Many of you may have seen The Washington Post article “Inside the hidden world of thefts, scams and phantom purchases at the nation's nonprofits” published on October 26, 2013. The article details the findings of a study of disclosures made by the nonprofit organizations on their IRS Form 990 federal tax filings. The study was assisted by GuideStar, an independent organization that collects and publishes nonprofit federal tax filings. More than 1,000 nonprofit organizations nationally have reported a “significant diversion” of assets since 2008, The Washington Post reported. The study reports that over the last five years, 12 Oregon nonprofits, with annual revenue ranging from $27,000 to nearly $45 million, have acknowledged that theft, investment fraud, embezzlement, or other unauthorized uses of funds has resulted in the diversion of funds. In connection with the study, The Washington Post published what it called “the first public, searchable database of nonprofits that have disclosed diversions.”
The Nonprofit Association of Oregon (NAO) believes that this report needs to be put into perspective. The 1,000 organizations that self-reported diversions were gleaned from a stack of more than 1 million nonprofit 990 filings. There is no arguing that diversion of funds in a nonprofit is a serious matter, but the real story that The Washington Post seems to have missed is threefold:
- Just like the private and public sectors, nonprofits are the targets of thieves and should take precautions. It outrages all of us working and volunteering with nonprofits to see that there are people that take advantage of their position on the Board, as staff, or as a sub-contractor to a nonprofit to commit fraud, but we all would be naive if we didn't recognize that it happens. These events are painful for the nonprofits that experience them and serve as a reminder to all of us to be vigilant. It is a responsibility of all nonprofit leaders to take precautions to mitigate against theft and corruption.
- When you look into these specific incidents, these are not stories about nonprofits defrauding the public—the picture that The Washington Post paints in their reporting—rather they are about how individuals have defrauded charitable nonprofits.
- Although the findings are striking, what the data actually reveals is how highly transparent the nonprofit sector is. The list was compiled from information that nonprofits disclose publicly every year in tax returns that are available to the public 24 hours, 7 days a week. This is a level of transparency and scrutiny that is required by our nonprofit status and one that nonprofits are adhering to through self-disclosure. By comparison, for-profit companies do not make such disclosures.
These kinds of articles should serve as a wake-up call to all of us in the nonprofit sector. It reminds us of our responsibilities to be vigilant to theft, fraud, and embezzlement in our organizations. It should also remind us of the trust that we have with the public and how easily and quickly that can be tarnished.
The Nonprofit Association of Oregon believes that the solution to mitigate against fraud is by ensuring proper systems, checks and balances, and capacities within nonprofits. Nonprofit leaders must understand their three over-arching duties of trust—the duties of due care, loyalty to the corporation, and obedience to the law. NAO, organizations like the Center for Nonprofit Stewardship, and others, specifically train and advise nonprofits on how to ensure compliance with both required and best practice systems for Board members, staff, and volunteers of nonprofits to meet their risk management and fiduciary responsibilities.
NAO urges all nonprofit leaders and Board members to schedule time and resources for proper mitigation and compliance systems development and review them regularly. The Charitable Affairs Section of the Oregon Department of Justice has an excellent guide for reviewing your responsibilities.