posted on: Monday, December 08, 2008

By Gary Snyder


There are hundreds of billions of dollars in contributions and trillions of dollars in assets in the charitable sector. For a multitude of reasons over the past two decades years, we have seen substantial increase in malfeasance in the nonprofit sector. They range from the Baptist Foundation in Arizona indictment of $550 million obtained by fraud eight years ago to the $1,000 petty theft seen on a daily basis at the small and medium charities. There are some common denominators, in no order, that seem pervasive in these misdeeds.

• Most nonprofits are required by law to file financial statements each year at the state and federal levels. In my experience, the information is not timely, is incomplete or incorrect either intentionally or by accident. Because these documents are available for public inspection and frequently used in the decision-making by donors, they are less than transparent. Salaries are frequently understated. Fundraising expenses are often a guess. Related party disclosures are very rarely cited.
o A recent example: A supervisor at the Colorado Department of Revenue wrote $11 million worth of checks to her husband under a dummy corporation.

• The board is often kept in the dark. Most boards are disinterested and disengaged. Some say that intentional deception of donors and board members is a common occurrence. In virtually all instances, the board has had the opportunity to inquire as to malfeasance but has not done so. Why? There are no consequences. Seldom is the board held accountable for its lack of fiduciary duty. Many board members are not full engaged in oversight. Another reason is that the bond between the board and the executive is strong, thus there is considerable trust.
o A recent example: The Downtown Waco (TX) association trusted its 18-year leader until $511,000 was missing. After being caught, she pleaded guilty.

• In some instances, the auditors have not done their do diligence. Frequently, problems are dismissed by auditors to retain the client; as in the case of Baptist Foundation and $11.2 million in irregularities at Roslyn schools,
o Two examples: In those two instances, the auditor for Baptist settled for $217 million and the auditor for Roslyn, upon being charged, closed its doors.

• Because the federal Sarbanes-Oxley law is for for-profit corporations, many charitable organizations have instituted whistleblower policies as well as other accountability measures. Few have provisions for an employee to complain directly to the accounting firm. In some recent cases the policies have worked. The policies are getting tips from employees on financial misdeeds. The mere adoption of written policies and practices, however, does not mean they are being used. In most cases, employees are intimidated or bribed by superiors and therefore no one steps up to share malfeasance.
• A recent example: The District of Columbia tax office employees were showered by their supervisor with expensive gifts and remained quiet in a $48 million scheme that lasted decades.

• Few auditors have employed sound fraud-detection audit procedures. An auditor cannot rely too heavily upon management assurances.

• Internal controls are frequently lacking in most nonprofits. For those with such controls, implementation is compromised for the sake of convenience.
o A recent example: The Central Prince George County Community Development Corporation was forced to revise its internal controls when a board member embezzled $500,000.

• There is the need to further delineate the role of managers and governors or trustees. A dispassionate set of eyes from the board on financial matters is critical. Many times this is overlooked in favor of deferring to the competence, in the world of details, of the executive and his/her role as chief operations officer. This is a recipe for disaster.
o A recent example: The Virginia Farm Bureau found out after it waited 10 years and $2 million before an audit caught an inside attorney embezzling.

All that money has in fact spoiled the sector. Most of us want more vigilance in nonprofit leaders acting more responsibly. This will strengthen the charitable sector to make it compliant and vibrant.

Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.