Nonprofits and Fraud Study: Are Leaders Too Complacent About the Risk?

(Press release, April 22, 2015) — When asked to name their top challengers, leaders of nonprofits were most likely to say "raising funds in a competitive environment with higher expectations for ROI" (74%), "leadership capacity deficit" (54%) and "populating the board with the people with the right fit" (51%), according to the findings of Nonprofit Pulse, a new national survey of 103 nonprofit leaders by accounting firm Marks Paneth.

But only 1% named "fraud by staff" as a top challenge, according to the survey, which was fielded during the fourth quarter of 2014 and whose respondents included Presidents, Executive Directors, Board Chairs, Chief Operating Officers and Chief Financial Officers of nonprofits with annual revenues between $10 million and $100 million.

"On the one hand, it's encouraging that nonprofit leaders are confident about the integrity of their staff. On the other, it's probably worth asking whether they're overlooking or actively not working to mitigate the risk of fraud," said Michael McNee, CPA, Partner-in-Charge of the Nonprofit and Government Services Group at Marks Paneth. The practice serves approximately 150 nonprofit and government clients.

When asked, nonprofit leaders said they have established practices to reduce the risk of fraud: 85% of nonprofit leaders said that their organizations "have appropriate separation of incompatible duties"; 84% have a "clear code of ethics" that is emphasized throughout the organization; and 72% employ background checks upon hiring.

However, only 20% of leaders said their organizations have a "facilitated fraud risk assessment process."

"The practices that the majority of nonprofits have in place may in fact just be 'table stakes' and probably do not go far enough," Mr. McNee said. "Fraud at nonprofits is arguably much more common than most organization leaders would suspect." A third party analysis of federal filings that shows that more than 1,000 nonprofits said they had discovered a "significant diversion" of assets between 2008 and 2012(1). And another study concluded that nonprofits and religious organizations accounted for one-sixth of all major embezzlements, placing the nonprofit sector second only to financial services(2).

When pressed, nonprofit leaders said that there are significant issues when it comes to preventing and identifying and instances of fraud. Many leaders -- 43% -- said the cost associated with facilitating fraud risk assessment represents a real challenge in that regard. And almost a third (32%) admitted that background checks only go so far in prevention, as many fraudsters are first-time offenders. Further, 37% of financial officers listed collusion as a top challenge to preventing fraud, compared with only 5% of other executives.

"We believe it's worthwhile for nonprofit executives to ask themselves if they are overlooking fraud risks. It's easy to do, because one often doesn't see fraud as a problem until it happens, and, importantly, most nonprofits are not taking the risk assessment steps that would reveal how potentially vulnerable they actually are," Mr. McNee said.