March 26, 2008
Most Cases of Charity Fraud Could Be Prevented, Study Finds
By Peter Panepento
Most cases of employee fraud at charities stem from a lack of proper internal controls that deter theft, and those cases are further compounded by lax efforts to recover financial losses when the fraud is discovered, according to a new study.
The report — based on an analysis of 2004 data from the Association of Certified Fraud Examiners regarding 58 fraud cases involving nonprofit groups — also found that a significant number of organizations did not pursue criminal charges against employees suspected of taking money.
In more than one in four cases, the organizations did not fire the employees suspected of stealing.
Taken together, the findings show that charities are unnecessarily slack in their efforts to fend off fraud, the study’s authors say. In turn, nonprofit organizations are at risk of losing valuable resources to employees who skim money.
“We lose a good percentage of our revenue and it hits our bottom line every year,” says Mary Fischer, a professor of accounting at the University of Texas at Tyler and a co-author of the study. “As trustworthy as everyone thinks we might be, there are sticky fingers.”
$30-Million Stolen
Among the 58 nonprofit groups included in the report, those sticky fingers were responsible for taking nearly $30-million from their organizations.
The most common type of fraud in the study was the theft of assets, usually cash. The manipulation of financial statements was the least common form of fraud in the sample, accounting for only about 5 percent of the cases. But these cases accounted for a median loss of $3-million — or 30 times greater than the $100,000 median loss from asset misappropriation.
The analysis found the most typical fraud cases involved female employees who earned less than $50,000 per year and had worked for the nonprofit group for at least three years. The most costly fraud cases in the study, however, involved male managers and executives who earned between $100,000 and $149,000 annually. Those cases resulted in a median loss to the nonprofit organizations of $150,000.
Janet Greenlee, associate professor of accounting at the University of Dayton, in Ohio, and a co-author of the study, says many of the groups that were victims of fraud would probably have been able to prevent the thefts — or at least minimized their losses — with some basic precautions.
Only 21 percent of the organizations, for example, had conducted background checks on their employees.
Sixty percent of groups in the study did not have internal audit departments. And 40 percent of the groups in the study failed to buy insurance on key employees who handle money.
Role of Board Members
“Nonprofit board members and management need to be made aware of the magnitude of the risks related to occupational fraud so that they can take steps to limit the frequency and amount of losses,” the report said. “Human failings lead trusted people to abuse their positions. Greed is part of the problem, but opportunity makes temptation harder to resist.”
Ms. Fischer says many organizations compound the problem by failing to report employees involved in fraudulent activities for possible criminal prosecution. Often, they handle the matters internally for fear of bad publicity — an approach that enables other employees to feel as though they can get away with similar crimes.
“Principally, it was because of perception,” Ms. Fischer says. “In the event that a major fund-raising group prosecuted someone for theft, would you give money to them in subsequent years? Probably not. Because of that, then, with the losses that are experienced, there tends to be little if any restitution.”
Nonprofit organizations, however, should be more aggressive in preventing and prosecuting cases of fraud.
Although they have altruistic missions, Ms. Greenlee says, donors and employees need to be reminded that charities manage their money responsibly.
“Nonprofits have to recognize that, in many ways, they are like a small business,” she says. “We are not all among friends here, even when they are all volunteers.”
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When I discovered that our business manager had “creatively appropriated” some expenses, there was no doubt in my mind I would prosecute. I fired her immediately, she is a convicted felon, spent 5 years on probation and paid every dime I could prove she stole as restitution. I was interviewed on the local news when I reassured donors that their money was safe. I would not hesitate to do the same if I were faced with that situation.
— Leigh Mar 27, 02:40 PM #
In Dallas,The University of Texas Southwestern Medical Center and its president,Dr. Kern Wildenthal, were exposed for misuse of donor funds on lavish parties,expensive wines,caviar,European travel,first class accommodations,gifts,etc..This was all using donor funds.Then,Wildenthal had his auditor state that “all expenses were 100% legitimate and appropriate”.What else would he say? If Wildenthal was lower on the food chain,he most likely would be in trouble,but he’s the president and UT System,nor the Regents,nor the Attorney General or te State Auditor will investigate.It’s really sad when even some donors think this misuse of funds was legitimate,but donor funds were not given to enhance the lifestyle of Wildenthal who already makes $1.1 million a year.
— Brent Mar 28, 08:09 AM #