Financial Integrity Demands Diligence and Discipline

A recent New York Times article cited a report by four professors of nonprofit accounting suggesting that theft in nonprofit organizations could be as high as $40 million for 2006, which would represent a loss of 13% of that year’s gross contributions of $300 billion. (Report Sketches Crime Costing Billions: Theft From Charities, New York Times, page A9, March 29, 2008.)  The amount is staggering, and if true would represent a rate of loss to fraud that is double the experience of the for-profit community.

Until now, there was no government agency tracking nonprofit fraud on a national basis, but that is about to change.  The new IRS 990 form will require that nonprofits report any losses due to theft or fraud in their annual tax filings.  Over time, this will give us a more accurate picture of nonprofit experience with theft, fraud or embezzlement.  Given that many of the frauds perpetrated against nonprofits take years to discover, it will take several years of tracking this experience to get a balanced understanding of the scope of the problem.

Nonprofit organizations are dominated by people who are so passionate about the mission that they tend to assume that those around them share the same passion and integrity.  But managers, and board members of nonprofit organizations would do well to borrow a page from the U.S. policy book during the cold war, when the administration practiced “trust and verify” in interactions with the Soviet Union.

Serious students of management know that financial integrity demands diligence and discipline. Nonprofit history is an inspiring tale of service to people in need, but not without the unsavory tales of fraud and embezzlement.  Commitment to mission does not grant immunity from theft.  The New York Times article pointed to male executives with long tenure earning over $100,000 per year as the most common perpetrators of nonprofit fraud.  We need not look far for pertinent examples that seem to prove this observation:

  • In 1995, William Aramony, CEO of the United Way of America, was sentenced to seven years in jail for conspiracy, money laundering and embezzlement costing the United Way millions of dollars in legal fees, lost contributions, and theft.

  • Two years later, John G. Bennett, Jr., CEO of New Era Philanthropy, was sentenced to 12 years in orison for defrauding charities, churches, colleges, and philanthropists of over $135,000,000 in a classic Ponzi scheme.
  • In 2002, Sherif Abdelhak, CEO of the Allegheny Health, Education and Research Foundation, was convicted for diverting $52,400,000 of donor restricted funds, driving the hospital system into bankruptcy.
  • Two years later, Oral Suer, CEO of the United Way of the National Capital Area, plead guilty to transporting stolen money across state lines, making false statements and concealing facts relating to an employee pension plan, costing the United Way of millions of dollars.
  • In 2006, William P. Crotts, CEO of the Baptist Foundation of Arizona,  was sentenced to eight years in prison and ordered to pay restitution of $159,000,000 in a Ponzi scheme that defrauded over 10,000 pensioners from hundreds of millions of dollars of retirement savings.
  • It is common for nonprofit boards and managers to place tremendous faith in the findings of their auditors.  Interestingly, in the cases above, some of the world’s greatest auditing firms gave a clean bill of health to the United Way of America, the Allegheny Health, Education and Research Foundation, and the Baptist Foundation of Arizona shortly before their perspective fiscal crises.  The value of audits should not be minimized, but fiscal prudence demands more than hands off reliance on the auditor’s report. 

    There are over 1.5 million nonprofit organizations in the United States today, and over 30% of them operate perpetually in financial distress, with some estimates that as many as 7% of all nonprofits are technically insolvent.  Given the minimal average net margins for the nonprofit community, an average loss to theft in the double digits could potentially represent a huge swing from solvency to insolvency.

    The analysis that concludes that the rate of theft in nonprofit organizations averages 13% is particularly startling given that many nonprofits never fall victim to fraud, meaning that the actual experience of organizations victimized by fraud is much higher than 13% loss.  If the rate of fraudulent loss in the nonprofit community is double that of the for-profit community as suggested, donors will be more wary than ever, and will demand change that assures financial integrity in regard to the intended use of their charitable contributions.  Either nonprofits will get serious about addressing this rate of loss to theft, or donors will invest elsewhere for a greater return on investment.  Nonprofit board members and managers should treat each other with dignity and respect, mixed with a disciplined skepticism such as “trust and verify.” Charitable donors expect nothing less.

    Source by Ron Mattocks

    Author: admin