I’ll be on Tony Martignetti Nonprofit Radio on Friday, March 7, 2014, talking with Tony about fraud and what nonprofits should do to prevent and possibly report fraud. Listen in live here or catch us on iTunes.

A nonprofit victimized by fraud can find itself doubly harmed by (1) the direct loss resulting from the fraud and (2) news reports that characterize the nonprofit as untrustworthy or its leaders as culpable. It should be no surprise that the media loves to expose and publish stories about fraudulent activities in trusted organizations. And unfortunately, those stories often infer that the sector as a whole is plagued by fraud and widespread diversions of charitable assets.

Take for example this headline from a Washington Post article that created public outrage: Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits (10/26/13). Among the provoking statements made in the article:

A Washington Post analysis of filings from 2008 to 2012 found that [the American Legacy Foundation] is one of more than 1,000 nonprofit organizations that checked the box indicating that they had discovered a “significant diversion” of assets, disclosing losses attributed to theft, investment fraud, embezzlement and other unauthorized uses of funds. …

 

The diversions drained hundreds of millions of dollars from institutions that are underwritten by public donations and government funds. Just 10 of the largest disclosures identified by The Post cited combined losses to nonprofit groups and their affiliates that potentially totaled more than a half-billion dollars. …

 

The Post found that nonprofits routinely omitted important details from their public filings, leaving the public to guess what had happened — even though federal disclosure instructions direct nonprofit groups to explain the circumstances. About half the organizations did not disclose the total amount lost. …

 

The findings are striking because organizations are required to report only diversions of more than $250,000 or those identified as having exceeded 5 percent of an organization’s annual gross receipts or total assets.

And here are some of the criticisms of the article:

In The Washington Post story, the reporters had access to more than a million tax forms nonprofits filed over four years. They found that 1,000 nonprofits checked yes in response to a question on those returns about whether their group had suffered a “diversion of assets.”

 

Using that tiny percentage, the article then gave the misimpression that the nonprofit world is rife with “financial skullduggery,” when in fact it was the approximately 1,000 nonprofits themselves that were the victims of scams by for-profit vendors, employee theft, and outside investment advisers.

– Tim Delaney, Nonprofits Must Respond Swiftly to Critical News Stories, The Chronicle of Philanthropy

[T]he lure [of the Washington Post’s headline] implies that the nonprofits are involved in and parties to these “thefts, scams and phantom purchases,” as opposed to victims of people inside or outside of the organizations who were quite intent on plundering charitable resources. It looks to the Nonprofit Quarterly that the diversions reported in the article are nonprofits that had been cheated by employees, vendors, and outside financial advisors, but not engaged in trying to cheat donors or the public. …

 

A common problem in the press is the lumping of all 501(c) organizations into a broad “nonprofit” category, as though the problems or issues the press might find are problems of public charities. The Washington Post list combines all kinds of groups, many of which are not 501(c)(3) public charities. A striking number of the groups in the Washington Post spreadsheet were labor unions (501(c)(5) organizations) and fraternal organizations (501(c)(10) organizations).

– Rick Cohen, Washington Post Diversions Piece: What it Really Means, The Nonprofit Quarterly

Personally, I believe that charitable nonprofits are not plagued by fraud any worse than the for-profit sector. And the public’s higher trust in the nonprofit sector than in the public or for-profit sectors is well placed. But that is not to say at all that charities are excused from taking reasonable steps to prevent losses from fraud, properly report any diversions of assets, and/or obtain restitution.

In an opinion piece for The Chronicle of Philanthropy, Pablo Eisenberg responded to the critics of the Washington Post piece by stating:

What the critics seem to have forgotten is that nonprofit boards and executive directors have responsibility for the activities of their organizations, including the actions of their employees and investment advisers. We should expect leaders at nonprofits nationwide to be tightening their oversight to assure no unscrupulous activity is occurring. Donors should be demanding nothing less: It is their money that has been diverted in most cases, and when it isn’t, it’ s their tax money that went first to nonprofits and then to con artists.

Stay tuned for tips about addressing the risks and occurrences of fraud after the show.