Report Sketches Crime Costing Billions: Theft From Charities

The volunteer treasurer of the MadisonCounty Humane Society in Indiana was charged this month with using$65,000 of the charity’s money to buy jewelry and makeup. In SanFrancisco, the chief financial officer of the Music Concourse CommunityPartnership was fired after he was accused of taking $3.6 million ofthe organization’s money to play the stock market.

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“It’s a surprisingly large number,” said Paul C. Light, a professor of public service at New York Universitywho does surveys of public confidence in charities. “We really need totake a good hard look at what’s going on in these organizations.”

Thenew report is based on data from the Association of Certified FraudExaminers, which, the report said, found that “all organizations,”whether government, for-profit or nonprofit, “lose on average 6 percentof their revenue to fraud every year.” Applying that percentage tononprofits’ total 2006 revenue of $665 billion — donations, governmentpayments and other income — the authors came up with the $40 billionestimate.

“Determining how much theft and embezzlement takesplace has been the holy grail of the sector,” said Jack B. Siegel, atax lawyer who specializes in nonprofit matters.

If the $40billion figure is accurate, then the money lost to fraud equaled thecombined giving by corporations and foundations in 2006, said DianaAviv, president and chief executive of the Independent Sector, whichrepresents nonprofit groups.

But Ms. Aviv expressed skepticismabout the report, noting that it relied on the fraud examinersassociation’s estimate of overall fraud across all sectors, includinggovernment and corporate.

“They’re lumping all those sectorstogether, and it could be that the for-profit sector experiences ahigher level of fraud, while the nonprofit sector and governmentexperience lower levels,” Ms. Aviv said.

Nonetheless, she said, “even if the figure is $20 billion, that’s still a huge amount and needs to be addressed.”

The report, published in the December 2007 issue of Nonprofit andVoluntary Sector Quarterly, found that losses to fraud among the 58cases reported to the fraud examiners association in a random survey ofnonprofits ranged from $200 to $17 million, with the median fraudcosting $100,000.

“Most of these things are not caught byroutine audits,” said Gary Snyder, who tracks nonprofit fraud in hisnewsletter, Nonprofit Imperative. “They’re usually done by someone inthe financial area — the treasurer, the bookkeeper, the signer ofchecks — who knows how to avoid getting caught.”

Almost 95percent of the reported frauds entailed loss of cash, and a majority ofthose involved false or inflated invoices, billing for expenses thatwere never incurred and check tampering.

“I gave a talk to agroup of nonprofit executives a few weeks ago, and every single one ofthem had a fraud story to tell,” said one of the report’s authors,Janet S. Greenlee, an associate professor of accounting at theUniversity of Dayton. “This has been going on for years, but there’s afeeling that it shouldn’t be discussed,” because of the effect it mighthave on donations.

Professor Greenlee — joined in the report byMary Fischer of the University of Texas at Tyler, Teresa P. Gordon ofthe University of Idaho and Elizabeth K. Keating of Boston College— said the failure of organizations to punish those who steal from themwas perhaps one of the biggest reasons for fraud in the sector. Shesaid she had worked at organizations that refused to dismiss employeescaught stealing.

Professor Light, at N.Y.U., said some 70 percentof respondents to a new survey among the general public thoughtcharities wasted “a great deal” or “a fair amount.”

“Donors have already indicated,” he added, “that they don’t have a great deal of faith in the way these groups handle money.”

But it will now be harder for charities to hide fraud, because beginning with tax forms they must file for 2008, the Internal Revenue Servicehas added a question requiring them to disclose whether they haveexperienced theft, embezzlement or other fraud during the year.

“Not only will that eventually give us a much better idea of howwidespread fraud is with these groups, it also gives them an incentiveto have better financial controls,” said Mr. Siegel, the tax lawyer,who is credited with the idea of adding the question to the tax forms.

Mr. Siegel used to track cases of fraud among charities but “got bored,” he said, because there were so many of them.

