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. Browning says:

    Tom Kelly’s post (#13) makes a good point about the “motive.” Many non-profits pay below market and their employees feel cheated. (Never mind that those employees may have no chance of a better position in a competitive organization.) A charity’s executive, who gets no stock options but hobnobs with corporate executives who wear expensive suits and who belong to three country clubs, can readily convince himself that it’s only right he should have the perks. The same phenomenon explains some of the civic servant bribery problems we see daily.

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  2. Troy Camplin, Ph.D. says:

    My wife used to work for nonprofits, and she said that aside from monetary fraud, the nonprofits are rife with corruption — especially those that get most of their money from government. Maybe 13% of the paperwork done is actually legitimate. She says that maybe 10% of the people her organizations tried to help actually needed help, and that most of the rest wouldn’t even show up to get something for free. She’s talked to me about all the ways people would scam the system, filling out applications in such a way as to ensure they would never get a job offer while filling out enough applications to continue getting government services. If you really want an interesting article, you should get my wife to write one for you exposing what welfare is really like. She should know, having worked in the system for many years. She had to leave because she could no longer continue being a moral person while working in the system.

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  3. David says:

    I’ve worked in the religious non-profit sector for over 11 years and at seven different organizations. Each place was a management crisis and my job was to maneuver most through their crisis. The common problem was a status quo culture, nobody striving for more efficient and effective activity. Hence, any change agent was undermined because he caused more or unfamiliar work.

    Where do many nonprofits get into trouble? For the most part, I think it comes down to the fallacy that working in the non-profit sector means paying employees less. Organizations that hire employees who are willing to work for less-than-market wages in some other sector could equate to hiring more inefficient and ineffective workers than other sectors.

    Non-profits usually operate on tight budgets, where every dollar needs to be stretched to its greatest elasticity, and that requires unique skill sets. However, non-profits create a vicious cycle of inefficiency by attracting less skilled employees. Rather than pay workers less to make a dollar work harder, they should try to attract the highest skilled employees to be more efficient and effective.

    Federal and state government impose regulations on nonprofits, regulations that are easy to run afoul of via any of the following:
    Financial reporting fraud -Overstating program expenses/understating fundraising and administrative expenses, charging unallowable costs to grants or inflating contributions.
    Fundraising fraud -Making misleading statements to donors or noncompliance with restrictions.
    Program reporting fraud -Misrepresenting program accomplishments or failing to comply with regulations.
    Poor control of unsolicited donations -Failing to have controls in place so that unexpected funds (e.g., Tsunami relief) are not used fraudulently.
    Tapping restricted funds -”Borrowing” restricted funds when cash flow is tight.

    The last organization for which I worked was a nightmare of malfeasants. Executives were willing to do things as illegal as accounting fraud, tax fraud, stock trading fraud, banking fraud, insurance fraud, and fundraising fraud; basically everything stated in the preceding paragraph. Remember, this was in the religious non-profit sector too, but if the executives are willing to substitute ethics for less consequential values, then it is no wonder why organizations are inefficient, ineffective and teeming with fraud.

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  4. zinzanthropus says:

    The non-profit is littered with individuals with
    ba of arts, social sciences etc. Mostly idle
    and looking to sustain their idleness.

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  5. Troy Camplin, Ph.D. says:

    ALong with that last comment, my wife pointed out that at one of her jobs she would typically get all of her week’s work done on Monday and have to look busy the rest of the week. Her friend, on the other hand, had the responsibilities that should have gone to 5 people, meaning much of his work was made up.

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  6. Gerard Verschuren says:

    19 years ago I was stranded in Goma, Zaire for 10 days with a party of 6 other kiwis. During that time, we were taken out clubbing on several evenings by a couple of ex-pat millionaires from an EU country. They unashamedly told us that they had made their millions by selling to the locals the clothing that western countries had donated as aid. I have viewed all such aid programmes very differently since then, and I suspect that a good deal of what is given in aid goes into the pockets of the un-needy.

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  7. Sandy Frost says:

    For more information about what I describe as the biggest non profit fraud scandal of our time, please visit my site at http://sandyfrost.newsvine.com. There you will read my two year investigation into the Shriners and their sub-group, the Royal Order of Jesters, three members of which were recently caught by the FBI transporting women over state lines to Jesters parties for the purposes of prostitution. In March, 2007, Stephanie Strom did an outstanding job describing this very thing in a front page story about how those reporting Shriner crime are intimidated, “tried” by kangaroo courts and otherwise bullied into silence instead of prosecuting the crimes.
    Thank you,
    Sandy Frost

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  8. Betsy Kain says:

    It is not technically fraud, but the public is often misled by glossy, clever ads by agencies that spend a huge amount of the money donated to them, on development and corporate expenses. In Rwanda, a major American NGO is housed in expensive(for Kigali)office space, on a major thoroughfare that is paved. A huge banner, in English, is spread across the entire front of the building. While not far from this expensive banner and office space, many poor Rwandans are fortunate to eat even one meal a day. Meanwhile,some other American aid agencies manage, in their cramped, small work spaces, off of rutted dirt roads. Before donating, I suggest visiting http://www.Charity Navigator.org or another such website to look at the rating given to these organizations. The very poor and hungry need the money more than the comfortable executives. We Americans need to be aware of how an agency spends our money. It is not difficult to investigate. It will be time very well spent.

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