Janet S. Greenlee

An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents

Losses due to fraudulent activities are particularly troublesome in the nonprofit sector because they directly reduce resources available to address tax-exempt purposes. The ensuing bad publicity also may reduce contributions and grants in subsequent periods. This article uses data provided by Certified Fraud Examiners to report on the types of fraud they identified in nonprofit organizations and the characteristics of both the victims and the perpetrators of the fraudulent activities. Based on the analysis of the data, the authors suggest ways that fraud losses can be prevented or mitigated. In particular, governing boards are urged to consider important controls in addition to the annual financial statement audit.

Assessing Financial Vulnerability in the Nonprofit Sector

Effective nonprofit governance relies upon understanding an organization’s financial condition and vulnerabilities. However, financial vulnerability of nonprofit organizations is a relatively new area of study. In this paper, we compare two models used to forecast bankruptcy in the corporate sector (Altman 1968 and Ohlson 1980) with the model used by nonprofit researchers (Tuckman and Chang 1991). We find that the Ohlson model has higher explanatory power than either Tuckman and Chang’s or Altman’s in predicting four different measures of financial vulnerability. However, we show that none of the models, individually or combined, are effective in predicting financial distress. We then propose a more comprehensive model of financial vulnerability by adding two new variables to represent reliance on commercial-type activities to generate revenues and endowment sufficiency. We find that this model outperforms Ohlson’s model and performs substantially better in explaining and predicting financial vulnerability. Hence, the expanded model can be used as a guide for understanding the drivers of financial vulnerability and for identifying more effective proxies for nonprofit sector financial distress for use in future research.

The Impact of Professional Solicitors on Fund-Raising in Charitable Organizations:

Donors claim that information about the fund-raising methods used by a charity is important to them, and the press periodically high lights fund-raising scandals and abuses, which fuels negative public attitudes. However, there is little systematic empirical research about fund-raising practices. This study examined professional solicitor contracts using information provided by the Commonwealth of Pennsylvanias Bureau of Charitable Organizations. The nature of the contracts, the impact of these contractual arrangements on the amount of funds the clients ultimately receive, and the relationship between actual and predicted returns were examined. Results showed that charities using professional solicitors tended to be larger and concentrated in the advocacy, disease/disorder, and public safety subsectors. Most campaigns generated few contributions and resulted in a small return to the charity, with many charities receiving nothing from the solicitations made in their names. Solicitors compensated by fixed-fee rather than by commission generated more contributions and provided proportionately greater returns to charities.

Fraud and Corruption in U.S. Nonprofit Entities A Summary of Press Reports 2008-2011

The charitable sector is vulnerable to fraud losses, with these losses negatively impacting the organization’s reputation, future funding, and ability to advance its mission. Research on nonprofit fraud is relatively scarce, due mainly to limited availability of data. We create a database that summarizes and describes basic facts (nature and timing of fraud, description of organization, magnitude of loss, and perpetrators) for 115 incidents of detected fraud occurring in U.S. nonprofit organizations. We find a disproportionately high incidence of nonprofit fraud in the Health and Human Services National Taxonomy of Exempt Entities Groups, a high percentage of females committing misappropriation frauds, and that the organizational role of the perpetrator is related to the size of the fraud loss. We also investigate whether organizations detecting a nonprofit fraud report this information, as required, on Internal Revenue Service Form 990, and find that many organizations do not comply.