Part I_ Millions diverted from nonprofit coffers
By Sidni Shorter In Financial Leadership Posted November 19, 2013 0 Comments

Heartbreaking is the word I would use to describe this article, “Inside the hidden world of thefts, scams, and phantom purchases at the nation’s nonprofits,” in The Washington Post. I decided to tackle this article through a two part series. The first part is more obvious, which is the lack of oversight within the nonprofit sector. Within the second part of the series, I’ll discuss how deeper partnerships between funders and grantees may help mitigate future losses.

We know there’s corruption in the world but when it’s discovered within a charity, my heart breaks for the millions of forthright, hardworking nonprofit leaders who are ethically leading the way on behalf of important and overwhelming social causes.

According to The Post, more than 1,000 nonprofits that filed 990 tax forms between 2008 and 2012 checked the box indicating they had discovered a “significant diversion” of assets attributed to theft, investment fraud, embezzlement and other unauthorized use of funds. These discoveries are remarkable because charities are required to report diversions in excess of $250,000 or five percent of the nonprofit’s annual total assets. Even though these organizations are directed to explain the losses, they regularly omitted information either because they were not yet aware of the diversions or did not want to report it.

More than 1.6 million nonprofits, controlling $4.5 trillion in assets, are registered with the federal government. From 2000 to 2010, the number of charities dramatically increased by 24 percent, boasting a 41 percent growth in revenue according to the Urban Institute. Beyond these 1.6 million registered nonprofits, an additional 700,000 organizations, such as religious groups and small agencies, don’t generally register. Translation: They are not filing reports and further add to the potential breadth of this issue.

It’s clear the nonprofit sector is experiencing growing pains. Gaps in accountability have led to congressional inquiries into groups such as the highly regarded Nature Conservancy and the Smithsonian Institution, for example. After a series of high-profile financial scandals, Senate Finance Committee Chairman Max Baucus (D-Mont.) said, “We need to seek out and stop those who are hiding behind tax-exempt status for their own gain.” Christopher Marquet of Marquet International observes that oversight in the nonprofit sector is often weaker and directors are overly trusting.

What is also interesting in The Post’s article is the groups filing these “diversion reports” are not necessarily the obscure agencies, but rather a who’s who of the nonprofit sector: Georgetown University, AARP, New York University, Legal Aid Bureau, Youth Service America, Columbia University and Alliance for Excellent Education to name a few.

Some of the specific diversion examples reported were:

  • embezzled funds using fraudulent checks and credit cards for phantom purchases
  • fraudulent electronic payments and unsubstantiated spending
  • drained accounts over a period of time
  • fake identities created to steal funds.

A blatant lack of oversight and spotty checks and balances are the common themes among these organizations that discovered enormous losses in revenue. At Execute Now!, we advise clients to overcome these frequent pitfalls by instituting internal practices such as:

  • Create a segregation of duties. For example, the person who records the payments should be different than the staff member who signs the checks.
  • Review expenses by staff member and by line item on a monthly basis versus simply approving total sums.
  • Share duties of monitoring account activity among staff, board and the board’s financial committee.

While these are examples of essential tactical practices, a much broader commitment to fiduciary excellence is crucial for organizational sustainability. There’s more at stake than a single nonprofit’s potential demise. Exemplary fiduciary performance is critical to upholding the social sector’s reputation and empowering ourselves to create social change in a society that’s become increasingly dependent upon nonprofits for its quality of life.

By Erica McGeachy Crenshaw, CEO of Execute Now!

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