After the Washington Post’s reprehensible piece 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 piled on with Iowa’s Charles Grassley saying, “Tax-exempt dollars are meant for tax-exempt purposes, not bankrolling someone’s personal Champagne lifestyle.” Falling for the Post’s poor reporting, Grassley said it’s “stunning that diversion appears to be so common.” Here in Washington, DC, the city’s Attorney General said that he will investigate whether “nonprofits are fulfilling their basic obligation to protect the charitable assets entrusted to them.” One of the Attorney General’s staff suggested that not-for-profits are “tolerating embezzlement,” and some will now be under “greater scrutiny” (Washington Post).
Well done, Washington Post; just when not-for-profits are needed more than ever, you’ve called the entire industry into question on the basis of one bad apple. Thanks. Let me use your own pages to show the problem: On November 1st, food stamp subsidies (the Supplemental Nutrition Assistance Program or SNAP) were reduced by US $5 billion (Washington Post). In Washington, DC, this translated to a $15 million cut affecting 140,000 people; roughly a quarter of the city’s population. Local not-for-profit groups, including Martha’s Table and D.C. Hunger Solutions, are scrambling to fill this Congressionally-mandated cut, but as you published on November 7th, “Martha’s Table’s food budget is $1 million for the entire year” and “when SNAP benefits are cut by 5 percent, charitable organizations have to double their contributions across the nation to keep up.” Food banks survive on the generosity of others, generosity that you, Washington Post, have threatened with your reckless reporting. Martha’s Table and D.C. Hunger Solutions used the Post’s editorial page to ask “those who are able should increase their charitable giving — in money and in food” (Washington Post). Will the Post assure its readers that such charity is well-deserved and needed or continue to suggest that all not-for-profits are subject to fraud and embezzlement?
And it’s not just the Washington Post and US not-for-profits that are coming under attack. Last week in online publication, Pambazuka News, two items caught my eye. From Uganda, Vincent Nuwagaba, “a human rights defender, researcher and life member of the Foundation for Human Rights Initiative (FHRI)” wrote an editorial declaring that Ugandan not-for-profit organizations “are guilty of murdering this country” are “far [more] corrupt than the government they demonise.” Without naming a single example, Nuwagaba accuses directors of being “chauffeured” in expensive cars, paying journalists to cover events and write supportive stories, and “cheat and fleece their employees.” He declares “80 percent of NGO staff are pretenders, hypocrites and outright dishonest. The human rights organisations flagrantly abuse human rights. The anti-corruption organisations are more corrupt than corruption itself.” His logic is flawed when he says that because “the media are always awash with stories chronicling ghost soldiers, ghost teachers, ghost students, ghost pensioners and virtually ghost everything… Does it not plausibly follow that we have ghost NGOs and ghost CSOs [?]” No, it doesn’t. The accountability structures in not-for-profits are different from those in governments. But Nuwagaba doesn’t discount civil society entirely, he calls for “the association of social scientists… [to] provide lasting solutions to the decay that characterize our society” (Pambazuka News) assuming that such an association would be immune to the corruption he sees in every other organization.
Unfounded and arbitrary accusations like those brought by Nuwagaba and the Washington Post leads to the “greater scrutiny” described by the Post and also allows for increased regulation of the not-for-profit sector. In Cambodia, Russia and Ethiopia, laws have been passed that limit the amount of funding not-for-profit organizations can receive from external sources. In these countries, the limitations are specifically imposed upon organizations that advocate for human rights and government accountability and have been used to investigate and close organizations that challenge the regime. By accusing all organizations of fraud and corruption, the Post and Nuwagaba provide cover for these authoritarian regimes to stifle opposition voices. In Kenya, the Parliament has gone one step further and proposes a law that states “A Public Benefit Organization shall not receive more than fifteen percent of its total funding from external donors.” Kenya’s law covers all organizations, including those that provide humanitarian relief and development support and would force donor countries to give the assistance dollars that would have gone to Kenyan not-for-profits to the Kenyan government. At the moment, not-for-profits represent 200 billion shillings (equivalent to US $2.3 billion) of Kenya’s economy and while I do not know the proportion that derives from international sources, I imagine it’s the majority of that amount. And with Kenya facing a one trillion shilling budget shortfall (Pambazuka News), additional threats to the economy are unwelcome, and to assume that donors would contribute to the Kenyan government, when the President and Deputy President of Kenya face prosecution in the International Criminal Court, would be false.
Not-for-profit organizations fulfill a very important role in development and providing social safety nets. Yes, they are subject to fraud, waste and theft, but so are all industries. To suggest that they are more susceptible or even complicit in such is to threaten the health and livelihoods of those that have come to depend upon them. Frankly, I wish not-for-profits were not needed and that the public sector and the private sector could provide for all of societies’ needs, but that is not the case, not today. However, just as the First Amendment to the US Constitution and Article 20 of the Universal Declaration of Human Rights protect my right of association, so too do those documents protect the right of the media to publish whatever they choose. And, as I will fight for the media’s right to publish irresponsible journalism, I hope the media will accept mine and civil society’s right to point out the media’s errors and false assumptions.
Michael P. Moore
November 18, 2013
Off-Topic: A defense of the not-for-profit sector and critique of the Washington Post’s “investigation”Posted: October 28, 2013
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