This article describes a model that can be used to predict which nonprofit organizations are vulnerable to financial problems. The model is based on financial indicators developed by Tuckman and Chang (1991)P OTENTIAL donors, managers and board members, creditors, and others are faced with multiple challenges when trying to evaluate the financial condition of tax-exempt organizations. First, research using financial measures in the for-profit sector is not necessarily applicable to nonprofit organizations whose purpose is to maximize service rather than profit. Second, relatively little research exists in the nonprofit sector that uses financial measures in evaluating financial condition across organizations. In the for-profit sector, many methods have been developed that use financial information to determine which organizations are vulnerable to financial problems. This article describes a model, based on the pioneering work of Tuckman and Chang (1991), that predicts which nonprofit organizations (specifically, charitable organizations) are vulnerable to financial problems. This model can be used by managers and board members during the strategic planning process, by donors and potential donors when deciding how to allocate their charitable contributions, by suppliers and other potential creditors in determining credit terms, and others.

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.

No abstract

No abstract

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.