The Toronto Star had an article of December 5, 2015 entitled “Cancer foundation co-founder misused donor cash, judge finds”. It sheds some light on how a co-founder of a Canadian registered charity, Steven Sokolowski, has been ordered to repay to the charity a large amount of money for “private parties, pricey wine and payments to girlfriends.”  The article is worth reading.  It highlights the importance of having good governance and adequate internal controls in a charity.

The Star noted: 

…There was a lack of oversight at Coast to Coast and Sokolowski was allowed to exercise broad discretion, which let him get away with the scheme for as long as he did, according to an affidavit from the chair of the foundation’s board, Jeff Rushton, who said he has known Sokolowski since 1992 and considered him a best friend.

The result is that Coast to Coast had to deplete its reserve fund while attempting to recover the money from Sokolowski, following an extensive internal investigation. The charity expressed concern in court documents that it may have to cease its charitable activities if it doesn’t get the money back.

Sokolowski, who founded Coast to Coast with four other people, acted as secretary of the foundation board. His main responsibilities included marketing, advertising and promotions, according to Rushton’s affidavit.

“However, two years ago, I bought a new business and had less time to devote to the foundation,” Rushton said in the 2014 affidavit. “At that time, I delegated additional authority to Steven and his role expanded so that he was basically responsible for co-ordinating the day-to-day business of the foundation.”

He said Sokolowski’s “signing authority allowed him to sign foundation cheques up to a limit of $10,000. In addition, he could unilaterally approve vendor invoices, without submitting to any vendor-approval process.”

Sokolowski also personally owes Rushton about $400,000, according to the affidavit.

The scheme was finally uncovered in August 2014, Rushton said in his affidavit. A foundation event manager, during a routine internal audit, became suspicious of some of the payments. Sokolowski was suspended the same month.

The investigation was frustrated by the fact that in many instances, there were no copies of supporting documentation for the invoice payments and expense reimbursements because the foundation’s part-time bookkeeper had allowed Sokolowski to keep the original documents.

Rushton’s signature was on many of Sokolowski’s expense reports, although Rushton states in his affidavit that he never signed them.

On the internet you can find the draft 2011 audited financial statements.   Some of the accountants comments in the notes are quite telling:

Invoices to Sponsors

Full original copies of these invoices were not available during my audit visit. I recommend that they be kept at headquarters.  

Expense Reports

Vouchers to Support Expenditures

I encountered several instances where there was no voucher to support expenses claimed for reimbursement. I acknowledge the existence of a ” lost voucher report”, which is an excellent control and practice. That said, it is not strong audit evidence, and it might not stand scrutiny by CRA. Also, when a voucher is lost, HST cannot be claimed.

Credit Card Slips not an alternative to Original Vouchers

In general, a credit card slip is not an adequate document for audit trail and may not stand scrutiny by CRA. I recommend that all claimants be asked always to produce the invoice AND the credit card slip, rather than just the credit card slip when claiming expense reimbursement.

Use of Corporate Credit Cards

I recommend that all personnel using credit cards to pay for expenses for the Organization use a card issued by the common carrier (Currently MasterCard) under the Organization's account and responsibility.

Delays in Submission of Expense Reports

I recommend that consideration be given to a monthly deadline for the submission of all expense reports. The fifteenth or twentieth day of the following month are quite commonly used for this purpose,

Accounting practices generally

Since the adoption of Quickbooks for 2011, the Organization stopped using account numbers and automatic journal entry numbering. Both are good practices and should be reinstated, with the account numbers being those used in the past under Simply

Accounting. Also, an entry which needs to be corrected should be reversed and reentered, not just modified: likewise, entries which need to be removed should be reversed, not just eliminated. All journal entries involving values exceeding a certain threshold should be approved in printed form by management. I suggest a threshold of $2,000.

I recommend that a posting summary be noted on all vouchers representing expenses paid. This should show clearly the amount of HST, and rebatable HST, as well as showing the allocation of the expense across one or more expenditure accounts in the general ledger.

Bank Reconciliations

I strongly recommend that the bank reconciliation be prepared as soon as possible after the printed bank statement is received from the bank each month. The reconciliation should be presented to a director, along with the bank statement which itself should include the micro-copies of all cleared cheques. As part of the approval process, the director should check at least these items:

a. That the balance on the bank statement according to the reconciliation agrees with that on the bank statement

b. The copies of the cleared cheques to ensure that:

i. The Signatures are in order

ii. The payments are in amounts and to parties which appear reasonable

c. There are no uncleared deposits or payments greater than six months in age – these should all be reversed in there general ledger;

d. The explanations for any cheque or deposit which remains uncleared after two months

e. Randomly, the arithmetic of the reconciliation.

Now that the QB bank reconciliation process is being used, the bank reconciliation should without exception work to the cent.

Once satisfied, the director should sign the bank reconciliation on all pages.

For a good overview of internal controls for a charity you might want to see this guidance from the Charity Commission of England and Wales and this free book from Oxfam UK.   Also for some thoughts on selecting good charities you might want to review the website I created

Here is the full article: Cancer foundation co-founder misused donor cash, judge finds

Here is the Charity Intelligence report on the charity, which does not reflect the fraud.