Accountable Strategies blog

A blog about accountability issues in the public, private, and nonprofit sectors

How to Steal from a Nonprofit

Posted by David Kassel on February 5, 2008

Articles should try not to promise more than they actually deliver, and that may be a problem with a piece in the current issue of The Nonprofit Quarterly, titled “How to Steal from a Nonprofit: Who Does It and How to Prevent It.”

The article, written by Janet Greenlee, Mary Fischer, Teresa Gordon, and Elizabeth Keating, asks the following question in the first paragraph: “Is it easier to steal from a nonprofit organization than from a business?”   The article implies that the answer is yes because it states in the following sentence that:

…an atmosphere of trust, the difficulty in verifying certain revenue streams, weaker internal controls, a lack of business and financial expertise, and a reliance on volunteer boards all contribute to increased nonprofit vulnerability.

The problem is that the article never really makes the case that nonprofits are more vulnerable to theft than are for-profit companies, and it doesn’t examine whether nonprofits are particularly hampered by an atmosphere of trust, weaker internal controls etc.  In fact, the article is largely based on a 2005 survey done by the Association of Certified Fraud Examiners (ACFE), which reported that of a sample of 508 cases of occupational fraud, only 58, or 12 percent, occurred in nonprofit organizations.  That actually doesn’t seem to be too bad a record for nonprofits.  Seventy-two percent of the fraud cases occurred in publicly and privately held companies and 16 percent occurred in government agencies.

Greenlee et al. state that the survey found that median losses per incident among nonprofits were actually similar to the losses suffered by businesses (though they were significantly higher than those suffered by government).  Also, they note that both payroll and check tampering fraud were more common in the nonprofit sector than in the business sector, while false invoices and skimming from revenues were more common in for-profit entities.  Thus, the comparison of the levels of stealing in nonprofit versus the for-profit spheres  sounds like a bit of a wash.  The authors further note that the sample size is too small to draw firm conclusions about fraud in the nonprofit sector.

The article does provide some helpful information about the common types of fraud perpetrated on nonprofit organizations and ways to prevent it.  For instance, the authors note that the survey found that the typical nonprofit fraud case was committed by a female with no criminal record.  She earned less than $50,000 a year and had worked for the nonprofit for at least three years.  

According to the article, more than 25 percent of the reported nonprofit frauds were conducted by managers, while 9 percent of the perpetrators were executives.  What about the remaining 66 percent?  Were they administrative staff, direct-care workers?  The article doesn’t say.

The authors state that there are three types of occupational fraud: asset misappropriation, corruption, and financial statement fraud, with asset misappropriation accounting for the vast majority of all reported frauds.  The article doesn’t define corruption, which would be helpful here.  It defines asset misappropriation as involving cash skimming, larceny, and fraudulent disbursements.  Fraudulent disbursements include inflaton of invoices, overstating hours worked, and falsifying claims for expenses.

As the article notes, fraudulent financial statements were a major feature of the Enron and Worldcom scandals in the private sector.  Those scandals led to the passage in 2002 of the Sarbanes-Oxley Act, which was intended to curb those abuses.

Citing the ACFE survey, the authors state that contrary to what some might believe, it was relatively rare for fraud to be discovered by the audit process.  They state that 43 percent of the frauds were detected by tips, 25 percent through internal audits, 12 percent through external audits, and 22 percent “by accident.”  Actually, the internal and external audits together detected 37 percent of the frauds, which isn’t all that far behind the fraud detection record for tips.

The authors suggest that to prevent stealing from nonprofits, every organization needs property insurance and, depending on size, may also need to buy employee dishonesty coverage.  For this coverage, insurance companies may require that a nonprofit’s bank accounts are reconciled by someone not authorized to deposit or withdraw.  In addition, they state, officers and employees should be required to take annual vacations of at least five consecutive business days (financial personnel who don’t take vacations is a red flag for possible fraud) or the organization should be required to have an annual audit.

Fraud, however, is not the only employee-perpetrated financial problem that nonprofits, in particular, are subject to.  There is also waste and abuse—activities which don’t necessarily rise to the level of fraud, but which may cause even greater financial losses.  For instance, nonprofits are often involved in transactions with nondisclosed related parties—transactions that can secretly benefit relatives, friends and business associates of the executives of the nonprofits.  Executives of nonprofits are also sometimes known for using organization funds to buy expensive personal cars, take unnecesssary trips etc. 

A more comprehensive article on how to steal from a nonprofit might also examine whether there are different levels of fraud between nonprofits that primarily depend on government revenues and those that don’t.  It would also be helpful to have an article that considers the questions suggested in the first paragraph of this NPQ article:  do nonprofits really have weaker internal controls than for-profit businesses; do nonprofits have less financial expertise than their business counterparts; and do volunteer boards exercise less financial control and oversight than do paid boards?  Who knows, the answers to those questions might be surprising.

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2 Responses to “How to Steal from a Nonprofit”

  1. Katie Morgan said

    I have noticed a new trend in ripping off unsuspected do-gooders and donors. For profit Organizations/Company are asking for donations for “Awareness Campaigns”. What they are not telling the donators, is that their “Awareness” campaign does not guarantee that any money, services, items or proceeds will go to the non-profit organization. So if a “for profit” company collects tens of thousands of dollars in services, items and donations in the name of a non-profit, there is no promise that they will give any proceeds or donations to the non-profit they say they represent in good faith.

    The company/organization is only promising an “Awareness Campaign”. Which means that the company will put the a non-profit company name on the advertising, maybe hand out literature or bumper stickers. But no funds, services or materials will be donated to the non-profit. The for profit company will keep all that they have collected.

    Now, Non-Profits are happy for any help they can get, especially in this economy, and are NOT dishonest for accepting this help in any way. However, the companies that collect donations in the name of :”Awareness” do keep all of the donations and proceeds and there is a possibility that they will use these items for their own profit. Sooner or later the almighty tax man will catch up with companies collecting items for “Awareness Campaigns”; but this could take years. There always needs to be a paper trail and the proper forms filed for non-profit collection/donations. But it is important for donors to recognize what and who they are donating to, and ask questions… How much or what part of what I am donating will directly benefit the non-profit and what will the organizer keep.

    Knowledge is always best.

  2. Michelle said

    Some employees of non-profits steal too, in a way that is hard to always detect! They will ask sponsors to donate gifts for volunteers; then instead of giving them to their volunteers, or using them as they have stated, they will KEEP THEM for themselves! Isn’t this stealing?

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