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Offering commentary and analysis from Washington, Oregon, and Idaho, The Cascadia Advocate is the Northwest Progressive Institute's unconventional 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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