November 1, 2013; Washington Post
Sign up for our free newsletters
Subscribe to NPQ's newsletters to have our top stories delivered directly to your inbox.
By signing up, you agree to our privacy policy and terms of use, and to receive messages from NPQ and our partners.
When investigative journalists look for a measure of impact, the top one is typically the impact seen in official actions taken by legislators and government administrators. The Washington Post’s investigative report on unauthorized diversions of nonprofit assets has done just that: Congress is apparently eager to take action.
According to reporting by Joe Stephens and Mary Pat Flaherty, Senator Charles Grassley (R-IA), the ranking member of the Senate Judiciary Committee, has initiated two investigations, one on “legal issues related to the diversions,” the other a specific investigation into the actions or lack of actions of the American Legacy Foundation, which apparently was less than celeritous in its disclosure of an alleged embezzlement of $3.4 million. As nonprofits know well, Senator Grassley was the prime mover behind the Senate Finance Committee hearings on charitable accountability nearly a decade ago. Stephens and Flaherty also report that Senator Tom Coburn (R-OK) plans to ask the Government Accountability Office (GAO) to look into the diversions. In addition, several states’ attorneys general announced plans to look into the Washington Post database of some 1,000 nonprofits for nonprofits in their states.
When Senator Grassley held his original charitable accountability hearings, some in the nonprofit sector reacted with a “circling the wagons” attitude of denial, followed by strenuous efforts to avoid potential legislative and regulatory changes. Hopefully, the nonprofit sector’s leadership will handle these investigations differently, avoiding strategies of delay and disguise. There is much to be explored here, hopefully with several useful themes that will benefit and strengthen the nonprofit sector:
- Financial systems and controls: It would be hard to underestimate the challenge that nonprofits face in developing robust internal controls that would minimize or deter some of the people involved in the reported diversions. If nonprofit leaders document the needs revealed by the Washington Post series, the message should be heard at high volume by funders, particularly foundation grantmakers, who typically skimp on “overhead” funding that can be used to create and strengthen those systems.
- Categories of vulnerable groups: The Washington Post database combines many different kinds of tax-exempt entities. They are hardly all 501(c)(3) public charities. There are associations, trade associations, veterans’ organizations, and social clubs all represented in the database. How about if Congress and the nonprofit sector examine trends and patterns of diversions affecting different kinds of tax exempt entities, in order to understand and predict vulnerabilities?
- Challenges for smaller organizations and communities: The Post described the groups in the diversion database as generally “larger,” which some are, but many aren’t. There are plenty of groups in the database that populate the four-fifths or more of nonprofits that are below $1 million in revenues. Our guess is that predators might prey on smaller nonprofits outside of the limelight, where there are few Washington Post-type reporters looking for the crooks who so egregiously think of nonprofits as booty to be plundered.
- State attorneys general: Senator Grassley and Senator Coburn are likely to find that IRS’s tax-exempt unit, already in various stages of freefall and disintegration, has been hardly energetic in investigating diversions. Understaffed state attorneys general and charity officers are the front line for these issues, but some seem to have been asleep at the switch. If the reporting of the American Legacy Foundation diversion is accurate, along with the reaction of AGs such as D.C.’s Bennett Rushkoff professing total ignorance about the ALF’s reported embezzlement, something has to happen at the state levels—better funding and a more aggressive posture for protecting the interests of the intended beneficiaries and the donors.
- Nonprofits as prey and as predators: By our review, nonprofits in the Washington Post database do not appear to be mini-Enrons, encampments of like-minded predators using their corporate structures to plunder and pillage on an institutional basis. It seems that even when there were insiders cooperating with outside predators, such as corrupt financial advisors, institutionally most of the nonprofits weren’t engaged in corporate strategies of abuse. For those that were, the hammer should fall, and hard.
- Nonprofits taking action: Unlike the reported action or inaction of American Legacy, most of the diversions seem to have been accompanied by reports that the culpable offenders were reported to the authorities for judicial action. It would appear that nonprofits have generally gone after the offenders. It would be worthwhile to see what happened after that, when the prospective felons were investigated by police and hopefully prosecuted. How did the authorities handle reports of nonprofit embezzlement and thievery?
- Put it in perspective: Senator Grassley told the Post that the reported incidents were “stunning [in] that diversion appears to be so common.” Let’s disaggregate the problems—internal employee thievery, problems with external vendors and contractors, rapacious investment advisors, etc. Hopefully, the congressional committees will look at the techniques that people are using to steal from nonprofits and put them into the context of how the same techniques are used or misused by others to steal from other sectors. We suspect, for example, that nonprofits are probably more open than other sectors in their reporting of internal players stealing money, and no matter how awful the magnitude of stealing in and from nonprofits, it doesn’t compare in absolute and proportional terms to other sectors of the U.S. economy.
As Congress gears up to look at this problem, we hope that the focus is on solutions, so that nonprofits that should be serving people in need are helped in ensuring their meager resources don’t get pocketed by trusted bookkeepers and IT managers or skeevy investment advisors. –Rick Cohen