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. LaPlace says:

    I have served as a consultant to many not-for-profits and am on the board of one. I have observed many of the issues discussed above and feel that the reasons for the problems are not going away in the near future.

    Nevertheless, there are several comments more favorable to NFPs that I would like to make:
    >the $40 billion is a made-up number, derived by a ‘fraud estimate” of 6% of revenue to NFPs based on an estimate of losses by “all organizations” – FP, NFP, and government – to NFP income. There is no mention of any data to support for the idea that all organizations suffer fraud at the same rate, or that 6 % is applicable in any way to NFPs. It is alarming to see such a fuzzy number treated as a fact.
    >there is increasing pressure from donors, including organizations such as United Way, for more accountability, more quality control, etc., to demonstrate that the $$ that are donated are wisely spent. The NFP world is becomingly increasingly competitive as organizations have to meet higher standards to get their share of donations
    >Both the larger fraud cases and the “overstaffing” cases (eg people with no work to do) are limited to the few NFPs with significant resources – large income streams or big endowments. Most of the NFPs I have worked with don’t have the money to pay people to sit around or the assets available to steal in large amounts. Many of the NFPs work on such narrow margins that a loss of 6% of income would be noticeable.
    >In the increasingly competitive NFP world, the importance of having a good CEO cannot be underestimated. A good one can energize and inspire an organization. A Board would want to keep such a person happy.

    There are many, many NFPs that function properly, spend their money wisely, and do as well as they can to fulfill their mission. The biggest problem is lack of access to experts. Most depend on pro bono work from lawyers, accountants, investment advisors, etc., and the amount generously donated by the professional communities should be considered as well.
    Similarly, the Board members donate a great deal of personal time, often in their fields of expertise (the Chairman of our Finance Committee is a banker who personally reviews checking account statements and other financial statements regularly) ; the portrayal of Boards as generally lazy and clueless is uncalled for.

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  2. Amb says:

    I am going to apologize in advance if my questions is out of line for this topic, but I could not come across any other information on Non-profit/Charity Problems.

    I am by no means rich, I am not even financially secure, but no matter what I give. Well I started giving 10% of my ebay sales to a Non-profit that then distributes the monies to whom ever you choose.
    Not really paying attention, here, not only am I no making a profit myself, but I a realize I am digging myself into a financial hardship because between the 10% I am paying faithfully and ebay/paypal fees, I am giving my product away and making nothing.
    I contacted this organization and asked that they please hold off on taking my DONATION until I can get back on my feet and get other important things taken care of that pertain to the lively hood of my family which includes 3 kids.
    They not only told me NO, but in a very disrespectful manor DEMANDED payment. They even went as far as to restrict my ebay selling for $15.00!!
    I emailed them and asked what in the world the problem was and the only response I received was an auto response “Your payment could not be processed” as my checking account is getting charged $35.00 each time they try to take this money I just asked to wait 2 weeks until I receive my disability check.
    I’m baffled. I have never ever heard of a Non-profit/Charity Organization, nor would I ever expect an organization of this reason, to act like this to anyone.
    I sure could use some feedback on this situation because I am beside myself over wanting to give to a great cause and the people who are taking the money to “persay” give….
    By the way, the charity I was donating to was for Vets coming home from the Iraq war who were homeless or disabled.
    Thank you for listening.
    Amb

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  3. CJF says:

    Anything involving money and power without adequate regulation and sufficient supervision inevitabaly lead to corruption or fraud. People working in nonprofit organizations may be not so greed as men in financial sector, but they are still human and thus susceptible to human weakness and taking their great influence to shape our perception of morality and social awareness they must be put into constant scrutiny and held accountable through exposing to public observation of their activities.

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  4. Werner says:

    I used to be an employee for a non-profit that closed. I’m still waiting for 2 months of pay by the way. It closed for two main reasons. 1. A non-active board lead to poor management 2. The IRS doesn’t seem to monitor non-profits as closely as other companies. Not many people want to serve on the board for a small non-profit for free, which led to the inactive board.

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  5. Todd in Cali says:

    Surprise ! Now you know what I’ve known since the 80′s, when everyone and their brother had an AIDS non-profit. The funds of one shady non profit that attempted to hire me, were spent, uhm, liberally. On the guy running it, that is.

    Non-profit fraud is rampant, and I blame the so-called non-profit industry for not policing itself. Where do you go to verify the veracity of a non-profit ?

    Well you can see if they’re resisted with the IRS. But frankly, anyone can start up a non-profit, or inherit one for that matter.

    You can check to see how much money they’ve brought in over the years with the IRS – still not a verification that the non-profit is legitimate.

    Fact is, there’s nothing the public can do to make sure some guy soliciting on behalf of a non-profit is legitimate.

    Guy comes by my house, opens my carport gate, a big no-no, and knocks on my door. He has a really crappy photocopy of his non-profits information – it’s in a city 25 miles away.

    All the information checks out via the IRS – but the phone number doesn’t work, and the address is at a commercial mailbox rental. Shady ? You bet. But he can’t be stopped from knocking on doors and pestering people. It’s his “right”.

    This one’s easy, but other abuses are more overtly grievous, and non-profits are hardly in any position to police themselves, much less properly inform the public.

    Non-profits should be aggressive about abuses. They aren’t, and people do not give a red cent to any, and in my opinion, rightly so.

    Yeah, yeah, everyone working for/owning a non-profit is gonna say it’s your responsibility to know who you are donating to. This is a bigger problem than that. Non-profits “network”, and entangle themselves so thoroughly with illegitimate ones, as to ALL be seriously sullied.

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  6. Elizabeth Doyle-Propst says:

    Does it happen? Yes. Should it happen? No. I started a NPO after working in the industry as a volunteer and employee for 20 years. I didn’t see it at the NPOs I worked but we have heard all about it. I account for every penny to our Board of Directors and I don’t get reimbursed for many things that I spend funds on for the NPO. Our organization is purely run by volunteers – including myself.

    It is called ETHICS – something that you used to be raised with and now must be taught in schools and colleges. And it happens in corporate American too!

    If you have questions about a non-profit – ask. If they don’t answer – don’t donate. Or then there are those evasive “political” answers that are really fluff and untrue.

    Ask who benefits from their organization – what and how do they benefit? We have started a scholarships fund and we also are going to start a research fund too. We distribute Newsletters, Awareness Ribbons and other items to those we are supporting and the general public.

    States also should take on some of the responsibility of following up on non-profits too. Many don’t. The IRS is not the one that should solely be enforcing laws.

    ~ Elizabeth in Virginia

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  7. Anonymous says:

    NPOs should also be held accountable for the behavior of their leaders as well. Falsely accusing organizations of unethical behavior is just as bad as stealing funds because it is purposely attacking the reputation of a good, honest organization and trying to divert funds to another organization. Do a search on “Elizabeth Doyle-Propst” and see how “ethical” she is.

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  8. Blah Blah.... says:

    In a few words, Yes, the non-profit sector is teaming with corruption. It could almost be reasoned, that in some areas the non-profit sector is almost entirely comprised of corruption dynamics. Especially, and knowing saying this expecting argument – the ‘Anonymous’ groups. Many aspects as result of the omni-presence of such an organization. There are no boundaries concerning the anonymous groups due to their nature in supposedly combating addiction(s). Simply put, they exists as an affiliation within every aspect of modern society… including governance and finance. Doing so with a ‘secrecy code’ built in. Any other standards on the planet would recognize such as a white collar crime organization.

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