Help Your Nonprofit Customers Prevent Fraud: Many Nonprofit Organizations Have Been the Victims of Fraudulent Activity. You Can Help Your Nonprofit Customers by Offering Value-Added Fraud-Prevention Services

By Parham, Abbie Gail; Kelly, Julia Ann et al. | The RMA Journal, December 2009 | Go to article overview

Help Your Nonprofit Customers Prevent Fraud: Many Nonprofit Organizations Have Been the Victims of Fraudulent Activity. You Can Help Your Nonprofit Customers by Offering Value-Added Fraud-Prevention Services


Parham, Abbie Gail, Kelly, Julia Ann, Buckhoff, Thomas, The RMA Journal


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Many nonprofit organizations (NPOs) mistakenly assume that their employees and volunteers will not steal from them. After all, what coldhearted person would steal money donated to help terminally ill children? Or make off with funds pegged for important research? These misguided assumptions often lead managers of NPOs and small charities to be less diligent than their for-profit counterparts in setting up controls for safeguarding cash and other assets. As a result of lax controls, many NPOs become breeding grounds for fraudulent activity. Consider the following examples:

* A former program administrator of the Carnegie Institution of Washington, which conducts scientific research across several disciplines, pleaded guilty to embezzling $202,000 earmarked to help public school teachers become better versed in science.

* The founder of the Thornton Kidney Research Foundation pleaded guilty to mail and wire fraud and was ordered to pay $644,000 in restitution. His transgressions also earned him eight years in federal prison.

* The former CEO of the Indianhead Community Action Agency, which helps the poor find housing and offers them literacy training, was charged with forging checks in excess of $1 million.

* A former president of Goodwill Industries was indicted on federal charges that he stole more than $800,000 from the charity by wiring money to overseas bank accounts. Since then, a financial controller of Goodwill Industries has been charged with embezzling nearly $400,000.

* A former accounts payable clerk for North Bay Health Care Group, a not-for-profit organization that operates hospitals and clinics in Vacaville and Fairfield, California, pleaded guilty to computer fraud. She used her computer to gain unauthorized access to the company's accounting software and issued checks payable to herself and others, resulting in the theft of at least $875,000.

A Growing Problem

According to the 2008 Report to the Nation on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE), occupational fraud and abuse costs U.S. organizations roughly $994 billion annually, or about 7% of total revenues. Results of other surveys underscore an emergent problem. In 2006, KPMG conducted a fraud survey of 459 public companies, nonprofit organizations, and state and federal government agencies. Some 75% of respondents reported that their organizations had suffered losses due to employee fraud during the past year, for an average loss of $464,000.

It's important to note that the results of fraud surveys reflect incidents that were actually discovered, which some experts estimate are less than half of all frauds perpetrated. Indeed, most employee fraud goes undetected. But regardless of whatever measure is used, this type of deception has become increasingly widespread, and it is an enormous and intolerable financial drain on NPOs specifically and on society generally.

Fraud Prevention

Preventing fraud in NPOs involves two important steps: 1) conducting thorough employee background checks, and 2) minimizing opportunities to perpetrate fraud. Since most fraudsters are repeat offenders, some experts estimate that NPOs can prevent about 80% of fraud by effectively screening prospective employees and volunteers. Those with criminal backgrounds or who misrepresent themselves on their employment applications are most likely to commit fraud.

A case in point: Steven Mason, the father of three young children and an overtly religious man, was criminally convicted of unemployment compensation fraud and of receiving stolen property. Subsequently, Workforce Central Florida, a nonprofit job-placement program, hired the convicted felon as its finance director. Mason exploited the lack of controls over cash and stole $172,000. Impressed by his experience as finance director for Workforce Central Florida and having no knowledge of his past convictions, the United Arts of Central Florida hired Mason as its finance director. …

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