Saturday, March 29, 2008

Fraud and Abuse in the Nonprofit Sector

Yesterday we reported about increasing occurences of private inurement and excess benefit transactions in nonprofit organizations.  We have also previously opined that instances of private inurement and/or excess benefit transactions ought more often to be treated as criminal behavior subject to penal sanction.  The harm is at least as great as that occuring from manager bad behavior in the for-profit sector.  Today's New York Times picks up on a study we mentioned yesterday.  The article states:

Nonprofit leaders tend to shrug off such cases as evidence of “just a few bad apples.” But a new report, trying to identify the scope of such thefts for the first time, suggests otherwise. The report, by four professors who specialize in nonprofit accounting, found that the typical theft from a charity was committed by a female employee with no criminal record who earned less than $50,000 a year and had worked for the nonprofit at least three years. The amount she stole was less than $40,000.  The most costly cases, the study found, involved male executives earning $100,000 to $149,000 a year. The thieves in such cases had typically been with the organization the longest.

The final study, refered to in the article, is available by subscription to the Nonprofit and Voluntary Sector Quarterly Online but an earlier version (which appears to be nearly final except for data sets) is available for free online  here.  Here is an abstract of the study:

Losses due to fraudulent activities are particularly troublesome in the nonprofit sector because they directly reduce resources available to address tax-exempt purposes. The ensuing bad publicity also may reduce contributions and grants in subsequent periods. This article uses data provided by Certified Fraud Examiners to report on the types of fraud they identified in nonprofit organizations and the characteristics of both the victims and the perpetrators of the fraudulent activities. Based on the analysis of the data, the authors suggest ways that fraud losses can be prevented or mitigated. In particular, governing boards are urged to consider important controls in addition to the annual financial statement audit. 

dkj

http://lawprofessors.typepad.com/nonprofit/2008/03/fraud-and-abuse.html

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