The Fraud Examiner

Nonprofit Governance: Why Donate to a Fraudster?

By Catherine Lofland, CPA 

The Sarbanes-Oxley Act (SOX) of 2002 imposed many new corporate governance provisions for public companies. When we think about scandals at companies like Enron, Tyco, and WorldCom, which were the impetus for SOX, it makes sense that corporate governance is so important: We must protect shareholders and encourage investment to promote economic growth. Although its importance is not as intuitive as that of the for-profit sector, the nonprofit sector plays a significant and wide-reaching role in our society. According to the National Center for Charitable Statistics, there are currently more than 1.5 million nonprofit organizations, which account for 9.2 percent of all wages and salaries paid in the United States.

In 2002, the former chief executive of the United Way of the National Capital Area (NCA), Oral Suer, was charged with defrauding the charity of as much as $1.5 million during the 27 years he worked there. Other executives were accused of stealing hundreds of thousands of dollars as well. Internal auditors uncovered questionable spending by top leaders and inflated overhead costs. Publicity of this scandal caused donations to decline dramatically. In 2001, the charity received more than $90 million; in 2011, only $35 million was donated to the still-tarnished organization. Could this scandal have been prevented if the United Way of the NCA had a more robust system of corporate governance?

In nonprofit organizations, corporate governance is all too often a low priority. First of all, mismanaged nonprofits have little incentive to reform in an effort to protect their reputations because donors are unlikely to be aware of corporate governance weaknesses. Internal controls and governance structures can be very expensive to implement. Furthermore, a smaller staff in a more intimate environment (as you find in many nonprofits) might foster an artificial impression of trust since coworkers work closely together and know each other on a personal level. Nonprofit organizations, particularly charitable ones, are especially vulnerable to weaknesses in a corporate governance structure due to the altruistic nature of their business. It’s hard to imagine that someone who devotes their career to a philanthropic organization would perpetrate fraud there.

When reforming a corporate governance system at a nonprofit, management and the board should focus on the importance of reputation. As evidenced by the United Way of the NCA scandal, a damaged reputation can be devastating. Nonprofits depend on their reputations as efficient, trustworthy and effective entities to raise funds and continue operations. Current regulation, however, makes little effort to harness the regulatory effects of a nonprofit’s efforts to protect its own reputation. Therefore, it is up to nonprofits to take the initiative in implementing corporate governance reforms to prevent scandal and succeed in their missions.

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