Fraud in the Nonprofit Sector? You Bet

Article excerpt

Because their mandate is so noble, many nonprofit organizations (NPOs) mistakenly assume that their employees and volunteers wouldn't steal from them. What coldhearted person would steal money donated to grant wishes for terminally ill children or make off with funds pegged to important research? Misguided beliefs like these often influence accountants and auditors of NPOs and small charities to be less diligent than their counterparts in large for-profit entities in setting up controls for safeguarding cash. As a result of these lax controls, many NPOs become breeding grounds for fraudulent activity.

Consider the following case 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 got 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 was charged with embezzling nearly $400,000.

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

* An internal investigation by Oxfam International, a relief organization, uncovered fraudulent expenditures of $22,000. Oxfam paid for relief supplies that were never delivered to a province in Indonesia following the 2004 tsunamis in South Asia. Most of the funds were recovered, and 22 employees are facing disciplinary action, including possible dismissal.

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 the respondents reported that their organizations had suffered losses because of employee fraud during the past year, with the average loss coming in at $464,000. And (surprise!) workers at foreign charities and nonprofits aren't immune from corruption, either. In its 2008 fraud survey, BDO Kendalls, a worldwide network of public accounting firms, received 384 responses from not-for-profit organizations based in Australia and New Zealand. Major findings included:

* The typical fraudster was in his or her 40s and was a paid nonaccounting employee.

* The average fraud loss was $45,527.

* About 92% of fraud was committed by paid employees and only 8% by unpaid volunteers.

* Cash theft and kickbacks/bribery were the most common types of fraud reported.

* The largest number of fraud incidents was reported in organizations with no volunteers.

As these statistics and case examples illustrate, small charities and NPOs aren't immune from this disturbing trend toward greater employee dishonesty. It's important to note, however, that the results of all fraud surveys reflect incidents that were actually discovered, which some fraud experts estimate comprise less than half of all fraud being perpetrated. …