Jacob Parks, J.D., CFE
ACFE Research Specialist
I recently had the privilege of attending a roundtable discussion on “Fraud on Charities: Analysis and Prevention,” hosted by the National Center on Philanthropy and the Law (NCPL). One of the prominent issues we discussed was the effect of the media’s portrayal of fraud at nonprofit organizations — no doubt influenced by the preceding release of the Center for Investigative Reporting and the Tampa Bay Times’ story on “America’s Worst Charities.” The series of articles and reports detailed unethical and fraudulent practices occurring at nonprofits that were often receiving millions of dollars in donations.
Many nonprofits depend on income from donations or agency budgets, and so the public awareness of a fraud against a particular nonprofit can seriously threaten those sources of funds. Several attendees of the NCPL roundtable lamented the reality that while nonprofit organizations provide so many valuable services to the general public welfare, some of the most popular news stories surrounding this sector are related to fraud and abuse. This situation is harmful to the entire nonprofit sector because it can create cynicism amongst donors and taxpayers, resulting in lower public funding overall.
For better or worse, the public holds nonprofits to a higher standard than other private organizations. When a for-profit organization is defrauded, the perceived victims are typically the owners and members of the particular company. In contrast, frauds against nonprofits are seen as crimes against the entire public. The fraud risk, therefore, is different for nonprofits because a fraud scandal can cause indirect losses from decreased donations or funding.
Anti-fraud professionals often note internal controls weaknesses in nonprofits (as seen in the chart below, based on data from the 2014 Report to the Nations). There are several reasons for this, including the desire of nonprofit leaders to reduce non-program costs. Additionally, the leaders, employees, volunteers, and members of nonprofits might be more prone to assume that they can trust each other, given that the organizational mission is to serve the public’s interest. However, trust is an inadequate control; even people who otherwise seem to be upright citizens might commit fraud under certain circumstances.
Fraud examiners who work for nonprofits or who have them as clients need to be able to recognize the common fraud schemes to which such organizations are susceptible. Additionally, they should be able to help nonprofits set up proper controls to prevent frauds that pose the greatest risk. The ACFE’s upcoming online self-study, Fraud Against Nonprofit Organizations, covers such schemes and prevention measures.
While the negative press that nonprofits receive for poor anti-fraud efforts might be disproportionate to their successes, these organizations can still be proactive in stopping fraud at their organizations. Having a fraud prevention program designed to face the unique risks in nonprofits will not only prevent or mitigate losses at a specific organization, but will also help to improve the image of the entire sector.