A conviction clause would require an actual criminal conviction for coverage to apply while the term manifest intent refers to the required showing that the employee actually intended to personally profit from the wrongful act. So a Robin Hood motivated embezzlement would conceptually not trigger coverage under the typically more limited BOP form.
So, while honesty is the best policy. A good dishonesty policy can provide an important back stop.
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