Michael King’s embezzlement demonstrates why progressive and Democratic organizations need strong internal controls

Yes­ter­day, King Coun­ty pros­e­cu­tors charged Michael Wal­ter King, the for­mer exec­u­tive direc­tor of the now-defunct Sen­ate Demo­c­ra­t­ic Cam­paign Com­mit­tee (SDCC) with six counts of theft fol­low­ing a six month inves­ti­ga­tion, in which Seat­tle police found that King had stolen more than a quar­ter of a mil­lion dol­lars from the Sen­ate Demo­c­ra­t­ic cau­cus to fund his gam­bling and alco­hol addictions.

King is expect­ed to plead guilty and may end up serv­ing a cou­ple of years in prison, and he will be required to repay most of the mon­ey he stole.

Accord­ing to the charg­ing papers, he admit­ted to police in an inter­view: “I did these things, and I have to accept the con­se­quences, and I do.”

The SDC­C’s three 2012 co-chairs — Ed Mur­ray, David Frockt, and Sharon Nel­son — held a con­fer­ence call today with reporters to dis­cuss the results of the inves­ti­ga­tion and their pro­found dis­ap­point­ment of King for his crime. Both Jim Brun­ner and David Gold­stein have well writ­ten write­ups cov­er­ing what was discussed.

The embez­zle­ment, uncov­ered by Argo Strate­gies’ Jason Ben­nett and first report­ed by Seat­tle Met’s Pub­li­Co­la back in Feb­ru­ary, robbed the Sen­ate Demo­c­ra­t­ic Cam­paign Com­mit­tee of hun­dreds of thou­sands of dol­lars that could have been used to sup­port can­di­dates like Tim Prob­st, who came a few dozen votes shy of unseat­ing ultra right wing Sen­a­tor Don Ben­ton in the 49th LD.

Had Prob­st won, Rod­ney Tom and Tim Shel­don would not have been able to engi­neer a Repub­li­can takeover of the state Senate.

King was able to steal as much as $300,000 before he was stripped of his check writ­ing abil­i­ty and ulti­mate­ly fired. His embez­zle­ment demon­strates why pro­gres­sive and Demo­c­ra­t­ic orga­ni­za­tions need strong inter­nal controls.

Many busi­ness­es have such con­trols — to pre­vent fraud and to com­ply with fed­er­al and state laws. But how many non­prof­its and cam­paigns do?

King was able to trans­fer more than a quar­ter of a mil­lion dol­lars from the SDC­C’s accounts to his own because he had oppor­tu­ni­ty, because he was under finan­cial pres­sure (he need­ed a way to fund his gam­bling and alco­hol addic­tions) and because he fig­ured out a way to ratio­nal­ize his actions.

Rig­or­ous over­sight would undoubt­ed­ly have mit­i­gat­ed or elim­i­nat­ed King’s oppor­tu­ni­ty to steal, but unfor­tu­nate­ly, no one was pro­vid­ing such oversight.

How­ev­er, there is a com­mon sys­tem of inter­nal con­trols that non­pofits, cam­paigns, and par­ty orga­ni­za­tions can adopt, from the account­ing best prac­tices ini­tia­tive COSO. It’s called the Inte­grat­ed Frame­work, and it con­sists of five components:

• A con­trol environment
• Risk assess­ment
• Con­trol activities
• Infor­ma­tion and communication
• Mon­i­tor­ing

Con­trol envi­ron­ment refers to an orga­ni­za­tion’s cul­ture and ethos, and the process­es or sys­tems an orga­ni­za­tion has in place to fos­ter hon­esty and integri­ty. Risk assess­ment involves ana­lyz­ing what could go wrong and how to pre­vent wrong­do­ing. Con­trol activ­i­ties are the poli­cies and pro­ce­dures an orga­ni­za­tion adopts to min­i­mize the risks. Infor­ma­tion and com­mu­ni­ca­tion ensures peo­ple are on the same page, and mon­i­tor­ing is the car­ry­ing out of over­sight duties.

COSO has a longer descrip­tion of each com­po­nent for read­ers who are inter­est­ed.

Account­ing texts tend to empha­size the impor­tance of con­trol activ­i­ties (the third com­po­nent of the frame­work) because effec­tive con­trol activ­i­ties can great­ly reduce or elim­i­nate oppor­tu­ni­ties for peo­ple to com­mit fraud.

