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Report Sketches Crime Costing Billions: Theft From Charities
By Stephanie Strom
The New York Times
Saturday 29 March 2008
The volunteer treasurer of the Madison County Humane Society in Indiana was
charged this month with using $65,000 of the charity's money to buy jewelry
and makeup. In San Francisco, the chief financial officer of the Music Concourse
Community Partnership was fired after he was accused of taking $3.6 million
of the organization's money to play the stock market.
Nonprofit leaders tend to shrug off such cases as evidence of "just a
few bad apples." But a new report, trying to identify the scope of such
thefts for the first time, suggests otherwise.
The report, by four professors who specialize in nonprofit accounting, found
that the 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 most costly cases, the study found, involved male executives earning $100,000
to $149,000 a year. The thieves in such cases had typically been with the organization
the longest.
But what is getting the attention of nonprofit leaders is the report's
estimate of the overall cost, which the authors put at $40 billion for 2006,
or some 13 percent of the roughly $300 billion given to charity that year.
"It's a surprisingly large number," said Paul C. Light, a
professor of public service at New York University who does surveys of public
confidence in charities. "We really need to take a good hard look at what's
going on in these organizations."
The new report is based on data from the Association of Certified Fraud Examiners,
which, the report said, found that "all organizations," whether
government, for-profit or nonprofit, "lose on average 6 percent of their
revenue to fraud every year." Applying that percentage to nonprofits'
total 2006 revenue of $665 billion - donations, government payments and
other income - the authors came up with the $40 billion estimate.
"Determining how much theft and embezzlement takes place has been the
holy grail of the sector," said Jack B. Siegel, a tax lawyer who specializes
in nonprofit matters.
If the $40 billion figure is accurate, then the money lost to fraud equaled
the combined giving by corporations and foundations in 2006, said Diana Aviv,
president and chief executive of the Independent Sector, which represents nonprofit
groups.
But Ms. Aviv expressed skepticism about the report, noting that it relied on
the fraud examiners association's estimate of overall fraud across all
sectors, including government and corporate.
"They're lumping all those sectors together, and it could be that
the for-profit sector experiences a higher level of fraud, while the nonprofit
sector and government experience 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 and Voluntary
Sector Quarterly, found that losses to fraud among the 58 cases reported to
the fraud examiners association in a random survey of nonprofits ranged from
$200 to $17 million, with the median fraud costing $100,000.
"Most of these things are not caught by routine audits," said Gary
Snyder, who tracks nonprofit fraud in his newsletter, Nonprofit Imperative.
"They're usually done by someone in the financial area - the
treasurer, the bookkeeper, the signer of checks - who knows how to avoid
getting caught."
Almost 95 percent of the reported frauds entailed loss of cash, and a majority
of those involved false or inflated invoices, billing for expenses that were
never incurred and check tampering.
"I gave a talk to a group of nonprofit executives a few weeks ago, and
every single one of them had a fraud story to tell," said one of the report's
authors, Janet S. Greenlee, an associate professor of accounting at the University
of Dayton. "This has been going on for years, but there's a feeling
that it shouldn't be discussed," because of the effect it might
have on donations.
Professor Greenlee - joined in the report by Mary Fischer of the University
of Texas at Tyler, Teresa P. Gordon of the University of Idaho and Elizabeth
K. Keating of Boston College - said the failure of organizations to punish
those who steal from them was perhaps one of the biggest reasons for fraud in
the sector. She said she had worked at organizations that refused to dismiss
employees caught stealing.
Professor Light, at N.Y.U., said some 70 percent of respondents to a new survey
among the general public thought charities 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 Service has added a
question requiring them to disclose whether they have experienced theft, embezzlement
or other fraud during the year.
"Not only will that eventually give us a much better idea of how widespread
fraud is with these groups, it also gives them an incentive to 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.
Newspapers routinely report incidents of nonprofit fraud in their communities,
but the amounts tend to be small and thus go unnoticed at a national level.
Mr. Snyder, the tracker of nonprofit fraud in his newsletter, said that through
use of databases and other searches, he had stumbled across more than $700 million
in fraud already this year among government agencies 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.
It started in the 1970s and continued until one of the participants blew the
whistle in 1998. Merchandise donated to the organization was sold outside 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 sent to prison.
The thieves had given more than $800,000 to the organization's president
and chief executive, who parked the money in accounts in Switzerland, in Austria
and on the Isle of Man and then escaped to Guatemala as investigators closed
in, according to the authorities. Guatemala sent him home in 2003, but he ultimately
pleaded guilty to only one charge - of tax evasion unrelated to the scandal
at Santa Clara Goodwill - and walked out of the courtroom.
"I like that one," Mr. Snyder said, "because it's an
extreme example of something 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're creating audit committees and adopting the provisions
of Sarbanes-Oxley as best practices," she said of the 2002 law that imposed
stricter accountability on corporate governing, though not on charities.
"Boards are becoming tougher," she said, "because they know
that as fiduciaries, they are at risk of, at the very least, embarrassment."
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