posted on: Wednesday, August 13, 2008

by Gary Snyder


U.S. organizations lose about seven percent of their revenues to fraud, according to the newly released survey of the Association of Certified Fraud Examiners. When compared to the projected U.S. Gross Domestic Product for 2008 — seven percent equates to $994 billion. This is up from an estimated 6% representing more than $761 million in losses in 2006.

This is startling because a study published in the December 2007 issue of Nonprofit and Voluntary Sector Quarterly projected a $40 billion loss for 2006 or about 13% to charities to fraud. The study was based on data also from the Association of Certified Fraud Examiners.

Fraud in the charitable sector is almost twice as widespread as that found in all sectors.

Fraud, from the 2006-2008 ACFE studies, in public companies has decreased by 29% (probably impacted by Sarbanes-Oxley or SOX), stayed even in the governmental sector and increased by 9% in the nonprofit sector.

In their just released Report to the Nation on Occupational Fraud and Abuse, the Association notes that the average case cost a business $175,000. In a quarter of 959 cases used to compile the study, the loss was $1 million or more. The most costly type of fraud was financial statement fraud — more commonly known as cooking the books —, which cost organizations an average of $2 million. In the charity study, four nonprofits realized losses of more than $1,000,000 with one losing $17 million.

Not surprisingly, smaller businesses suffered the greatest losses because smaller businesses normally can't afford dedicated resources to detect and prevent fraud. For small businesses, the average case studied cost about $200,000. In the nonprofit study, there appears to be no significant relation between the size of the fraud and the size or age of the organization.

The typical fraud in the latest study lasted two years from the time it began until the time it was caught by the victim organization. The only exception was publicly traded companies that detected fraud in eighteen months, presumably because of SOX controls.

The establishment of internal controls dictated by Sarbanes-Oxley seems to be taking hold. Its controls have had a measurable impact on the organization’s exposure to fraud. Two areas in which nonprofits could improve their results in catching (or discouraging) fraud are to implement a management review of the financial statements and establish a hotline. These two internal controls could reduce losses by more than twenty percent as well as cutting detection time by a similar amount.

Despite increased focus on anti-fraud measures in the wake of SOX, malfeasance is much more likely to be detected by a tip than by audits, controls or any other means. Almost 50% of nonprofit detection is tips, followed by internal controls (24%), external audits (14.9%), internal audits (13.2%), and by accident (12%).

And, the most commonly cited red flags of illegal behavior? Perpetrators that are living beyond their apparent means or experiencing financial difficulties at the time of the frauds.


Greenlee, Janet, et al, An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents



Gary Snyder is managing partner of Nonprofit Imperative and author of Nonprofits: On the Brink and Nonprofit Imperative. He can be reached at http://gary.r.snyder@gmail.com. His website is: www.garyrsnyder.com.