Per­haps no con­trol activ­i­ty is more impor­tant than seg­re­ga­tion of duties. When one per­son has con­trol over both assets and records, they can more eas­i­ly com­mit and con­ceal fraud. That’s why the seg­re­ga­tion of duties prin­ci­ple calls for putting dif­fer­ent indi­vid­u­als in charge of relat­ed activities.

For exam­ple, a fir­m’s accoun­tant should not have access to the cash reg­is­ter, and the clerk should not have access to the books.

Doc­u­men­ta­tion and records reten­tion is also essen­tial. If prop­er doc­u­men­ta­tion is not kept, it makes it dif­fi­cult to see what trans­ac­tions and events have tak­en place. Since records can be fal­si­fied, it’s also impor­tant for orga­ni­za­tions to insist on the prompt for­ward­ing of receipts and oth­er source doc­u­ments for review.

Phys­i­cal safe­guards are nec­es­sary too. Such con­trols can ensure that vital records or cash are kept under lock and key and sur­veil­lance. Peo­ple with­in the orga­ni­za­tion should not be allowed to share each oth­er’s accounts or ID cards; oth­er­wise, it could be dif­fi­cult to estab­lish who was respon­si­ble for doing what lat­er on.

Peri­od­ic inde­pen­dent review of trans­ac­tions and records can help uncov­er dis­crep­an­cies and sus­pi­cious expen­di­tures. The review should be con­duct­ed by some­one out­side of the record­keep­ing chain of command.

Many orga­ni­za­tions try to par­tial­ly accom­plish seg­re­ga­tion of duties and autho­riza­tion of trans­ac­tions by requir­ing two sig­na­tures on checks above cer­tain amounts. This ensures that a sec­ond per­son with­in the orga­ni­za­tion is sign­ing off on major expen­di­tures, min­i­miz­ing the risk of fraud.

Ongo­ing super­vi­sion is also crit­i­cal. The Sen­ate Demo­c­ra­t­ic cau­cus should have assigned some­one to reg­u­lar­ly go over the accounts with and with­out Michael King once they decid­ed to give him check-writ­ing authority.

But sad­ly, it seems nobody thought to pro­vide this over­sight. Sen­a­tors took a hands-off approach to day-to-day oper­a­tions. They gave King flex­i­bil­i­ty but they did­n’t cou­ple it with super­vi­sion; as a result, King was able to con­ceal his steal­ing for months. Had he been caught and stopped, and replaced with a com­pe­tent exec­u­tive direc­tor ahead of Novem­ber 2012, Prob­st might have won his race.

Jason Ben­nett, who served as the SDC­C’s com­pli­ance offi­cer and trea­sur­er, was required under his con­tract to file time­ly and prop­er­ly pre­pared reports with the Pub­lic Dis­clo­sure Com­mis­sion, but the accu­ra­cy of the infor­ma­tion he was sub­mit­ting was not his respon­si­bil­i­ty — nor should it have been.

Remem­ber, the seg­re­ga­tion of duties prin­ci­ple calls for dif­fer­ent indi­vid­u­als to be respon­si­ble for relat­ed activities.

I have no doubt the WSDC, the suc­ces­sor to the SDCC, has giv­en seri­ous thought to putting sen­si­ble inter­nal con­trols in place to negate and pre­vent a repeat of the King embez­zle­ment. But I won­der: how many oth­er pro­gres­sive and Demo­c­ra­t­ic orga­ni­za­tions have done the same?

Many clubs, asso­ci­a­tions, and grass­roots polit­i­cal orga­ni­za­tions are run by vol­un­teers, includ­ing a vol­un­teer trea­sur­er and chair. Such orga­ni­za­tions look and oper­ate very dif­fer­ent­ly than for-prof­it businesses.

They still need inter­nal con­trols, though.

There­in lies the chal­lenge: How can orga­ni­za­tions with­in our move­ment instill con­fi­dence in donors that the mon­ey they’re giv­ing will be man­aged with care? Per­haps we need to devel­op a guide to best prac­tices that is espe­cial­ly tai­lored for pro­gres­sive non­prof­its and cam­paigns, which pro­vides tai­lored guid­ance and prac­ti­cal ideas for inter­nal con­trols that they can real­is­ti­cal­ly imple­ment giv­en their per­son­nel con­straints and resource limitations.