• September 17, 2014

Better Oversight by Nonprofit Leaders Can Help Prevent Fraud

In the weeks since The Washington Post published an extensive investigation documenting the diversion of hundreds of millions of dollars from 1,000 nonprofits, one might have expected regulators and others to move swiftly to figure out how to prevent such abuses and punish wrongdoers.

But little of that has happened. Some state officials say they have started reviewing the Post’s work to see whether they should take any action, but they haven’t said much about why they didn’t’ notice the wrongdoing before the newspaper did. And the IRS has been quiet.

Perhaps more predictable, but just as demoralizing, has been the response from the nonprofit world itself. Instead of looking at what has gone wrong at the organizations that lost money to employee embezzlement, unethical financial advisers, and other scams, some nonprofit leaders have attacked the Post, saying it sensationalized the facts.

Tim Delaney, chief executive of the National Council of Nonprofits wrote in The Chronicle that the Post “has overreached to give all nonprofits a black eye” and went on to say the article “gave the misimpression that the nonprofit world is rife with 'financial skullduggery.’”

Even the respected reporter for Nonprofit Quarterly, Rick Cohen, declared that nonprofits are not broken and were not at fault in the diversion; they were simply the victims of unscrupulous investors and employees.

What the critics seem to have forgotten is that nonprofit boards and executive directors have responsibility for the activities of their organizations, including the actions of their employees and investment advisers. We should expect leaders at nonprofits nationwide to be tightening their oversight to assure no unscrupulous activity is occurring. Donors should be demanding nothing less: It is their money that has been diverted in most cases, and when it isn’t, it’ s their tax money that went first to nonprofits and then to con artists.

The news that fraud and embezzlement are widespread at nonprofits should not have come as a surprise to anyone. Perhaps some people are surprised because nonprofit leaders have not been willing to pay attention to the fraud problem and refuse to discuss publicly its ramifications. It is that well-kept secret that the public must know about.

The extent of fraud is high. Bart Bevers, a former Texas inspector general, estimates that $50-billion a year is lost in nonprofit fraud. No wonder Ken Berger, president of Charity Navigator, told Fox News, “My five years at Charity Navigator has only reinforced my impression that the problem of nonprofit fraud as well as questionable activities is significant, and the sector has yet to take it as seriously as it should.”

Policy makers also seem to have missed the lesson of the Post’s reporting.

The newspaper based its work on the answers nonprofits gave to a simple question on the informational tax returns they are required to file annually with the IRS: “Did the organization become aware during the year of a significant diversion of the organization’s assets?”

But what is clear from the article is that the groups that reported the diversion faced little questioning from either the public or regulators and probably thought nobody would pay attention to the checked box on the IRS form.

The Post study confirms that a major assumption about nonprofit policy is wrong. While many people think transparency and greater openness deter wrongdoing, they do not by themselves bring about better behavior and public accountability. To be effective, they must be accompanied by tough and appropriate enforcement efforts.

That is clearly not happening. The IRS conducts investigations into very few tax returns; it has too few people to enforce regulations that could reduce charity fraud.

Already the Post’s work has prompted an investigation from several Congressional leaders. But that is unlikely to lead to much. One of the people leading the charge is Senator Charles Grassley, an indefatigable, vocal champion of nonprofit accountability. While the Iowa Republican is always quick to call attention to abuses, often issuing news releases and tough letters to nonprofits he thinks are at fault, he has done little in recent years to introduce legislation or take other steps that would make a real difference.

What’s really needed is a tougher stance among regulators and more money for them to hire the staff they need to find and punish people who are pulling off scams that cost nonprofits—and by extension their donors—millions and millions of dollars.

The persistence of charity fraud endangers the integrity and reputation of the nonprofit world as well as its ability to attract substantial private donations. The Washington Post deserves praise for exposing and publicizing abuses that all organizations should be working to prevent. It is now up to nonprofit leaders, regulators, and Congress to remedy the situation.

Pablo Eisenberg, a regular Chronicle contributor, is a senior fellow at the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute. His e-mail address is pseisenberg@verizon.net.

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