Years ago, while living and working in Chicago, I was invited to be on the young professionals board of a nonprofit organization that provided legal services for disadvantaged, disabled, and elderly individuals. With a handful of employees and a cadre of volunteer lawyers, they ran a lean operation and historically had the support of all the major law firms in Chicago for both manpower and money. The board was a “Who’s Who” of Big Law luminaries and rising stars of the law and finance fields.
At my first meeting, I met the new executive director of the organization and learned that the organization was in dire financial straits. Knowing the reputation of the organization, I was shocked. As it turns out, the former executive director, well-respected and award-winning for her commitment to the community, had stolen a significant amount of money from the organization over three years. The board of competent and respected professionals trusted the executive director completely and had no idea of the fraud until it was uncovered. While the former executive director was being prosecuted, the organization was left to pick up the pieces.
The major law firms and large donors no longer saw the organization as trustworthy with their charitable contributions. Given the stature of the members of the board, including experienced finance and accounting professionals, donors wondered how the missing funds could go without notice for any period of time. Formerly enthusiastic and generous donors stopped contributing. The new board was tasked with working to regain the trust of the law community and the public, winning back former donors, and identifying new sources of funding for the organization.
Through this experience, I came to understand the importance of directors and officers insurance and learned a hard lesson in professional skepticism. This was my first foray into the world of nonprofit fraud, and unfortunately it has not been my last (though the rest have been in a professional capacity). According to the Washington Post, I’m not alone.
In a recent article examining fraud disclosures by nonprofits, the Washington Post analyzed IRS filings from 2008 through 2012 and found that more than 1,000 nonprofit organizations indicated that they had discovered a significant diversion of assets – theft, investment fraud, embezzlement, and other unauthorized uses of funds. The analysis was compiled based on IRS Form 990, Part VI, line 5, which requires an organization to disclose if it became aware of a significant diversion of assets during the tax year. A diversion is considered significant if it is more than $250,000 or exceeds 5% of gross annual receipts or total assets. It is important to note that small nonprofits are not required to fill out the full Form 990 and therefore are not included in the analysis. Read the full Washington Post article to learn more about fraud disclosure in the not-for-profit sector.
When a fraud is uncovered, a nonprofit faces a hard decision: prosecute (and in the process let the public know of the fraud) or terminate with a restitution plan (and keep the fraud out of the headlines and away from the public and donors). While keeping the fraud out of the public domain may seem like a good idea from a donor perspective, it allows the employee at fault to potentially accept a position at another unsuspecting nonprofit organization.
Schneider Downs provides a variety of services to nonprofit organizations, from audit and tax to fraud prevention and investigation. For more information on how Schneider Downs can work with your organization, contact Joel Rosenthal at 412-697-5387.
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