Nonprofit Fraud Hurts More Than The Bottom Line

Why does theft happen? How can you work smarter to prevent this happening in your nonprofit, and how do you recover when it does happen? I have lived the devastating discovery of a theft, assisted in the discovery process, and watched as the perpetrator was prosecuted. It changed my life. For many years, the questions, the grief, and the feeling of responsibility and betrayal were my close companions. Money was stolen, people I was responsible for were hurt, people I trusted betrayed trust, and I had to face my own inadequacies as a leader. There is more peace now, but it was hard fought through important internal battles of trust and self-confidence.

Since January 2017, my company, Lee + Associates, has direct knowledge of six cases of theft in Central and South Texas with an estimated loss of just under $5 million. All but one nonprofit will probably recover from the loss, but when people steal from a nonprofit more than money is lost: services to children and fragile populations are diminished or cut altogether; quality-of-life programs for everyone in the community are affected; and the people closest to home – the donors, staff, volunteers, and volunteer board – will suffer loss of trust and jobs, fear, insinuation and rumor, investigation, and a level of stress that is for some, unbearable.

Since 2011, there have been 1,100 reported cases of embezzlement in the nonprofit sector, according to the IRS. This figure may seem small compared to the 1.5 million nonprofits operating in the United States today until you begin to dig deeper. The 1,100 reported cases are documented only through the IRS electronic filing of 990 forms. They do not include cases reported through paper filing, which are hard to compile, nor do they include the cases that are not reported to the IRS or legal authorities. The IRS estimates that the number of unreported cases is at least 10 times greater than those recorded.

In 2006, a documented study conducted by faculty from New York University, in conjunction with the Association of Certified Fraud Examiners, estimated that charities had suffered a theft in charitable funds of $40 billion or 13 percent of total gifts to charity in 2005. Twelve years later, the study has updated losses to approximately $49.6 billion, the majority of which go unreported and unpunished.

Abagnale would know. One of the most celebrated confidence tricksters in the U.S., he is now a lecturer for the FBI and leads his own consulting company focusing on financial fraud. In his article, “Embezzlement,” published in the Financial Fraud Law Report, Abagnale discusses the primary reasons fraud and theft occur in nonprofit and for-profit environments:

• Lack of policies and procedures that govern how money is tracked, receipted, deposited, and invested, which includes the oversight of basic accounting practices such as bank statement review and reconciliation, audit practice, and correct and timely financial statements
• Lack of standards and procedures in hiring and employment tending to rely on the “good ole boy/girl network”
• Reliance on volunteer board members and staff members who do not have experience, expertise, or understanding of their roles and responsibilities
• Expansion of program services without the adequate number of administrative staff to manage the system
• A pervasive culture among both board and staff members that: 1) standards and procedures normally found in a corporation are not needed in the administration of a nonprofit, and 2) passion for the mission equals goodness, honesty, and kindness
• Rarely reporting theft, prosecuting the perpetrator, or providing an appropriate response when asked for a reference on the perpetrator
• A legal system that does not support the investigation or prosecution of theft within nonprofits. On three occasions, I have been told by detectives, FBI and IRS representatives, and staff from district attorney offices that the funds reported stolen were not enough to pursue an investigation. In each of these cases, amounts ranged from $150,000 to just under $1 million. One officer told me: “It is just not enough money to warrant the paperwork, or the costs associated with the investigation. After all, we probably are not going to get the money back. It is just not worth it.”

While “not worth it” to law enforcement, to the nonprofit, those lost funds meant cutting a program, potential reprisals from the funding source (government funds), and the thief not facing repercussions and living to steal another day. To another organization that needed the funds to provide hot meals and a safe place for the elderly in their community, it meant the closing of the center until it could regroup. Abagnale believes that prevention is the only recourse, as punishment and recovery of funds is rare.

Several people get caught in the vortex of an embezzlement. Not the donors or the people you serve, but that quiet group: the board, the staff, and the perpetrator.

Why do they steal? When I interviewed some perpetrators, the answers are oddly the same:

“They owed it to me,” tops the charts. People who steal from nonprofits feel that they work long hours for low pay, little-to-no recognition, and they are owed the funds for their dedication.

“I had to so that I could support the image expected of me.” Maybe this says something about the messages we are sending in our work environments. This tells us that our interview questions should focus on asking candidates about their values and how we fulfill our mission.

“It wasn’t their money anyway, somebody gave it to them …”

And my personal favorite, “It is no big deal, because no one got hurt.”

Collateral Damage

We don’t often hear about what goes on behind the scenes when fraud is discovered. The focus always seems to be on how much money was stolen, sometimes who stole it and how, but rarely do you hear about the people who are left to pick up the pieces – staff and board members who share in the aftermath.

For all members of the nonprofit, initially there is a profound sense of shock and disbelief. The successful embezzler is usually someone who is well liked, fun, charming, compelling, and the go-to person in the office. Get rid of your image of the dark loner working in a small office, keeping to themselves. Board members ask each other and themselves how they could not have seen it. Staff gathers to compare notes and ceaselessly examine how they could have kept it from happening. They have a sense of guilt, self-doubt, and helplessness.

And, finally, comes the fear. In a fraud situation, the staff – sadly – is guilty until proven innocent. Unless the mode of theft is clear cut, there is always the chance that more than one person was involved. They along with everyone connected to the situation should be vetted and cleared. It is a lengthy, time-consuming process which is distracting, often feels degrading, and instills a sense of distrust within the remaining group. Additionally, staff members worry that they will lose their jobs, lose respect within their community, and be tainted in a way that will harm them professionally and personally. They wonder, should they stay or seek employment elsewhere. Some leave as soon as possible, but most remain, true to the mission and the people they serve.

Board members experience all of the above and for some, this includes a profound sense of responsibility. Upon their shoulders lies the decision on next steps: sweep it under the rug, or grapple with the full gamut of discovery and prosecution? Over the years, we have found that approximately one-third of the board resigns upon the discovery of the fraud hoping to escape liability, notoriety, and responsibility. One-third will remain, but take an inert position – heads buried in the sand, just hoping it will be over soon – and one-third – brave souls – step up to actively support the organization through the troubled times. They support the staff, accept interim positions, make hard decisions that may lead to facing the media, communicating with law enforcement, and taking the heat.

Profile of an Embezzler

In a study conducted in 2005 (updated in 2016), The Hauser Center for Nonprofit Organizations at Harvard University in partnership with the Association of Fraud Examiners, developed a profile of an embezzler. They found that the majority of individuals who committed fraud were married women, median age of 41, with children. They steal on average, $160,000. Men who steal are usually married, with children, between the ages of 35 and 55, and steal considerably more, with an average of $350,000.

Embezzlers have many of the characteristics that remind me of front-line responders and fighter pilots. Intelligent, perceptive, highly skilled in predictive behavior, with a high threshold for anxiety and risk-taking. Most understand that nonprofit leadership will not prosecute due to their own fear of exposure. Although the embezzler realizes that their employment will be terminated if caught (in 5 percent of the cases, the individual is not terminated), they will keep the money or the goods and lay low in a job outside of the nonprofit sector until enough time passes, and then can step back into a position where it is made easy for them to steal again.

Where do we go from here?

Nonprofit organizations are likely to discover a theft or fraud situation more quickly and endure it with less trauma if they have established the clear, definitive policies and procedures they need before the fraud occurs. We are blessed to work in an industry that changes the world on a daily basis where we laugh often and much, find the best in others, try to leave the world a better place, and know as we turn out the lights that one life may have breathed easier because of our mission.