Life Planning - Beware of Fraud in Non-Profit Organizations


By Christina Bush, CES, CAS, CMFC
Wealth Manager
Certified Estate and Trust Specialist

There are some very important facts to know about non-profit organizations before donating to them or making the commitment to sit on the Board of Directors for one. Although there are many amazing chartities that do great work, an estimated $40-50 billion per year is lost to fraud in non-profits and scandal is found in nearly 20% of philanthropic organizations, according to the New York Times. Charities need to tighten controls against theft, especially in a tough economy. It is wise to be skeptical and first do your due diligence before involving yourself or your financial support.

  • Nonprofit organizations and faith-based houses of worship make the headlines almost weekly about theft of funds, embezzlement, corruption, fraud, health/safety violations and misconduct.

  • The financials of non-profit organizations can be verified at Guidestar's website. By law, the past two years financial statements, the past three years 990 tax returns and any salary information should be publicly accessible on this website. If the information is missing it could be a red flag.

  • Board members personal assets can be in jeopardy if the non-profit organization is not paying its federal employee taxes.

  • Many non-profit groups use grant funding for inappropriate activities.

  • Losses caused by founders/managers are four times those caused by employees.

  • The embezzler is typically always the person the organization would least expect to be a thief. The most typical theft in charities is committed by a female employee with no criminal record who earns less than $50,000 a year and has worked for the charity for at least three years.

  • Non-profits should be suspicious of people in positions of authority and trust who are operating on the edge of financial ruin and those who refuse to share duties. They may behave in a desperate manner and steal donations.

  • Fraud is usually committed by someone in the financial area -- the founder, the treasurer, the bookkeeper, the signer of checks -- who knows how to avoid getting caught. Many times they will create fraudulent financial documents and evade sharing bank statements with the other board members.

  • People between age 36-50 account for over 60% of the perpetrators.

  • The most costly abuses occur in organizations with less than 100 employees.

  • Careful practices should be established about how the money and financial documents of the organzation should be handled. Different people should be assigned separate functions of managing the finances -- writing checks, signing checks, reconciling bank accounts and checking the cancelled checks that are returned from the bank. Three people should work together for this task if possible.

  • Boards should regularly meet without management present. They should also seek assistance from outside professionals in designing and implementing internal controls that focus on management fraud.

  • All 501(c)3 organizations must have a clearly written Mission Statement.

  • Non-profits may NOT campaign to support or oppose the candidacy of anyone running for an elected office.

  • No founder may be treated as if he/she 'owns' the organization.

  • Non-profits exist to provide a public benefit. It must change some aspect of the human condition. It needs to solve a problem, provide education or build a monument.

  • Each board member has equal voting rights and equal liability for making sure the charity is run according to proper standards. All board members will be held accountable for the governance of the organization.

  • The organization must have established by-laws that they operate in accordance with.

  • Personal loans to board members are prohibited.

  • If any staff member earns over $50,000 per year it needs to be reported to the IRS.

  • No board member should participate in a board decision that benefits himself or his family.

  • The organization should maintain a Board Book - a notebook that contains Articles of Incorporation, By-Laws, minutes to board meetings, past 3 years tax returns and annual financials.

  • An internal audit should be performed at least annually.

  • Non-profits are excused from filing a 990 return if the organization has annual donations of less than $25,000.

  • Non-profits do not have owners like for-profit organizations do. A board of directors guides and oversees the organization.

  • A board's primary responsibility is 'to uphold the public trust' and make sure the rights and priviliges of the organization are not abused.

  • A board of directors has the fiduciary responsibility for ensuring that the funds are properly spent and to make sure that set standards are adhered to. They have legal responsibility and 3 main duties:

    *Care: Be a prudent board member and pay attention to what is going on and make decision based on good information.
    *Loyalty: put the organization's welfare above other interests when making decisions.
    *Obedience: Act in accordance with the non-profit's missions and goals.

  • Each board member is responsible for reviewing the organization's budget and staying informed of the financial situation. They must insist on good reporting -- financial reports should be kept up to date and distributed at each board meeting for review (at least quarterly).

  • Paid staff should not serve on the Board of Directors. This is a conflict of interest and poses potential problems. Embezzlement is possible and the board should always take steps to detect it.

  • If a founder or other paid staff member serves on the board, he/she should not be elected President because it tends ot keep all responsibility for vision and leadership in a single person's hand.

  • Non-profit organizations should carry liability and property insurance.

  • If staff is being paid, a payroll system should be established and proper taxes should be withheld.

  • Non-profit organizations are expected to spend cautiously and honor the trust placed in them by their donors.

  • The board members should analyze EVERY assumption that they make.

  • Finances of the non-profit should always be kept separate from the finances of the founders or other board members. Two signatures should be required on checks and bank transfers over a set amount. All bank statements should be retained in organized files for all board members to easily access along with an itemized list of any purchases made or donations received.

  • Worker's Compensation insurance is required by law if the non-profit has paid workers. If someone is injured as a result of duties performed the organization can be sued.

  • Board members should be covered by Directors' and Officers' Insurance. Insurance of this type protects the organization against employee theft or embezzlement.

    References: www.irs.gov and Non-Profits for Dummies.

  • CB Wealth Advisory - Private Wealth Management

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