Title: Protecting Your Nonprofit from Fraud in 30 Pages: Advice to Board and Management by
Thomas R. ittelson, Copyright 2020
Who’s responsible for nonprofit fraud? The crooks, of course! But mostly, the Board and senior
management are just asleep at the switch. They do not ensure adequate financial checks and
balances in the organiza�on, nor implement the proper financial systems and controls necessary
to prevent fraud.
Introduction
Theft, fraud, and simple stealing from nonprofit public charities is a national tragedy. In this
book, I will give you real-life examples of how and why such fraud occurs and offer practical tips
on how to prevent it from happening to your organization. Read on.
Misappropriation of assets and embezzlement in nonprofits is: (a) common; it happens more
often than you think, (b) relatively easy to do by employees intent on fraud, and (c) possible to
prevent with simple-to-implement, yet strong, well-designed financial systems and procedures.
Financial fraud committed by trusted nonprofit employees is a ticking time-bomb waiting to go
off — if the organization does not take the necessary precautions. An organization is most
susceptible to financial fraud if it has lax financial controls with few checks and balances, and
then compounds the problem by looking the other way. Sound familiar?
Who is responsible for nonprofit fraud? The crooks, of course! But mostly, the board and senior
managers are also asleep at the switch — or the crooks could not have succeeded. The board
and management don’t demand and implement adequate financial checks and balances in the
organization.
This book is written for nonprofit board members, senior managers, and also donors. You are
the folks who can best protect your organization from fraud. It’s not all that complicated to do.
This book will show you how. Read on.
How big is the problem? Estimates vary since most nonprofit fraud is hushed-up and
unreported. Organizations don’t want to admit to donors that their donations have been
stolen. Probably several percent of all nonprofit contributions, grants, and private contract
revenue is diverted. In the U.S., that amounts to an estimated $10 billion or so each year. That’s
a lot of money and a tragedy in missed nonprofit mission accomplishments.
Fraud is a People Problem
Realistically, you must assume that even your most trusted employees might steal if they: (a)
urgently need the money due to challenging life circum-stances, such as a medical emergency
in the family, (b) feel they will not be caught and/or their fraudulent actions punished, and (c)
see the opportunity for theft because of weak control systems.
1.
Remember, these folks work deep in the systems and know weaknesses to exploit if their need
arises.
Economic Impact of Nonprofit Fraud
As we will see in more detail in future chapters, stealing from nonprofit organizations is highly
profitable (and fairly easy). Often, nobody is watching closely, and happily for the fraudster, the
money is tax-free since it will go unreported as income. The charity loses the opportunity for
using the money to advance its mission. The government receives lowered tax revenue caused
by both the charitable deduction given to the donor and the loss income tax that should have
been paid by the fraudster if the income was reported.
Diversion of Revenue
The most common revenue theft — diversion from contributions, grants and contracts — is
diversion of contributions. These contributions never had a chance to become an asset on the
organization’s books. They were snatched at the door and spirited away (see “A.1” on page 4).
Diversion of contributions is a distinctly nonprofit type of fraud. For fraudsters, contribution
theft is straightforward and easy to do if no one is looking. Diversion of grant and contract
revenue is more difficult since grant and contracting agencies keep better track of their money.
United Midcoast Charities (Camden, Maine) In 2014, long- time charity president Russel
“Rusty” Brace pleaded guilty in federal court to three felony counts related to the
embezzlement of $4.6 million.
Brace served as President of the Maine charity for 17 years and built it from $50,000 to
$500,000 in annual contributions. The charity worked like a “community chest” aggregating
donations from townsfolk and distributing them to local non-profit community service
organizations. Brace, a local businessman, was highly regarded in the town for his affable
personality and good works.
However, charity revenues were actually much higher than Brace reported. He was skimming2
sometimes half of all donations, depositing many donation checks into a private bank account
for his own use. His wife was the bookkeeper of the organization. Rather than see his wife also
go to prison, Brace agreed to plead guilty in federal court and make restitution. He served 4
years in the federal penitentiary in Rochester, Minnesota where Dennis Hastert, child molester
and former speaker of the U.S. House of Representatives was a fellow inmate.
When money is illegally siphoned for personal use, the resulting pain ripples through the
communities, families and individuals that depend on the services provided by these
organizations. However, the United Midcoast Charities’ story has a very happy ending. Read
about it in the Conclusion of this book.
2.