The cost of theft from the non-profit sector is estimated to be about 13% of donations in 2006, according to a new study. It figures out as about 6% of total revenue. Skeptics of the figures agree that even half that figure would need to be addressed.
The fraud issue is one of the non-profit sector’s big non-issues. Fraud is usually not publicized, or even discussed. It’s endemic, and this survey has opened to scrutiny a problem that’s been festering for decades.
The New York Times:
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“It’s a surprisingly large number,” said Paul C. Light, a professor of public service at New York University who does surveys of public confidence in charities. “We really need to take a good hard look at what’s going on in these organizations.”
The new report is based on data from the Association of Certified Fraud Examiners, which, the report said, found that “all organizations,” whether government, for-profit or nonprofit, “lose on average 6 percent of their revenue to fraud every year.” Applying that percentage to nonprofits’ total 2006 revenue of $665 billion — donations, government payments and other income — the authors came up with the $40 billion estimate.”
There is some qualified skepticism, including a comment that the survey was possibly misleading, by including non-profit and government with profit making groups, where fraud may be higher.
That’s blurred the issue a bit. Generally, for study and demographic purposes, non-profit organizations are considered a separate area as standard practice, so it’s hard to see how or why that grouping would occur.
That there are cases of fraud across the sector isn’t in dispute:
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The report, published in the December 2007 issue of Nonprofit and Voluntary Sector Quarterly, found that losses to fraud among the 58 cases reported to the fraud examiners association in a random survey of nonprofits ranged from $200 to $17 million, with the median fraud costing $100,000.”
According to the NYT article, the fraud issue has been going on for years, but isn’t discussed for fear of discouraging donations.
The fear of donor backlash may well be the driving force behind the other big issue regarding non-profit fraud: Charges are rarely laid, and people are rarely punished.
People working in the industry would know that. The policy of no punishment would therefore be a license to steal.
As a form of chronic mismanagement, this would be hard to beat. There’s also the fact that fraud is a crime, not a misdemeanor.
I would suggest that fraud laws exist for a reason, and that it might be a nice idea to understand that reason.
New tax laws coming into force this year will require disclosure of “
any experience of theft, embezzlement or other fraud.”
If that’s what it takes to get any accurate figures it’d be worth the effort, for the sake of accuracy.
But it’s debatable if having to get Federal laws passed to get the sector to make disclosures indicates much real understanding of the responsibility to the public, and the people these organizations are supposed to be helping.
One classic case is cited in the NYT article which illustrates the point, a 20-something year process of embezzlement from Goodwill Industries in Santa Clara California which netted $25 million, direct from donors:
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It started in the 1970s and continued until one of the participants blew the whistle in 1998. Merchandise donated to the organization was sold outside the Goodwill shops by the perpetrators, who kept the proceeds. One of the embezzlers committed suicide before arrest, and six others, all related, pleaded guilty, were fined and, in some cases, were sent to prison.
The thieves had given more than $800,000 to the organization’s president and chief executive, who parked the money in accounts in Switzerland, in Austria and on the Isle of Man and then escaped to Guatemala as investigators closed in, according to the authorities. Guatemala sent him home in 2003, but he ultimately pleaded guilty to only one charge — of tax evasion unrelated to the scandal at Santa Clara Goodwill — and walked out of the courtroom.”
Indictable offenses, lots of money and a corrupt CEO, and only stopped by one of the perpetrators, not the organization.
Where was management?
Where were the auditors and accountants?
Where was the responsibility?
Goodwill Industries is a broad spectrum charity, helping the needy, not the greedy.
Just coincidentally, that’s what charities are supposed to do.
Goodwill Industries has been around for a long time, and has a good reputation.
So why do they and others have to suffer this expensive indignity, purely because of a useless management culture of self defeating denial of common knowledge?
It doesn’t even make sense. If a charity says it was robbed, it’d be more likely to get sympathy than condemnation.
If we're talking about $665 billion in revenue and $300 billion in donations, is it unreasonable to expect that a bit more than corner store standards of management are applied?
From Goodwill’s values statement, which applies to the non-profit sector universally:
“Respect - We treat all people with dignity and respect.
Stewardship - We honor our heritage by being socially, financially, and environmentally responsible.
Ethics - We Strive to meet the highest ethical standards
Learning - We challenge each other to strive for excellence and to continually learn.
Innovation - We embrace continuous improvement, bold creativity and change.”
Well, how about doing that, folks?
The sector might want to consider those ideas, and finally remember whose side it’s supposed to be on.
