Off-Topic: A defense of the not-for-profit sector and critique of the Washington Post’s “investigation”

For my day job (when I’m not writing and researching about the continuing threat of landmines on the Continent) I work as a finance manager for a not-for-profit company in Washington, DC.  My entire professional career has been in this field working for a variety of organizations.  I have worked for a professional association, a university, and three international development organizations of differing sizes and missions.  In addition to the work I have done for these organizations directly, I have conducted audits of dozens of organizations in the United States and around the world (the only continent I have not been to is Antarctica).  When I was thinking about launching Landmines in Africa, the alternative was “Free 2 Associate,” a blog that would have discussed the nonprofit sector, international development and the increasing challenges faced by the sector.  I am good at what I do and am pretty pissed off at the Washington Post for its article in yesterday’s paper, “Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits” (Washington Post).  Had I written this yesterday, I would have used words like “shoddy,” “irresponsible” and “ignorant” and felt justified in doing so.  I still feel that way, but will settle (as my blood pressure has) for “sensationalist and lazy garbage.”

I have two problems with the story, the first (and what drove me to a sputtering, expletive-ridden rant) is the tone.  Starting with “the hidden world of thefts, scams and phantom purchases” in the title to unsupported claims of “financial skullduggery,” the article suggests that nonprofits are crime-plagued scams to bilk the government and the suckers who give them money.  The article quotes a lawyer’s accusations that nonprofits are “allowing people to steal” money and states that the “the nonprofit sector has repeatedly run into accountability problems” on the basis of only two, albeit high profile, cases.  The article claims that nonprofits actively try to hide any thefts and abuse the public’s trust in doing so.  The Washington Post would have you believe that you cannot trust any nonprofit with your money because fraud and theft is so pervasive in the industry.  To further fan the flames of discontent, the Post published the annual salaries of three people – the president, a vice president and the person accused of the fraud – it implicates in the American Legacy Foundation case (the only one it presents in any kind of detail), leading readers to assume that the employees of the Foundation, specifically the president and vice president, had a financial motive to keep the story quiet.  The Post also repeatedly noted where no charges were filed against accused thieves.

The second problem with the story is factual.  The Post accuses the nonprofit sector of insufficient scrutiny of its financial operations and are unusually susceptible to theft and fraud.  As part of the financial operations of several organizations, I can assure you, dear readers, that this is completely false.  Yes, nonprofits are subject to theft and fraud, but all industries are.  The Post even says, “Little comparative data are available about the prevalence of fraud across business sectors,” but quotes one study which listed nonprofits as “second only to the financial services industry” in cases of “major embezzlements.”  There are over 2 million nonprofit organizations in the United States with millions of employees around the world with at least $4.5 trillion in assets.  Nonprofits are susceptible to theft and fraud simply because we are so numerous, we have such a large stake in the domestic and global economies, and we employ so many people.  Fraud is a crime of opportunity and unfortunately, the amount of business nonprofits do and the number of people we employ means that there are opportunities for fraudulent behavior.  There are even some funny stories like the time I was asked to pay a bribe for a service and when I balked, the person asking for the bribe offered to give me a receipt for the bribe so I could include it in my expense report.

The Post does identify one of the key sources of scrutiny for nonprofits, their employees, but misses the third, the board of directors.  In the American Legacy Foundation case, an employee identified the fraud and reported it.  When he or she did not see a satisfactory response, the employee reported it again to someone else.  Every case of fraud that I know of was discovered not by an auditor or an accountant, but by an employee who was angered by the fact that a co-worker was stealing.  Look at the quotes from the Post article, “We are horrified it happened on our watch,” “It’s sadder when it happens to a nonprofit,” “There are kids out there we could have touched that we didn’t, because this money was taken from our coffers,” “We do view ourselves as holding a public trust.” Most people who work at nonprofits know that they are being entrusted with someone else’s money and hold themselves and their co-workers to a very high standard.  The organizations I have worked for helped landmine victims, searched for cures to malaria, sought to educate under-privileged students and protected fragile ecosystems.  We do work that no one does and without us the world would be a worse-off place; we honestly believe this stuff and when someone steals from a nonprofit, they are stealing not from an organization, but from the people we try to help.  As the President of the American Legacy Foundation said, the stolen money was money “that did not go to save lives.”  I say with confidence, people in nonprofits do not stand for theft or fraud.  If the Post were to investigate further, I’m sure they would find that most instances of fraud were reported by employees who detected the problem and took action.

