Wednesday, December 5, 2012

My Thoughts in The Atlantic Journal Constitution

Fraud in the private and nonprofit sector

Moderated by Rick Badie
As we learned last week, nonprofit organizations aren’t immune from employee fraud. Employee misconduct at the Woodruff Arts Center is reported to have resulted in the cultural organization being defrauded of $1.438 million over the last five years; a former administrator is accused of submitting invoices for phony services. Today’s topic: fraud in the nonprofit and for-profit sector. A CPA says small businesses are always vulnerable to embezzlement, but especially so in tough economies. A watchdog group director writes about the pervasiveness of nonprofit fraud.
Workers cheat charities
By Gary Snyder
Nonprofit fraud is pervasive.
The latest estimate is that it is a $51 billion business. It affects medium, large and small charities. With $2.7 trillion in assets, the charitable sector is ripe for abuse. Few care. One study says charity fraud happens at almost twice the rate as for-profit fraud.
Nonprofit Imperative has documented abuses in such nonprofits as breast cancer charities, veterans’ organizations, disaster relief efforts, colleges, universities and religious organizations. We have just completed a study where we found elected officials took almost $300 million from charities.
There are few incentives to not take advantage of the public’s trust. Philanthropic leadership accepts the failed notion that self-regulation (like self-deportation) is the answer. Leaders have been recently quoted as saying there is no interest (in fraud detection) on their part because no one is going to listen.
The judicial system has coddled criminals using the ruses that there is no jail space and that restitution (which is virtually never discharged) is more important. The IRS has recently awakened to the malfeasance problem. State enforcement agencies are unable to perform their charge because of a lack of economic and political support. Watchdog agencies are moving in the right direction, but budget constraints preclude them from monitoring charities in the same manner that the SEC oversees for-profits. Lawmakers have had ample opportunity to stiffen charity behavior but have walked away.
While most charities are honorable, internal controls are, nevertheless, a must as well as a significant deterrent. The charitable sector is made up of approximately 77 percent small and medium agencies. Their budgets have been challenged for the better part of a decade. Charity fraud is simply not a priority unless the agency has been struck by such untoward conduct.
Denial has been the watchword of anyone in a position to tackle the problem. Very few professional nonprofit conferences address fraud as a threat. Educational institutions seldom engage in the topic. Only on rare occasions do funders use malfeasance prevention, including effective governance, as a criterion for backing.
Aside from significant intervention from those that have the wherewithal to affect this scourge, here are a few steps to at least mitigate the problem. Donors should monitor governance and decision-making. Use GuideStar/Charity Navigator, an independent charity evaluator, before contributing; information on smaller agencies may not be available. Expense ratios do not necessarily tell the whole story. Use the charity’s website. If there are no financials, call the agency. If unavailable, consider a different agency. Is the agency being audited? Make sure all money is spent in supporting the mission of the agency. No funds should be spent on any programs that are inconsistent with the mission of the agency. Ask if internal controls are in place. Ask if staff leadership salaries are being monitored by the board and are in sync with comparable agencies in the same geographic region.
Agencies, meanwhile, should strengthen governance and decision-making. Remember that, as a charity, you are in the public domain. Behave as such. Understand that the public uses expense ratios as a proxy measure for the value of their contribution. Be as transparent as possible. The discipline in doing so will result in open accountability. Have an audit or compilation. No funds should be spent on any programs that are inconsistent with the agency’s mission. Make sure there are internal controls and that they are continuously being monitored. Engage in a salary survey. Be open with the board. Nonprofits should not be expected to pay less than government or for-profits.
Gary R. Snyder is the managing director of Nonprofit Imperative, a West Bloomfield, Mich.-based watchdog group.

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics,, Responsive Philanthropy Magazine, New York Times...and many more Nonprofits: On the Brink (2006) Silence: The Impending Threat to the Charitable Sector (2011)
Post a Comment