Small Nonprofits and the Temptations of Fraud: What Every Donor Should Know

This past summer, there was an article in the New York Times about the number of frauds reported in youth sports activities and their size. The article mentioned that some 14,000 such organizations in the U.S. take in annual revenue of about $9 billion (about $650,000 each on average). It then mentioned that there have been hundreds of arrests and convictions in 43 states, involving 15 sports.

I can't say I was surprised. As I always told my clients, “just because you are doing God’s work, don’t assume that all of your employees (or volunteers) are angels.”

In the auditing business, we try to drill into people’s consciousness that financial fraud is not a crime committed by criminals but a crime of opportunity that occurs because it is so easy to commit. In case after case, financial misappropriations have been committed by otherwise upstanding members of the community— people who hold positions precisely because they were trusted citizens, known by many.

In many charitable organizations, there may be lots of cash involved. Cash can be used by everyone without additional efforts like trying to cash a check made out to an organization. In addition, many organizations are run like social clubs without any internal controls or sound business practices. Frequently, the entire financial function is in the hands of only one person on whom there are no checks and balances. This is not a situation into which you want to contribute your financial support.

In these situations, when an individual gets into some financial difficulty—a job loss, gambling, marital difficulties, etc., the lure of the easily accessible funds (the opportunity) may be too much to resist. This is not meant to condone the perpetratioin of a financial crime, but to demonstrate how easily the “upstanding community member” may do the unthinkable.

What is the solution? In short, organizations must recognize the potential and work to eliminate the temptation. Then they should be transparent about this and inform their donors and financial supports of the procedures in place to mitigate against the financial fraud potential. Organizations should put together a program of controls, monitoring and review and explain this in a short, one-page document. This document should be available to all resource providers.

If you are a donor or another resource provider, you should not hesitate to ask for this. “What steps and procedures does your organization have in place to guard against financial fraud?”

Note that I (a former auditor) am not suggesting that all organizations (including the local Little League) engage an auditor on an annual basis. Yes, larger organizations should be subject to an independent audit and resource providers should be aware that such a policy is in place. But internal control procedures need to be in place in all organizations, even when an independent audit is part of the control process.

Organizations need to get their heads out of the clouds and realize that not all of their employees and volunteers are angels. Resource providers need to understand that insisting on the recognition of fraud risk and the establishment of control procedures is not too much to ask in exchange for a donation.