January 27, 2018; Boston Globe
No sector is immune from embezzlement or theft; it can be found at nonprofits, at for-profits, and in the public sector. A recent article in the Boston Globe posits that theft by employees of nonprofits may be more common than we think, but this case is not well made for a number of reasons. In fact, most of the article is devoted to one (albeit interesting) case in contrast to a series done in the Washington Post four years ago on the same topic. At that time, Rick Cohen wrote,
There are big themes in the Washington Post’s series on nonprofit “asset diversions” that merit attention and action, but they aren’t necessarily the ones you might think. The unfortunate result of much of the reporting done on the basis of this data is the general perception that nonprofits tend as a class toward bad managers or crooks or both. The reality is far more nuanced, and likely not dissimilar from that of the business sector. The truth is that there are many predators out there with a lot of new scams and tools who victimize the nonprofit sector as they do individuals.
In short, nonprofits should be bulking up their protections against in-house and out-of-house thieves and embezzlers, and they should be working with governmental authorities to take action against anyone and everyone who would purloin resources from tax-exempt organizations. But they must also take action against categories of miscreants and malefactors in ways that produce change; not just for nonprofits, but for standards of ethics and accountability in the US economy.
There are lessons to be had in the reminder of the asset diversion data base and in the one highlighted case of the Somerville Homeless Coalition. The theft was initially discovered by a board director reading the organization’s Form 990 and finding, to his surprise, that the salary reported for the CEO was $12,000 less than that for the COO. Looking into the matter, it was discovered that this was no typo but a case of theft. The COO, in charge of financial matters at the organization, had taken funds at the rate of an average of $6,000 per month over 18 months. In several cases, this was apparently quite openly added to his salary.
Todd Wallack of the Globe found that at least 1,100 nonprofits have reported unauthorized diversion of funds on the electronic IRS Form 990s over the past seven years. This is not a large number, but it also does not include agencies that do not file electronically, the very small agencies filing a Form 990-EZ who are not asked the question, and the fact that the IRS does not require reporting for any amount less than $250,000 unless it is more than five percent of the organization’s total gross receipts or assets. Only one in seven nonprofits file electronically. In other words, the number of unauthorized diversions is probably a lot higher.
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As described in the report, and as seen in a quick scan of the searchable database of cases as reported to the IRS, which is appended to the article, by far the largest proportion of instances involve flat-out embezzlement—an employee of the nonprofit in some way siphoning off funds for their own benefit. Two items seem to jump out from the Globe article and from the database: not all of the cases are referred to the courts, and in a majority of the cases, the response by the organization is to tighten fiscal policies.
The database comprises information drawn directly from the electronic filing with the IRS, indicating the size of the organization’s budget, the amount diverted, and an explanation of what happened and what is being done about it. A scan of a single state’s entries in the searchable database found more than 20 cases of unauthorized distribution. Fewer than 50 percent of the entries say that the case was sent to the legal system. This could be because restitution was made by the guilty party or by the organization’s insurance. In other cases, it may be due to the desire not to draw bad publicity in the form of a court case, which might scare off some donors who would be worried about poor oversight of their funds.
One common organizational response was a significant review of fiscal policies and procedures, either through an internal process or by hiring an external consultant. Since the existing policy almost certainly didn’t condone or outline how to embezzle funds, such a review might simply point out how it happened and call for more stringent oversight, which would seem the more logical and important fix.
In the case of the Somerville Homeless Coalition, it was the diligence of a board director that found the theft after actually taking the time to read the 990. The COO’s brazenness in listing the salary so openly suggests a confidence that no one would read the document. This, then, is an argument that boards need to include people with the skill and willingness to read and understand the financial forms and reports, and the courage to ask the tough questions as they come up.
The Globe article makes and illustrates good and interesting points, and so is eye-opening for staff and board alike. However, it’s the inclusion of the searchable IRS database at the end that makes it a valuable tool. Readers can search by state to see a list of the cases reported on electronic Forms 990 and can then expand each entry to read a more detail account of what happened and what is being done.
In the end, however, the case for there being more malfeasance than we think at nonprofits is not made and the author misses making some of the connections to what we can do about all of this. For that, however, you can go to Cohen’s 2013 article, which is based on a more nuanced look at diversions.—Rob Meiksins