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.

TAGS: ,

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 54

View All Comments »
  1. Marc says:

    Does that 13 percent include the charities that _are_ frauds?

    Thumb up 0 Thumb down 0
  2. Garland Walton says:

    I am a nine year veteran of a $12M Stamford, CT human services nonprofit (www.domuskids.org). Beyond internal controls we’ve set up, we are audited by an outside firm every year. I think those two steps, plus a vigilant board of directors with reputations to protect, can truly eliminate most fraudulent activity. But, just like in any organization, if a clever person wants to steal from you, s/he will figure it out–hopefully your controls will point that theft out quickly and definitively.

    Garland Walton
    Domus | http://www.domuskids.org

    Thumb up 1 Thumb down 0
  3. Kent says:

    I’ve spent a lot of time looking into non-profit budgets as part of one of my reluctant civic duties.

    Based on this experience and the fact my wife works for a non-profit, I would guess that fraud is equal to, if not higher in non-profits than it is in for-profit companies.

    The biggest problem is a lack of checks and balances.

    A board is in theory supposed to be the largest check for a non-profit, but the reality is that a board is limited in its insight into operations. They rely on the director/president/ceo for most of their insight and that’s usually the person participating in the fraud, directly or indirectly. This is assuming the board is a real board. Smaller non-profits have barely functioning boards which consist of a few people trying to do what’s right 1 hour a month.

    The other major check is supposed to be the donor’s fickleness with their money. Results should drive donor dollars and supposedly non-results should limit donor money. But when the group that gives you money is not the same group that receives the benefits of your service and the two groups rarely, if ever, interact then it’s very easy to commit fraud. Results can easily be inflated or created.

    Adding to this problem is public opinion. Non-profits are generally given the benefit of the doubt because they are a non-profit. It’s easy to overlook minor improprieties because “look at all the good they are doing.” Some long standing charities invoke such an irrational and emotional response that a single bad word about it can invoke public shame upon the person speaking. This give the non-profit a lot of room to mis-spend money. The Boy Scouts and the Red Cross are great examples.

    Another problem is the combination of small size and lack of tangible benefits. A lot of non-profit action happens at the local level, even for big organizations. As a result, a very small administrative group makes the majority of the financial decisions. When Bob is supposed to be the financial check against Cindy and Bob and Cindy are married, everything breaks down. Even if they aren’t married, but just long time acquaintances, the objectivity disappears. This combined with the fact that employees are poorly compensated usually leads to minor acts of fraud like unnecessary conference trips or purchases for personal use or worse.

    Thumb up 0 Thumb down 0
  4. raldes says:

    I wonder what the percent of fraud and embezzlement in the business world is?

    Thumb up 0 Thumb down 0
  5. Tom Kelly says:

    I spent years working for three different non-profits. Fraud was no the problem for any, feathering the CEO’s nest was.

    All three unrelated non-profits were dominated by a CEO who did as he/she pleased. Mainly the CEOs were pleased to spend lots of money on their own perks and hiring multiple friends and family members.

    And I can’t even say that I blamed them. These were people who could have commanded much higher salaries in the private sector. Their self indulgent ways were probably justified by the job they did.

    Thumb up 0 Thumb down 0
  6. Winston says:

    But how does it break down? I’m sure it’s not 13% across the board. Is the majority of this fraud concentrated in a small percentage of charities? How much is fraud within legit charities and how much is charities that were set up with fraudulent intent? How much is cash that’s syphoned off and how much is stuff like supplies taken for personal use?

    Thumb up 0 Thumb down 0
  7. Ex-Auditor says:

    As a former auditor of non-profits, I’d say no, and to the extent that fraud occurs, its fairly minor (compared to the stock options backdating schemes, and other frauds committed at for profits). That said, many non-profits are smaller organizations without the internal controls to properly identify fraud risks and detect fraud in a timely manner. One of my personal favorites that came out during an audit (it had been identified and addressed by management prior to our audit) was a case where an employee who was a recovering crack addict went on a bender on his company card, and pawned his laptop for crack money. He was promptly terminated, the NPO received restitution for their losses.

    This probably could have been avoided by checking references, or confirming information in the employee’s resume… but that’s too expensive and time consuming for a smaller non-profit.

    The real fraud is inflicted on the taxpayer, who pays for some truly wasteful programs funded in part by federal grants. Considering how poorly the books are maintained at some non-profits, the thought of giving them federal funds should terrify the average taxpayer.

    Thumb up 0 Thumb down 0
  8. Joe Ventimiglia says:

    It’s interesting to see this weekends papers full of non-profits pleading there case because of the budget cuts,in Albany. Is timing everything?

    Thumb up 0 Thumb down 0