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Fraud in Reputable Nonprofits

FraudI hate to even mention this: non-profits sometimes have bad people working for them. We know non-profits are full of good people – passionate, dedicated, altruistic folks who are paid less than they might earn in the corporate world. They not only want to change the world for the better, they are working toward it!

Yet, nonprofits are organizations too – and try to hire the best people, based on what they know. Sometimes financial controls are less than optimal, which allows a self-serving staff member takes advantage of them one way or the other. I was sickened to read a recent Washington Post investigative piece about fraud in non-profits. It upset me because I would not want anything to dissuade people, like you, from giving to the non-profits that they care about.

First some context to give you some richer information. The form called the 990 lists financial and other information, the IRS requires it, and that it be made available to the general public. They are usually on the nonprofit’s web site, you can contact them to request it, or get it through an organization like Guidstar.org. Part of that form asks about “diversions” of funds and for an explanation. Nonprofits are required to report on diversions only if they are more than $250,000 or exceed 5 percent of an organization’s annual gross income or total assets.

The Post investigation used data from more than a million 990 tax forms submitted over four years and only found that 1,000 nonprofits who provided that information. Now that is a lot, well any would be too many. And it is a high financial reporting bar; it is impossible to tell how many non-profits experience smaller losses. Yet we are talking about .1% of the non-profits in the study group, which is modest.

Also, remember that these criminals were taking advantage of the non-profit organization and not you. Generally, nonprofits are interested in reducing financial waste as much as you are. I looked at the more detailed reporting on some of the actual 990 forms in the study. In  many cases, the person had been caught and prosecuted, in some instances the money was even recouped. I would recommend that you not see this as a horrible epidemic of nonprofit fraud. Nonprofits are actually quite transparent compared to other entities. After all, we know much less about the inner workings of private corporations that produce the commercial goods we buy on a regular basis.

So what can you do to ensure that the nonprofits you give to are not subject to fraud? Here are some tips:

  • Engage with the non-profit. If you care about the issue, volunteer with them. That way you will get to know the staff and other volunteers. This will tell you a lot about how they are generally run.
  • Check out their most recent 990 form. If you have any questions about it, contact the organization and find the right person to ask.
  • Look at the searchable database that the Washington Post and Guidestar put together, to see if one of your chosen charities is listed.
  • Ask the organizational leaders about “financial controls.” These are really the key to preventing bad people from taking advantage.
  • As you can tell, if you are giving to dozens of organizations every year, you cannot do this with every non-profit. By focusing your giving with a strategy, you will be more able to manage these relationships.
  • Finally, once you have done a reasonable amount of due diligence, go ahead and trust them. Non-profits generally attract passionate, altruistic people, trying to make a real difference. Don’t let suspicion about a few bad actors in a large sector curb your generosity. As I once heard a wise man say, “Testing has to give way to trusting.”

Everyone suffers at least one bad betrayal in their lifetime. It’s what unites us. The trick is not to let it destroy your trust in others when that happens. Don’t let them take that from you.                                    ― Sherrilyn Kenyon, author of Invincible

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