NPI's Cascadia Advocate

Offering commentary and analysis from Washington, Oregon, and Idaho, The Cascadia Advocate is the Northwest Progressive Institute's uplifting perspective on world, national, and local politics.

Wednesday, September 25th, 2013

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.

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One Comment

  1. This is not only a crime, but polit­i­cal­ly dam­ag­ing in many ways, shapes, and forms. Hope­ful­ly there is no foul play by out­side orga­ni­za­tions on this.

    # by Mike Barer :: September 26th, 2013 at 1:15 PM

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