The Impact of Fraud on the Nonprofit and Social Services Sector
Ron Matan, CPA
Darryl Neier, CFE, MS
This white paper sets forth a discussion on the breadth of fraud occurring in the nonprofit community and its over-all impact on the nonprofit sector and the community at large. The paper begins with a brief overview of the size and scope of the nonprofit sector. It then delves into the types of fraud common to nonprofits, provides a profile of a typical perpetrator and traces the cost of fraud in the nonprofit community. Examples of nonprofit fraud are cited in order to share lessons learned in the real world. Suggestions and guidelines are ...view middle of the document...
This long tradition has created a powerful legacy with more than 1.3 million public charities, private foundations and religious congregations in existence according to the Report to Congress and the Nonprofit Sector on Governance, Transparency and Accountability. In New Jersey alone there are more than 48,000 organizations and chapters listed as tax-exempt organizations. What is also interesting is that, according to the Independent Sector’s report on Giving and Volunteering in the United States, in this decade nearly one-half of all adults volunteer for a charity during the course of a year, and nine out of ten households report making a charitable donation. These facts clearly demonstrate the commitment of individual volunteers who collectively provide the efforts that are the equivalent of more than nine million paid employees.
Despite the goodwill of their efforts and the pride that we feel for the nonprofit organizations that are woven into the fabric of our communities, the scandals in the corporate world that have been played out in the news since 2002 have begun to trickle into the nonprofit world as well. The media is carefully watching this sector, concerned over the possibility that fraud and misuse may taint charitable entities as it has for-profit corporations like Enron, WorldCom and Adelphi - to name a few of the highly publicized cases.
The Cost of Fraud
The nonprofit sector in the United States is now worth more than $665 billion, making it a rich and tempting opportunity for the 12 million people who work within the sector and are in a position to commit acts of fraud!
Given its enormity, it is no surprise that the nonprofit community has become a major target for fraud. While it is hard to image someone stealing from our nation’s most critical social service, religious, healthcare and educational programs, the FBI reports remind us that more than 2,000 internet sites set up to solicit relief for Katrina hurricane victims proved to be phony upon thorough investigation.
Although fraud like this occurs in both the for-profit corporate world and the nonprofit and social services sector, somehow the concept of stealing from a charitable organization seems more heinous than when a business is victimized in the same manner. Perhaps it is because we have an image of nonprofit organizations as stewards of the community, performing good deeds and offering services to the most needy. Or it might be that we expect the leaders of nonprofit organizations to be more trusting and less business-like, therefore making them more vulnerable to fraud. In fact, while the average fraud scheme only lasts about 18 months in the corporate world, fraud in the nonprofit sector goes on for a longer time period without being detected because of the less-business like atmosphere and the dependence on volunteer leaders (board members) who, or may not, have financial expertise. One further...