posted on: Tuesday, May 26, 2009

Gary Snyder

In these times of considerable financial pressure, we are seeing some troubling signs in charities’ ability to keep their nonprofits afloat. One major, but often ignored, area of concern is charitable fraud…and by all measures it is growing. Desperate employees and board members are doing desperate things at an alarming rate.

A little over a year ago, a New York Times article, “Report Sketches Crime Costing Billions: Theft From Charities”, caused considerable discussion about the cost of fraud in the charitable sector. It highlighted a 2006 study that put the estimated cost of theft at $40 billion of the roughly $300 billion given to charity.

After that study’s results were published, many believed that brakes were being put in place to slow down the contagion of philanthropic crime. Some thought that it would be harder to hide fraud with the increased scrutiny with the submission of the revised IRS tax Form 990 which added questions regarding theft, embezzlement or other fraud in the previous year. Others held that the increased federal examination would lead to more exposure by newspapers and dampen the incidents of such crime. Still others believed that some provisions in the Sarbanes-Oxley Act would take hold and rein in fraud.

Even with the IRS becoming more aggressive in pursuing nonprofit fraud, the major federal investigative force in fraud--- the Federal Bureau of Investigation---and other enforcement agencies have shifted their focus to other matters such as counterterrorism and the explosion of banking and insurance misdeeds.

Peppered with optimism things have not worked out as envisioned. There have been some mitigating factors that most never anticipated. In the intervening year since the study results were released, the economy has tanked and the newspaper industry is in doldrums.

A recently released survey by the Association of Certified Fraud Examiners has shown that the economic crisis has led to an increase in fraud. The ACFE report “Occupational Fraud: A Study of the Impact of an Economic Recession” pointed out a sobering issue. Those organizations that had been most effected by the poor economy which resulted in layoffs during the past year were the ones that eliminated internal controls (35%). Only 3.2 percent of those surveyed increased controls. This trend is consistent with Nonprofit Imperative, my newsletter that tracks nonprofit fraud, data collection, which indicates that there is an increasingly widespread lack of internal controls in place in nonprofits.

As a result of less internal oversight, more than half (55.4 percent) of the ACFE respondents indicated that the level of fraud has increased in the previous 12 months compared to the level of fraud they investigated or observed in prior years. The largest reason for committing the crime was greater financial pressure caused by the depressed economy.

The magnitude of fraud in the nonprofit sector is considerably larger than all organizations in general. In the 2006 ACFE study, U.S. companies, on average, lost 7% of their annual revenue to fraud. This is in contrast to 13% that was published in the Nonprofit and Voluntary Sector Quarterly in 2007.

Although the revised Form 990 is still being phased in, Nonprofit Imperative had its largest amount of misdeeds ever in March 2009. NI showed an increase of 63 percent in nonprofit fraud from the past March 2008. That closely mirrors the 48.3% ACFE survey boost in corporate embezzlement during the past year.

Few--- only 2 percent--- in the ACFE survey expect a decline in the level of fraud.

The focus should be on the perpetrators. They are typically those in power and have direct responsibility/access to the money. The earlier ACFE study said that accounting personnel, followed by executive and upper management, commit the largest number of thefts. With little or no deterrents in place employees and board members can have a run on the money. With fewer charities having fraud-prevention policies in place, it becomes harder for auditors to help identify problems and set up counter-measures to keep deceit in check.

The dismissive response on the part of nonprofit leadership to this most important problem is puzzling. Their reliance on the government to weed out what they say is “a few bad apples” has resulted in a firestorm of criminality. The apparent boredom by agency boards is equally puzzling How many studies and how much evidence does it take to get their attention?

The facts are irrefutable. Organizations that had well-implemented policies have much smaller misconduct. Increasingly, fraud has become big business, with $15 trillion at stake, and fewer obstacles to getting caught. With every proxy measurement---endowments, contributions and trust--- on the wane what better time than now to address the fraud issue. Absent an unrelenting and unyielding thrust to rid the nonprofits of this scourge, the confidence in philanthropy will continue to spiral downward and so will the support that keeps the agencies that do so much good sustainable.



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 http://gary.r.snyder.com; website: www.garyrsnyder.com, phone: 248.324.3700.