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From: plumbergurl <plumbergurl@xxxxxxxxx>
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Sent: Sunday, March 30, 2008 3:29:16 PM
Subject: [PacificaRadiowaves] "Just a few bad apples"
The New York Times
Saturday, March 29, 2008
Report Sketches Crime Costing Billions: Theft From Charities
By STEPHANIE STROM
The volunteer treasurer of the Madison County Humane Society in
Indiana was charged this month with using $65,000 of the charity's
money to buy jewelry and makeup. In San Francisco, the chief financial
officer of the Music Concourse Community Partnership was fired after
he was accused of taking $3.6 million of the organization' s money to
play the stock market.
Nonprofit leaders tend to shrug off such cases as evidence of "just a
few bad apples." But a new report, trying to identify the scope of
such thefts for the first time, suggests otherwise.
The report, by four professors who specialize in nonprofit accounting,
found that the typical theft from a charity was committed by a female
employee with no criminal record who earned less than $50,000 a year
and had worked for the nonprofit at least three years. The amount she
stole was less than $40,000.
The most costly cases, the study found, involved male executives
earning $100,000 to $149,000 a year. The thieves in such cases had
typically been with the organization the longest.
But what is getting the attention of nonprofit leaders is the report's
estimate of the overall cost, which the authors put at $40 billion for
2006, or some 13 percent of the roughly $300 billion given to charity
that year.
"It's a surprisingly large number," said Paul C. Light, a professor of
public service at New York University who does surveys of public
confidence in charities. "We really need to take a good hard look at
what's going on in these organizations. "
The new report is based on data from the Association of Certified
Fraud Examiners, which, the report said, found that "all
organizations, " whether government, for-profit or nonprofit, "lose on
average 6 percent of their revenue to fraud every year." Applying that
percentage to nonprofits' total 2006 revenue of $665 billion —
donations, government payments and other income — the authors came up
with the $40 billion estimate.
"Determining how much theft and embezzlement takes place has been the
holy grail of the sector," said Jack B. Siegel, a tax lawyer who
specializes in nonprofit matters.
If the $40 billion figure is accurate, then the money lost to fraud
equaled the combined giving by corporations and foundations in 2006,
said Diana Aviv, president and chief executive of the Independent
Sector, which represents nonprofit groups.
But Ms. Aviv expressed skepticism about the report, noting that it
relied on the fraud examiners association' s estimate of overall fraud
across all sectors, including government and corporate.
"They're lumping all those sectors together, and it could be that the
for-profit sector experiences a higher level of fraud, while the
nonprofit sector and government experience lower levels," Ms. Aviv said.
Nonetheless, she said, "even if the figure is $20 billion, that's
still a huge amount and needs to be addressed."
The report, published in the December 2007 issue of Nonprofit and
Voluntary Sector Quarterly, found that losses to fraud among the 58
cases reported to the fraud examiners association in a random survey
of nonprofits ranged from $200 to $17 million, with the median fraud
costing $100,000.
"Most of these things are not caught by routine audits," said Gary
Snyder, who tracks nonprofit fraud in his newsletter, Nonprofit
Imperative. "They're usually done by someone in the financial area —
the treasurer, the bookkeeper, the signer of checks — who knows how to
avoid getting caught."
Almost 95 percent of the reported frauds entailed loss of cash, and a
majority of those involved false or inflated invoices, billing for
expenses that were never incurred and check tampering.
"I gave a talk to a group of nonprofit executives a few weeks ago, and
every single one of them had a fraud story to tell," said one of the
report's authors, Janet S. Greenlee, an associate professor of
accounting at the University of Dayton. "This has been going on for
years, but there's a feeling that it shouldn't be discussed," because
of the effect it might have on donations.
Professor Greenlee — joined in the report by Mary Fischer of the
University of Texas at Tyler, Teresa P. Gordon of the University of
Idaho and Elizabeth K. Keating of Boston College — said the failure of
organizations to punish those who steal from them was perhaps one of
the biggest reasons for fraud in the sector. She said she had worked
at organizations that refused to dismiss employees caught stealing.
Professor Light, at N.Y.U., said some 70 percent of respondents to a
new survey among the general public thought charities wasted "a great
deal" or "a fair amount."
"Donors have already indicated," he added, "that they don't have a
great deal of faith in the way these groups handle money."
But it will now be harder for charities to hide fraud, because
beginning with tax forms they must file for 2008, the Internal Revenue
Service has added a question requiring them to disclose whether they
have experienced theft, embezzlement or other fraud during the year.
"Not only will that eventually give us a much better idea of how
widespread fraud is with these groups, it also gives them an incentive
to have better financial controls," said Mr. Siegel, the tax lawyer,
who is credited with the idea of adding the question to the tax forms.
Mr. Siegel used to track cases of fraud among charities but "got
bored," he said, because there were so many of them.
Newspapers routinely report incidents of nonprofit fraud in their
communities, but the amounts tend to be small and thus go unnoticed at
a national level.
Mr. Snyder, the tracker of nonprofit fraud in his newsletter, said
that through use of databases and other searches, he had stumbled
across more than $700 million in fraud already this year among
government agencies and nonprofits, including church-related
organizations.
Asked about his favorite example of nonprofit fraud, Mr. Snyder was
initially stumped.
"There are so many," he said.
He eventually settled on the embezzlement of some $25 million from
Goodwill Industries of Santa Clara County in California.
It started in the 1970s and continued until one of the participants
blew the whistle in 1998. Merchandise donated to the organization was
sold outside the Goodwill shops by the perpetrators, who kept the
proceeds. One of the embezzlers committed suicide before arrest, and
six others, all related, pleaded guilty, were fined and, in some
cases, were sent to prison.
The thieves had given more than $800,000 to the organization' s
president and chief executive, who parked the money in accounts in
Switzerland, in Austria and on the Isle of Man and then escaped to
Guatemala as investigators closed in, according to the authorities.
Guatemala sent him home in 2003, but he ultimately pleaded guilty to
only one charge — of tax evasion unrelated to the scandal at Santa
Clara Goodwill — and walked out of the courtroom.
"I like that one," Mr. Snyder said, "because it's an extreme example
of something typical: that no one gets in trouble for this."
Professor Greenlee said she saw signs that charities were now trying
harder to deal with fraud.
"They're creating audit committees and adopting the provisions of
Sarbanes-Oxley as best practices," she said of the 2002 law that
imposed stricter accountability on corporate governing, though not on
charities.
"Boards are becoming tougher," she said, "because they know that as
fiduciaries, they are at risk of, at the very least, embarrassment. "
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