The Possibility Of Fraud – A Nonprofit Board Alert
By: Eugene Fram Free Digital Image
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“According to a Washington Post analysis of the filings from 2008-2012 … of more than 1,000 nonprofit organizations, … there was a ‘significant diversion’ of nonprofit assets, disclosing losses attributed to theft, investment frauds, embezzlement and other unauthorized uses of funds.” The top 20 organizations in the Post’s analysis had a combined potential total loss of more than a half-billion dollars. *
One estimate, by Harvard University’s Houser Center for Nonprofit Organizations, suggests that fraud losses among U.S. nonprofits are approximately $40 billion a year. **
Vigilant nonprofit boards might prevent many of these losses. Here’s how:
• Have an audit committee charged with reviewing the overall results of a yearly independent audit conducted by an outside auditor.
• Carefully oversee executive compensations, pension benefits and other finance activities.
• Conduct a yearly review of conflict-of–interest policies, have employees/board members sign a conflict-of-interest statement and have board members involved with development of IRS Form 990 before submission.***
• Assure new hires are well vetted for honesty by searching background.
• Meet with external auditors at specified times, including an executive session without management present.
• Ask the auditors:
1. Have they perceived any fraud problems?
2. Are internal controls adequate, e.g., those handling financial matters must take at least two weeks vacation per year so their duties can be temporarily assigned to others?
3. Are financial records accurate? To what extent were material mistakes located or was there an increase in non-material mistakes?
4. Do the proper managers or officers properly authorize activities and expenditures?
5. Do all assets reported actually exist?
6. Is the organization performing any activities that might endanger its tax-exempt status? For example, provide misinformation on the IRS Form 990.
7. Is the organization paying its payroll taxes, sales taxes and license fees on time? ****
Trust But Verify
Some directors argue boards can do little to prevent fraud. I argue that every director should know enough about finances to raise issues about questionable activities. At the least, everyone in the organization should be alerted to the fact that board members are paying attention to the possibility of fraud. That knowledge, in itself may deter some people from trying to steal.
* Joe Stephens & Mary Pat Flaherty (2013) “Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits,” Washington Post, October 23rd.
**Janet Greenlee, Mary Fischer, Teresa Gordon & Elizabeth King, “An investigation of the fraud in nonprofit organizations: occurrence & deterrents, “ Working Paper#35 hauser-center@harvard.edu.
***https://papers.ssrn.com/sol3/papers.cfm?abstract id=2604372
****More actionable details can be found: Eugene Fram & Bruce Oliver (2010) “Want to avoid fraud? Look to your board,” Nonprofit World, September-October.
Eugene Fram (2013) “Preventing and managing leadership crises in nonprofit organizations, “ in Handbook of Research on Crisis Leadership in Organizations, Andrew J. DuBrin, editor, London, Edward Elgar International Publishing.
Nonprofit Management 
The worse part of this truth is that some nonprofit leaders and board members don’t want to be held responsible. Four months into my tenure as a new Operations Director, I was let go a week after submitting several pages of issues I found related to lack of internal controls, potential of misdirected funds, less than thorough audits — with no management letters from the auditors — a CPA who was managing funds and in charge of the audits, and a president who had opened and managed an organization fund account in his own name. After my release, I sent copies to the board, but heard nothing since.
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Have you thought of going to the local media with your concerns? That will certainly garner board attention!!
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I first sent the same report to the whole board, and when I received no response, I then sent it to the related fiscal/ethical association under whose seal they are certified. I believe in the biblical model of: speak to the one who is wrong, then take it to their authority, and then if it remains unheard, take it to the “church” (in this case, the leading Christian fiscal/ethical certification organization — my wife held me back from sending it to the IRS).
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Thanks for sharing your experience.
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