Fraud and Corruption in U.S. Nonprofit Entities

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.

The Determinants of Charity Misconduct

“…The distribution of risk and regulatory responses constitutes an informative account of misconduct in the charity sector, one that complements analyses based on alternative sources of data (e.g. Archambeault et al, 2015;Gibelman & Gelman, 2001). Second, we highlight factors associated with charity investigation and misconduct, showing the mismatch between those predicting complaints and those predicting regulatory action.…”

“…misappropriation of cash by an employee) and fraud conducted by the organization such as the deliberate misreporting of financial performance (Greenlee, Fischer, Gordon & Keating, 2007). Previous research has focused on the nature of fraud in the US nonprofit sector, the organizations subject to fraud, and perpetrators of said action (Archambeault, Webber & Greenlee, 2015). Bradley (2014) conjectures that occupational fraud damages the organization subjected to it (through significant financial loss, reduced income from donations and potential fines), intended beneficiaries (through the diversion of funds away from services), and the reputation of the nonprofits (loss of public confidence).…”

“…Empirical research by Greenlee et al (2007) and Holtfreter (2008) (Archambeault et al, 2015). Consequently, much of this exploratory work has focused on nonprofit subsectors such as Human and Health Services (e.g.…”

“…Bradley (2014) conjectures that occupational fraud damages the organization subjected to it (through significant financial loss, reduced income from donations and potential fines), intended beneficiaries (through the diversion of funds away from services), and the reputation of the nonprofits (loss of public confidence). It is posited that the nonprofit sector is particularly sensitive to the negative effects of fraud, especially asset misappropriation, as these organizations often lack sufficient controls for detecting and dealing with this issue (Archambeault et al, 2015). Douglas and Mills (2000) proposed five reasons why this might be the case: an atmosphere of trust surrounding the nonprofit; the difficulty in controlling certain revenue streams (for example, cash donations); a lack of financial resources necessary to implement sufficient internal controls; a lack of business expertise in the organization; and the reliance on volunteer boards.…”

Fraud survival in nonprofit organizations: Empirical evidence

“…Empirical research on fraud in the nonprofit sector has traditionally lagged behind the volume of data on fraud in for‐profit organizations, but some progress has been made in documenting the incidence of fraud in nonprofit organizations (Archambeault, Webber, & Greenlee, ; Fremont‐Smith, ; Fremont‐Smith & Kosaras, ; Gibelman & Gelman, , ). Although these studies provide insight into the incidence of fraud in the nonprofit sector, there is an absence of empirical evidence on the consequences of these frauds after their discovery.…”