Part II Millions diverted from nonprofit coffers
By Sidni Shorter In Financial Leadership Posted December 3, 2013 0 Comments

Part II: Millions diverted from nonprofit coffers

In my last post, I introduced a heartbreaking article in The Washington Post, “Inside the hidden world of thefts, scams, and phantom purchases at the nation’s nonprofits.

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. 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.

A blatant lack of oversight and spotty checks and balances are the common themes among these organizations that discovered enormous losses in revenue. I discussed strategies to overcome these frequent pitfalls by instituting internal practices in my last post.

This week, I want to take a look at additional methods for nonprofit accountability through deeper partnerships between funders and grantees that may help to mitigate future losses. Transparency is the key to securing financial advice and support Grantees should not discount the value of deeper financial transparency with foundations. In fact, if the grantee feels comfortable with their funder, they should consider debriefing the program officer about their fiduciary management limitations. The funder already has access to the nonprofit’s 990—it’s up to the organization to help the foundation make sense of it. The reality is that most grantees uphold financial management as a priority but, ironically, smaller organizations don’t have the resources to meet their own internal expectations. These organizations are legitimately understaffed so the cause for potentially diverted funds is clear. Larger organizations like universities, for example, are less concerned about limited financial staffing and more commonly about the lack of oversight and/or a breach of internal controls. These organizations must evaluate current leadership and incorporate a wider segregation of duties along with internal spot audits, to mitigate errors or fraud.

Foundations must recognize financial capacity as a funding focus

More foundations need to meet the growing financial management demands of their grantees. There are some terrific examples of foundations that already include operational systems in their capacity building grants but more funders must join this early-adopter pool. Typically, technical assistance falls in the areas of programmatic areas such as board retreats and strategic planning, fund development and governance—all very worthwhile areas—yet I must make the point that sound financials uphold the organization’s mission and therefore should be a major tenet within technical assistance.

Characteristics of healthy financial management practices

With all of this discussion surrounding diverted funds and mismanaged funds, let’s revisit what sound financial management looks like. Here are a few reminders:

  • Exceptional financial judgment is applied to all organizational decisions.
  • A clear chart of accounts and ethical policies honor donor requests.
  • Multi-year data is easily reviewed while monthly projections are conservative and regularly monitored by staff and board.
  • All external and internal systems are fully integrated with budgeting.
  • Finances reflect a commitment to transparency.

At Execute Now!, we are dedicated to helping nonprofit organizations demonstrate these characteristics and operate with financial ease so they can focus on the programs that honor the mission. Watch for future Finance Fundamental newsletter installments about the foundation’s role in supporting fiduciary transparency. Finally, please join me in observing The Post’s article as a reminder to look internally at your financial matters while making the necessary changes to a) develop ways to provide additional oversight and b) increase transparency with grantors that truly believe in the merits of your organization.

By Erica McGeachy Crenshaw, CEO of Execute Now!

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