Is the Non-Profit World Teeming With Fraud?

When we recently wrote a column suggesting that philanthropies be run more like businesses, one factor we didn’t look into — but perhaps should have — was fraud.

According to a Times report by Stephanie Strom, fraud and embezzlement in the non-profit sector account for a loss of $40 billion a year, or roughly 13 percent of philanthropic giving.

The article is based on a report (gated) recently published in the Nonprofit and Voluntary Sector Quarterly. Strom’s article peaked at about No. 6 on While Strom’s article hasn’t hit the Times’s “most e-mailed list“; I am guessing that just about everyone in the non-profit world has read it by now, and are readying their replies to anxious donors.

Thirteen percent gone to fraud! That’s about the same loss experienced by the Bagel Man — and he didn’t even have anyone watching the till.

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  1. Wow 13% says:

    This should be a wake-up call to the NonProfit industry. But what’s the answer to the problem? Fraud can’t be entirely elminated. There’s a cost to monitoring, policing & prevention. What costs could they expect to incurr & what return could be expected? Obviously, spending 2% to cut the number down to 5% would be a good return. Total fraud cost would be 7% (2% prevention + 5% loss). But is something that good possible? I’d assume they’ll have to go to the private sector to recruit experts & figure out a game plan.

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  2. TT says:

    Pretty simple, if money is involved. There will be fraud.

    http://dailychatter.wordpress.com

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  3. Joe Ventimiglia says:

    Steve,

    It’s all about the lack sustainability within the non-profit world. I believe that if you have a pure mission then you should be able to sustain the non-profit by spreading your message, sharing best practices, publishing, corporate programming (turn your program into a training program and sell it to other organizations) or develop sellable materials. If a program cannot eventually fund itself I would revisit the mission. By definition non-profits community based organization should add to the community not waste resources.

    Joe V

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  4. Shan says:

    Maybe 13% is about the amount of money that everybody loses to dishonesty if it’s not closely monitored. I’ve never heard of an anti-fraud department at any nonprofit organization… it’s not that much harder to fraudulently take their money than it is to fraudulently steal a bagel. I’ll bet there would be much less loss if there was closer monitoring; the question is just whether the cost of the monitoring would justify the gain.

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  5. luke says:

    at first, i wondered if there is something about 13% (about 1/7th). perhaps this is related to the principle of just noticable difference, where this is about the level of theft of fraud before people take action…

    however, i know it isn’t true… why? because it seems unlikely that the 13% fraud is accross the board. some non-profits will have rather low fraud rates (probably close to the level of for-profit groups), but some will have much higher rates.

    consider: if there were 4 charities, and three were completely fraud free, but one charity had 50% fraud, then the average would be about 13%…

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  6. Cindy says:

    The Time articles points out the source of the 40 billion– it is calculated based on total nonprofit revenue of 600+ billion multiplied by 6%, which is an estimate of ALL fraud cross ALL organizations whether for profit or not, including governments. Although 40 billion is numerically 13% of roughly 300 billion that were donated, it is not true that 13% of donations were lost to fraud, as a cursory reading of the article would suggest. The article never suggested that nonprofits lost more or less than other organizations.

    It would be way more helpful to compare fraud in different KINDS of organizations instead of lumping them all for an overall percentage and then PENALIZING the nonprofits because they have two main sources of income.

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  7. Rachel says:

    I don’t know how much of a story this is, I mean was there any doubt that this was happening. It shouldn’t and it is outrageous, but it happens every where, so why wouldn’t someone assume it happens in charity foundations as well?

    It would be nice if it was a problem that could be fixed, and I hope they come up with some sort of solution.

    Rachel
    The baked blogger
    http://bakedblog.com

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  8. Opus says:

    It may be interesting to look at those nonprofits receiving federal earmarks in light of this report.

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