Tuesday, November 18, 2008

Non Profit Fiscal Fraud

One recent study* estimates that some 13 percent of the roughly $300 billion given to charity in year 2006 was lost to corporate fraud and embezzlement. Broken down that's about $40 billion a year wasted that would have otherwise supported much needed public services. From this same report and others like it, accountability in nonprofit organizations is coming to the forefront like never before. This report found that "typical theft from a charity was committed by a female employee with no criminal record who earned less than $50,000 a year and had worked for the nonprofit at least three years. The amount she stole was less than $40,000." The report goes on to cite that the most costly cases involved male executives earning $100,000 to $149,000 a year.

As taken directly from the cited report, fraud is defined by Occupational fraud, e.g., a nonprofit employee overcharges his or her employer for travel expenses or steals cash from the bank account

Consumer fraud, e.g., an attendee at a fund raising auction replaces the price tag on an item with the goal of purchasing it at a lower price.

Insurance fraud, e.g., a nonprofit policy holder falsely claims its van or car has been stolen with the goal of collecting the value of the "stolen" vehicle in cash.

Medicare fraud, e.g., a nonprofit healthcare worker "codes" services rendered with the goal of increasing Medicare reimbursement to the organization

A study by J. T. Wells (2005) reports three major types of occupational frauds. The first is misappropriation of assets and occurs when organization's assets are stolen or misused. The second is referred to as corruption and occurs when influence is inappropriately used in an economic transaction. Third, financial statement fraud is the deliberate falsification of an entity's financial statements. Asset misappropriations comprise more than 97 percent of all reported frauds. It was by far the most common among the nonprofit organizations. Prior studies have found that fraud may be easier to commit in a nonprofit organization. It is argued that an atmosphere of trust is assumed particularly in human service organizations. Many nonprofits have difficulty in verifying certain revenue streams, possess weaker internal controls than for-profits and overall there is a lack of business and financial expertise. The reliance on volunteer and often inexperienced boards is one main contributory factor. Some nonprofits in New York State recognize the need for stronger boards of directors and separate auditing committees. A local nonprofit CEO explained,"Boards are looking for more accountability because they know they are fiduciaries and are at risk."

* An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents Accepted for Publication in Nonprofit and Voluntary Sector Quarterly (NVSQ) By Janet Greenlee, Mary Fischer, Teresa Gordon, and Elizabeth Keating

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