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Fraud Report Roils Not-For-Profit Sector

It’s not surprising that fraud and embezzlement are a major concern for employers around the country. But a recent investigative report by the Washington Post raised eyebrows both inside and outside not-for-profit circles. The Post found that misuse of funds in the not-for-profit sector was rampant. Predictably, some commentators dismissed the report as sensationalistic journalism, while others were outraged by the findings. At the very least, however, the report deserves consideration by not-for-profit managers.

Background Information

More than 1.6 million not-for-profit organizations are registered with the federal government. All told, they control a staggering $4.5 trillion in assets. What’s more, an estimated 700,000 other groups, including churches and other smaller entities, aren’t required to register, swelling the numbers further.

According to a recent study, the number of registered not-for-profits increased by 24 percent in the ten years spanning 2000 through 2010. Revenue at such organizations, adjusted for inflation, grew by 41 percent. Those not-for-profit organizations perform vital work and depend on the public for support. On the flip side, the tax benefits available to charities and their donors amount to close to $100 billion a year in foregone tax revenue. So the public is a large stakeholder in the affairs of these groups.

During this unprecedented period of growth, the not-for-profit sector experienced numerous accountability problems, resulting in congressional probes and other inquiries. Now the investigative report has roiled the waters even further.

The Washington Post Report

In its analysis of filings covering 2008 through 2012, the Post discovered that more than one thousand not-for-profits checked the box indicating a “significant diversion” of assets that may be attributable to theft, investment fraud, embezzlement and other unauthorized use of funds. These diversions siphoned off millions of dollars from institutions supported by public donations and government funds.

The ten largest rip-offs cited by the Post combined for losses totaling more than one half billion dollars (see examples below).

While some of the worst offenders have surfaced in the media, others have not been revealed. The Post said that not-for-profits routinely leave important details out of their public fillings. About half of the organizations didn’t disclose the amount of funds that were lost, even though federal regulations require them to do so.

Specifically, not-for-profits must report diversions of more than $250,000 or those that exceed 5 percent of the annual gross receipts or total assets. Under the filing instructions, organizations are required to disclose “any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to embezzlement or theft.”

In conjunction with its investigative report, the Post has assembled a public, searchable database of not-for-profits — believed to be the first of its kind — which you can visit at http://www.washingtonpost.com/wp-srv/special/local/nonprofit-diversions-database/. Organizations were identified with assistance from GuideStar, an independent organization that gathers and disseminates federal filings of not-for-profit groups.

The report focused in particular on one exceptional case involving the American Legacy Foundation (“Legacy”), based in Washington D.C., within walking distance of the White House. For 14 years, it has managed hundreds of millions of dollars resulting from a government settlement with the tobacco companies. Legacy’s main goal is to publicize the adverse effects of smoking.

In response to the question about diversion of funds on its 2011 form, Legacy officials answered “yes,” but provided only a six-line explanation, simply stating that they became aware of a diversion in excess of $250,000, which was committed by a former employee. They wrote that the diversion was due to fraud. Subsequently, it was revealed that the organization incurred an estimated $3.4 million loss, relating to purchases from a business described on various occasions as a “computer supply firm” and a “barbershop,” and to an assistant vice president who currently runs a video game operation in Nigeria.

Action Ideas for Not-for-Profits

Regardless of your opinion about the depth and breadth of the problem, it’s clear that the Washington Post report should not be ignored by not-for-profit managers. Even well-run organizations remain at risk. This is the kind of thinking that got Legacy in trouble.

Consult with your accounting firm. Institute and periodically review an anti-fraud program. These efforts can help ensure that potential gaps are uncovered, and show employees that your organization is serious about preventing fraud.

When it comes to fraud, it is best to err on the side of caution because detecting crimes early can save your organization from considerable further losses. A forensic accountant can efficiently ascertain whether fraudulent activity is underfoot at your not-for-profit organization.

Prosecute perpetrators. One effective deterrent to internal fraud is to turn criminal cases over to law enforcement officials. This puts employees on notice that the organization will deal with violators.

In addition, review ethics and accountability materials. Discuss the particulars with your staff and board members to see if they go far enough. When appropriate, update the materials to reflect the latest developments. If your not-for-profit has not yet adopted an accountability program, don’t wait any longer.

Programs such as Principles and Practices for Nonprofit Excellence and Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector, offered by state associations of not-for-profits, provide valuable guidelines. Similarly, you might consult Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations by Independent Sector, a coalition of not-for-profits and foundations. The emphasis is on creating a culture of high ethics within your organization.

Also, expand efforts to remove the stigma often attached to accountability measures. Try to change the mindset that administrative practices are a negative and a drain on resources. Make it clear that you’re investing in the organization’s future and adding a vital step for moving forward.

Finally, don’t operate in a vacuum. Although not-for-profits don’t “police” others in the same sector, they can reinforce each other. One possible way to do this is to share accountability documents that have proven to be successful. Contact colleagues who are “in the same boat” to discuss common problems and potential solutions. Collaborate with other industry leaders to protect the public.

Remember: If the public losses faith in your organization, your mission will be in jeopardy. Everyone connected with your organization — board members, volunteers, donors, and regulators — are striving for a common goal. The Washington Post report brought the problems into the forefront. Now it’s incumbent on not-for-profit leaders to follow up.

Examples: Laundry List of Money Down the Drain

Other revelations from the Washington Post report include:

  • Activities connected to Bernie Madoff resulted in losses of $106 million by Yeshiva University and its affiliates. They also led to losses of $38.8 million by the Upstate New York Engineers Health Fund and $26 million by New York University.
  • The Global Fund to Fight AIDS, Tuberculosis and Malaria reported in 2012 that it uncovered misuse or unsubstantiated spending of $43 million.
  • The Conference on Jewish Material Claims Against Germany, a New York City-based charity for Holocaust survivors, reported in 2010 that it had been duped out of $42 million in a decade-long con. It recently raised its estimated loss to $60 million.
  • Vassar Brothers Medical Center, based in Poughkeepsie, N.Y., reported a loss of $8.6 million in 2011 due mainly to the theft of medical devices.
  • The Miami Beach Community Health Center reported losing $7 million in 2011 after its former CEO allegedly embezzled funds.
  • Columbia University admitted in 2011 that it was defrauded of $5.2 million via electronic payments.
  • The Woodcock Foundation of Kentucky, which awards student scholarships, reported that a former chairman stole more than $1 million, leaving the charity with assets totaling a mere $8. (That’s not a misprint!)

© 2014

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Contact
  • Jennifer Osburn
  • Director, Community Action Practice
  • (614) 947-5277
  • josburn@gbq.com