“Unethical behavior among Jewish leaders has reached crisis levels in the American Jewish community. It seems hardly a week passes without news of yet another scandal involving rabbis, Jewish organizational professionals, or other individuals in leadership positions. These disturbing developments make a mockery of Jewish values, shatter the trust that we have placed in our community’s leaders, and alienate young people from Judaism.”
So begins the Declaration on Ethics in Jewish Leadership signed by more than 350 rabbis and other Jewish leaders and released in January 2016. Reports of unethical behavior and fraudulent activity within not-for-profit Jewish and Israeli organizations are surfacing in increasing numbers, with damage to reputation suffered alongside that of direct monetary losses. Often, the secondary financial consequences associated with reputational damage are multiples of the actual theft because organizations lose the confidence of funders, constituents and regulators.
The international aspect of most Jewish and Israeli organizations adds complexity — and as a consequence, further vulnerability. The complexity results from many factors, including relatively impersonal means of communication (i.e., phone and email), country-specific regulations, and differing languages and cultures. Absent strong controls and close connections among all functions within the U.S. and Israeli organizations, there is opportunity for fraud in both countries.
Fraud protection starts with prevention, including a continuous emphasis on culture and ethics, the enforcement of policies that promote accountability and oversight, and the application of best practices for hiring and rewarding talent. Because prevention techniques are not infallible, detection alerts — which aid in the recognition of red flags — are equally critical in protecting your organization.
Guard against fraud through these preventive and detective steps:
1. Emphasize culture and ethics.
In any organization, the tone from the top is key. Make it clear that ethical behavior is expected at every level and that it is every employee’s responsibility not only to adhere to policies regarding ethical conduct, but also to report any instances of inappropriate behavior. This must be a black-and-white issue for all. Keep your organization’s code of ethics and conflict-of-interest policy up-to-date, and refer to them on a regular basis. Conduct training on your code of ethics, and establish a whistleblower hotline for employees to report any ethics violations.
2. Ensure accountability and oversight.
To gain accountability — and to ensure that eyes are on every critical aspect of the organization — put in place policies and procedures with the following as guides and allow no deviations:
Establish checks and balances, with more than one person participating in all significant transactions. The U.S. and Israeli entities should agree on the participants who will be assigned this responsibility.
Separate functional responsibilities of authorization, custodianship and recordkeeping. Determine roles and responsibilities, and ensure they are clearly understood by all.
Restrict access to assets and sensitive data, and monitor authorized access. Cooperation of colleagues on both sides of the world is imperative in identifying who should be granted access. Be firm when establishing limits on access rights.
Assign qualified personnel to oversee adherence to policies and procedures, or consider hiring an outside adviser as an outsourced internal audit function.
It can be difficult to be tough-minded toward individuals with whom you work. This is especially the case in a Jewish and Israeli organization, which generally comprises people dedicated to their beliefs and the organization’s mission and whose practices are based on a culture of trust.
3. Hire thoughtfully, reward realistically.
Gauge candidates’ interest in your mission in order to set a realistic expectation of their loyalty. Pay attention to each candidate’s general attitude and interests; the best employees in the nonprofit sector have positive outlooks and are involved in their community. Ask in-depth questions for insights into character and values. As for compensation, it can be difficult to match the going rate in the for-profit sector, but consider offering adequate salary and stronger benefits that offset the somewhat lower compensation as a hedge against temptation and a way to maintain loyalty. An often-overlooked reward is making a point of acknowledging quality performance through nonfinancial recognition.
Fraud undiscovered for 20 years
Three former executives of an East Coast Jewish nonprofit were convicted of grand larceny, having stolen approximately $9 million from the charity between 1992 and 2013. The former CEO, CFO and executive director of the Metropolitan Council on Jewish Poverty, which serves disadvantaged people in the New York City area, were sentenced in 2015 for performing fraudulent activities, including falsification of health insurance documents.
The fact that the fraud was neither prevented nor detected speaks volumes about the lack of a rigorous control environment and the will to enforce it.
4. Know the red flags.
Along with being proactive about preventing fraud, be continuously on the lookout for signs that fraud may have occurred. Watch for:
Infractions of accountability policies and procedures
Unrecorded or improperly authorized transactions
Frequent bypassing of standard approvals due to rush requests
Unreconciled assets and lack of accompanying records
Instances of inadequate employee supervision
Refusal to take time off
Unrealistic or unusual expenditures
Significant year-to-year variances
Identified conflicts of interest
Be forewarned that it is not enough to have thoughtfully established controls in your organization. You must make sure that controls as designed are actually implemented and operating effectively. Remain firmly committed to the importance of sound fiscal controls; even within an environment of like-minded devotion to service, temptations arise. A certain amount of professional skepticism in day-to-day operations is appropriate in your stewardship of funds and mission activities.
Set the right tone from the top by providing a common understanding and clear direction through your organization’s practices, expectations, policies and procedures. So that ethics are viewed as much more than an ideal, don’t hesitate to be repetitive in order to keep values and expected protocols fresh in the minds of employees — repetition in communication is a sign of ongoing management commitment and is critical in effecting culture change.
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The State of the Not-for-Profit Sector in 2016