Newspapersroutinely report incidents of nonprofit fraud in their communities, butthe amounts tend to be small and thus go unnoticed at a national level.

Mr.Snyder, the tracker of nonprofit fraud in his newsletter, said thatthrough use of databases and other searches, he had stumbled acrossmore than $700 million in fraud already this year among governmentagencies and nonprofits, including church-related organizations.

Asked about his favorite example of nonprofit fraud, Mr. Snyder was initially stumped.

“There are so many,” he said.

He eventually settled on the embezzlement of some $25 million from Goodwill Industries of Santa Clara County in California.

Itstarted in the 1970s and continued until one of the participants blewthe whistle in 1998. Merchandise donated to the organization was soldoutside the Goodwill shops by the perpetrators, who kept the proceeds.One of the embezzlers committed suicide before arrest, and six others,all related, pleaded guilty, were fined and, in some cases, were sentto prison.

The thieves had given more than $800,000 to theorganization’s president and chief executive, who parked the money inaccounts in Switzerland, in Austria and on the Isle of Man and thenescaped to Guatemala as investigators closed in, according to theauthorities. Guatemala sent him home in 2003, but he ultimately pleadedguilty to only one charge — of tax evasion unrelated to the scandal atSanta Clara Goodwill — and walked out of the courtroom.

“I likethat one,” Mr. Snyder said, “because it’s an extreme example ofsomething typical: that no one gets in trouble for this.”

Professor Greenlee said she saw signs that charities were now trying harder to deal with fraud.

“They’recreating audit committees and adopting the provisions of Sarbanes-Oxleyas best practices,” she said of the 2002 law that imposed stricteraccountability on corporate governing, though not on charities.

“Boardsare becoming tougher,” she said, “because they know that asfiduciaries, they are at risk of, at the very least, embarrassment.”

 Red Cross Insiders Just Don't Get It, Again

  There have been significant attempts by the American Red Cross to boost its image after numerous pratfalls by its leadership (both at the board and staff level). But the future course of the agency ended up in the hands of an outsider--- the Senate Finance Committee. This is, in part, because the Red Cross operates under a congressional charter. But once again one of the nation’s leading nonprofits continues to be the poster boy for poor decision-making.   

For the past few years,  the Red Cross dug in and produced a vision document that addressed many of the nonprofits weaknesses, The American Red Cross Governance for the 21^st Century, This was an attempt for the organization to make independent and meaningful changes that would ingratiate it with the public.

The lengthy document was a good start in identifying problems and making suggestions as to how to improve the nonprofit on a multitude of fronts. But, unfortunately insiders were unable to adequately address the omnipresent problems plaguing the organization.

Resolution: It took outsiders to strengthening the agency’s governance structure in a comprehensive manner by passing the Red Cross Modernization Act of 2007. It relieved the organization of some of the constraints posed by the 1947 congressional charter.

Understanding roles and responsibilities of the board and staff has been an enduring problem at the Red Cross.  The conflict centered around who was the principal officer—the President or the Chairman ---and what their respective roles were. With each new executive, a conflict ensued with the board. These conflicts resulted in short-lived tenures of some of the most senior staff.  Huge golden parachutes followed and the public got restive as to who was running the nonprofit and how its contributions were spent.

Resolution: It, again, took outsiders to bring a clear demarcation between board governance and executive management and hopefully avoiding the ever-present clashes between board members and management.

Perhaps the single topic that has received most of the attention from commentators was the size of the Board. The 1947 Bylaws called for a board of 50 members, including eight Presidentially-appointed members, who were seldom present for Board deliberations.

Resolution: Despite empirical studies that supports the notion that small boards are more effective and more efficient, the Red Cross will not fully comply with this matter until 2012.

There have been conflicts of interestwith FDA blood program-related requirements with the Secretary of the Department of Health and Human Services in which there is a consent decree that has forced the Federal Drug Administration to fine the Red Cross almost $10 million.