Thursday, July 23, 2009

News You Can Use

Let's Talk honestly about Honesty

This post is inspired by the Freakonomics opinion-site of the NYT and recent events close to home.

A few weeks ago a woman who is a former colleague of a friend of mine was indicted for reportedly embezzling $1.3million from a Massachusetts museum where she served as the longtime CFO.

You can read about the alleged crime here.

Whether or not the woman is guilty is not relevant here (I'll assume as Americans are supposed to that she is innocent until proven guilty). If she did take all that money, it simply punctuates a epidemic that corrodes the effectiveness and credibility of charitable work.

The Freakonomics article is based on a story in the NYT that cites a study published in the Nonprofit and Voluntary Sector Quarterly titled, An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents. The Times writer inflated the findings somewhat, but the study sounded an alarm to say that lax oversight in voluntary organization may lead to heightened opportunities for financial malfeasance.

When drawing on study data the authors extrapolate this to suggest that $40billion is lost in nonprofits because of fraud. This amount, which equates to 13% of the money donated during the study year is twice the average in the business community.

I take serious issue with the size of this problem - I think the extrapolation was very inaccurate. However, I entirely agree with the position that nonprofits are ripe prospects for fraud. And we uniquely must combat it.

We are vulnerable for three reasons, poverty, apathy and trust. First poverty. The majority of nonprofits are not multimillion dollar efforts. Most are small budget efforts. A lot, particularly congregations, handle a lot of cash. Many rely on volunteer bookkeeping or do not pay for a professional audit. Thus the checks and balances are weak.

Secondly, apathy is the lack of energy or numbers of volunteers willing to ensure honesty of the numbers. I am aware of a recent case where one man defrauded several organizations. He simply volunteered to take the bookkeeping off the hands of the others in the organization. They were happy to have someone doing the hard work and accepted at face the numbers he provided them. There was no one who wanted to double check the numbers, no audit committee.

Finally trust is the con-man's friend. In the story above the man assured members of the several organizations he "helped" that they didn't need to undertake the expense of audits. Each board agreed. Whom but good people would be volunteers for their organizations, they thought. Eventually they found out that hundreds of thousands of dollars were gone taken by this man they trusted.

While similar crimes occur in the private sector, their impact may be much less severe to the company than the nonprofit. That is because donations are different than most purchases. If I buy a coffee from a company that is being embezzled, I still have the coffee, so the crime means little to me. If I donate to a charity and find that the funds have been similarly mishandled, I might not give to that charity again. They have compromised my faith in them. Furthermore, research suggests I might be less likely to contribute to anything.

That is why we must remain absolutely circumspect in our accounting of funds raised, because of our geographically spread out nature and volunteer driven staffing, we need to remain vigilant. This is why we centralize our receipting, why we use a bonded gift processing agent and an independent auditor. It is vitally important that the donations you work so hard to attain are cared for until we apply them to the care of your community's children with dyslexia.


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