The story begins in a medium-sized public library. Over the last five years, the library has received awards for its outstanding community ser- vice, and the director has been personally recognized as the force behind this service. What isn’t obvious to the community, or even to the library board members, is that financially the library is a shell with almost no money remaining for operations.
Over the course of the last two years, the director has systematically looted the library funds. The means for doing this were almost laughably simple: receiving bogus travel reimbursements, receiving overtime pay
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when no additional work was done, using library funds for personal ex- penses such as credit card bills, and subsequently falsifying the recipients of such payments. All of this was possible because the director had com- plete discretion over how library funds were spent. The board rarely re- viewed any of the checks presented to it for signatures, and in any case, financial records were almost nonexistent.
The embezzlement was subsequently discovered, not by the library but by a payroll auditor from the state. When independent state auditors finally examined the library’s finances, they were able to prove embezzlement of more than $60,000, but pointed out that it could easily be more. Greater accuracy was impossible given the absence of records.
The Initial Response
The first thing the library board did after receiving evidence of fraud was to suspend the library director and summon the police. In the interim, the assistant director became the acting director and remains director to this day. (I doubt that many management texts discuss this, but one way to get promoted is to have your boss sent to jail.) In due course, the district attorney prosecuted the director, who was found guilty and served a brief stint in prison.
Most expenses in a library are fixed. That is, they remain the same even if the levels of activity in the library decrease. Faced with essentially no operating funds for the rest of the year, the library cut back on the only areas where it did have control: labor and acquisitions. The library was forced to lay off almost all of the staff and was forced to stop buying books for several months. It did manage to reopen with reduced hours after a month, but nearly a year passed before the library’s operations ap- proached a pre-embezzlement level of service.
Another management milestone occurred during the post-embezzlement year. The library changed its operating procedures. Changing procedures is also much less common than we’d expect. After all, changing how you do things in the wake of a disaster is a tacit admission that you were doing something wrong. (I know this sounds crazy, but the leadership in many organizations thinks this way. It’s often the case that no changes are ever made, even after a serious incident such as this embezzlement.)
The Follow-Up
What changes did this library make? First, the board hired an accountant to create a set of financial records, and, more important, the library used the system. More specifically, the library bought a high-powered accounting
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program and trained a bookkeeper to use it. It now generates regular fi- nancial statements, which are reviewed by the board of directors. (In a particularly nice touch that I would recommend to all of you, the state- ments also identify those expenses that are incurred directly for public service. It’s an effective way to demonstrate that public monies are not being eaten up by excessive overhead.)
A second change was to educate the board members and employees.
Boards of directors often constitute the only financial oversight in public organizations, but board members are rarely aware of their oversight du- ties or recruited for their financial knowledge. Conversely, it is often in- convenient for the library staff to have board members review financial documents. Either scenario can result in the library bypassing normal re- view processes.
Third, the library embarked on an aggressive training program for both the staff and the board members. Prospective board members are assigned a mentor who briefs them on such points as the need for proper authorizations for payments. Moreover, staff members are trained to in- sist that board members review their work. As the director has pointed out to me, this requires more time and work by the staff to prepare the documents, and sometimes payments are delayed when documentation is inadequate. However, as the director also noted, the library has changed its management practices to acknowledge that good financial manage- ment is worth the extra investment in resources.
This last point is worth emphasizing because it is frequently the case that organizations make procedural changes without ensuring that their employees have adequate resources to carry them out. We can’t expect our employees to undertake internal controls seriously if we simply add those controls to their existing job duties. In our case-study library, the director and board revised the staff job duties to take into account the additional workload involved in documentation and actually created a new position to deal with the increased documentation.
It took several lean years, but today the library has achieved its former level of excellence, only this time it isn’t just a façade. Recently, the library was successful in passing a bond issue to double the size of the facility:
proof of the community’s faith in their library’s ability to handle funds.
Epilogue: Where There’s a Will, There’s a Way Out
So where does this leave us? First, I hope this example can help you avoid similar problems. You can always improve the library after something
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goes wrong, but it’s better to avoid the situation entirely. Long after the library corrected its financial problems, the staff and board struggled to reestablish its reputation with the public. But having said that, it’s also possible not only to survive disaster but also to prevail, if the will to act is present. After the embezzlement was made public, this library could easily have slipped back to its earlier practices and possibly have invited a second embezzlement. Instead, the new director and board took a hard look at the conditions that caused their problems and changed them. It is always better to avoid mistakes, but acknowledging that this is impos- sible, we should at least endeavor not to repeat them.
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