While motivating, trusting, and supporting their dedicated staff is a primary issue for cultural managers, it’s also their duty to keep a close eye on the cash. The Orange County Performing Arts Center found this out the hard way this past spring as it discovered an employee had stolen $1.85 million from the coffers (more on this case here).
Auditors have several red flags they look for when sniffing out fraud or theft. Employee pressures and incentives are key indicators (personal financial problems or ill will against the organization), as are opportunities left open by easy access to cash or inventory, or lack of financial controls. Finally, attitudes and rationalizations by staff can suggest a need to dig a bit deeper (disregard for accounting controls, sudden change in lifestyle, and such). Full details of these risk factors are on-line, including specific examples of what to look for (thanks to Nonprofit Eye for the link).
It’s an unpleasant reality you may never have to face. But you owe it to your donors, your constituents, and your board to be alert.
I wondered as I read your post, Andrew, whether there is any data out there examining the prevalence of this type of fraud in different industries. Is it more likely to happen in a non-profit arts organizations than in, say, a huge finance company. I don’t really have an inclination about it, nor do I think it does or doesn’t, I’d just be interested to know.
David:
As far as I know, there is no statistically valid data on nonprofit fraud. The Association of Certified Fraud Examiners prepares a Report to the Nation which analyzes financial frauds in all industries. The last two surveys (2002 and 2004) have had somewhere between 500 and 700 cases, but these are submitted by fraud examiners so this is not a valid statistical sample that permits valid inferences about the population as the whole. The Association freely admits this. Nevertheless,the survey is excellent in terms of raising issues and focusing attention on categories.
I have been speaking with academics about trying to figure out how to develop a statistical sample.
I have had reason to conduct my own survey of frauds in a particular type of social service agency. Somewhat like the fraud examiners, I looked for cases and then tried to catalogue them. That was useful in terms of thinking about how to prevent fraud, but once again it isn’t statistically valid.
I did recently suggest to some people in attendance at an American Bar Association Tax Section meeting (Exempt Orgs committee) that the Form 990 be modified to require organizations to provide information about frauds. That was not well received. I think the attorneys reflected the views of their clients–we don’t like to talk about this when it happens
Here is the link to the Certified Fraud Examiners Report (They have a new report-2006–that I have not looked at because this is the first time I have seen it on their site)
http://www.acfe.com/fraud/report.asp
Good Luck
Jack B. Siegel
Charity Governance Consulting LLC
P.S. My informal survey (and I monitor nonprofit fraud through search engine tags) indicates that the perceived increase in fraud is due in significant part to legalized gaming and consumer spending habits–people believe a lot of things (I-Pods, big cars, flat panel TVs, fancy trips, etc etc) are necessities. There is a lot of truth to that commercial showing the guy riding around on his lawnmower talking about his lavish lifestyle and then saying “I am in debt up to my eyeballs.”