Why don’t more people go to jail for fraud?  How many bankers went to jail after the market collapses of 2008?  Nonprofits report theft to authorities and it’s up to the authorities to pursue the case.  We do what we can, we fire people.  As for getting the money back, that requires lawyers and unfortunately, most nonprofits do not have the resources to hire lawyers to pursue civil trials.  I’ve seen the anger at thieves when they were found in our midst and know that people wanted to use every lawyer in the phone book to get the money back, but the cost of litigation would exceed the amount stolen.  Blame the high cost of legal fees on the absence of court cases, not will on the part of the organizations.

Lastly, the Post’s article suggested that the “public” has a right to know about these cases.  Well, they do, but not directly.  Nonprofit organizations are governed by boards of directors who are tasked with acting on the public’s behalf.  Often board members are recruited for their ability to bring in funds or make connections for the organization, but their first responsibility is to ensure that the organization adheres to its mission and acts in the public interest.  There are organizations, like Board Source which are devoted to educating board members about their responsibilities and while more organization should take advantage of these resources, to say that nonprofits are held accountable is simply false.  Most board members I know take their responsibilities very seriously and as key donors to organizations, they have a lot at stake when someone steals from their organization so they are motivated to act.  When fraud is detected, the board should be notified so that the organization can take appropriate action.  What the Post did not ask, despite mentioning the American Legacy Foundation’s high-profile board members was when they were informed of the detected fraud.  The board provides direction in times of crisis, like a fraud investigation and whether or not to publicly disclose fraud is the role of the board, not a lawyer in Chicago with a beef against nonprofits.

After 15 years in the business, I do have some recommendations for organizations to minimize and monitor for fraud.  First, change your auditor frequently.  Most nonprofits are audited annually and a clean audit is a point of pride, but an audit is also the opportunity to ask hard questions.  A new auditor will ask questions that an old auditor might not; from experience, I know a new auditor keeps the finance team on its toes.  Second, minimize cash transactions.  When organizations have large piles of cash lying around (and I’ve carried upwards of $10,000 at times), the temptation is high, as is the risk of outright theft by a third party.  Third, tell your board everything.  If you have done your job, your board is both your biggest cheerleader and your harshest critique because they believe in what you are doing and want to see you succeed.  They will help make the hard choices.  If you don’t trust your board enough to tell them about potential fraud, you recruited badly.  Fourth, listen to your employees and keep them informed.  Many of the people who work for a nonprofit for that particular nonprofit because they believe in the mission of the organization.  They would be horrified to learn of any thefts and would be more willing to report it if they knew both that the organization is watching and that reports are taken seriously and fairly.  A culture of suspicion is not helpful, but a culture of accountability is.  Last, don’t believe everything you read in the paper.

 

Michael P. Moore

October 28, 2013

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2 Comments on “Off-Topic: A defense of the not-for-profit sector and critique of the Washington Post’s “investigation””

  1. Mike Kendellen says:

    I always find it incredulous that fraud goes on for years before it is discovered. Is everyone asleep at the office? In the end it is the CEO and the Board who are accountable. The Post article was basically about one NGO and then made sweeping conclusions about all NGOs. When I was reading the article, I thought, where was the CEO; where was the Board? What kind of internal controls were there? Apparently none. Why did the CFO have so much authority? But I do think, at least with domestic NGOs, if not the public, there is an attitude that non-profits because they are “charities,” — an irritating characterization of NGOs, — do good work, saving lives!, and therefore how could they possibly be dishonest people. So-called good work trumps good financial management goes the thinking. I don’t want to say that generalization is pervasive but it’s out there. The mission is more important than the organization is too often the assumption and attitude. We are helping children, orphans, veterans, the poor and so we must be honest think too many people. Who would steal from them? Well, unfortunately, we know many people would and do. The quality of NGOs is judged is frequently based on the cost of administrative overhead which includes accounting and watching over the money. The Post article made broad generalizations based on one NGO, and a fairly minor one at that. There are over 1.5 million registered NGOs in the US.

  2. […] on fraud and mismanagement in US not-for-profit organizations, I took the Post to task on this site.  The Post’s story and database generated other attention and some Senators and state regulators […]


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