When Dreams Turn Into Nightmares: How Idealism Can Lead to Fraud in Nonprofits

In most cases, nonprofits are started with good intentions. Maybe there’s one person who feels a call to improve some area of life around them. Sometimes it’s a group who has a mission to make a difference in the world. So why would anyone try and steal from them? That’s one of the questions ACFE Regent Kenneth Dieffenbach, CFE, addressed in his session, “Fraud in the Nonprofit Sector: Unique Risks and Opportunities,” at the 31st Annual ACFE Global Fraud Conference.

Dieffenbach, Assistant Special Agent in Charge for the U.S. Department of Justice, Office of the Inspector General, told attendees that there are approximately 1.5 million registered nonprofits in the U.S. The majority are founded by a small group of citizens who established the organization to do good things. “The purpose of nonprofits … is to serve the greater good,” he said. “Not all the people necessarily, but a certain segment of the community.”

Unfortunately, many nonprofits are set up in a such a way that fraud can easily proliferate. While the idealism necessary to further the cause of nonprofits is important in the founding, it can end up acting as blinders to potential fraud. “There’s often a high degree of trust in nonprofits,” he said. “It’s especially risky in a nonprofit setting if people are just focused on their mission.”

Since nonprofits usually don’t have the budget that a for-profit organization may have, they often rely on volunteers. “Volunteers are great. They’re wonderful, but they do enter special challenges in compliance,” he said. They may even rely on volunteers to serve important functions like auditing or bookkeeping. “Some, especially the smaller ones, may be challenged by not having a CPA.”

Dieffenbach also warned attendees about “founder’s syndrome,” where the person who established a nonprofit may have undue influence on the workings of the organization — often to the eventual detriment of the group. “Because they started it, they may think they own it, when we know they really don’t.” He said this can be especially troublesome because by its very nature, “quite literally no one owns a nonprofit.” If a leader starts assuming more power than they should have, the risks for fraud can ramp up.

One of the biggest risks nonprofits face is embezzlement — especially asset misappropriation. “I would argue they’re at a higher risk for this type of scheme,” he said. With lean staff, or a heavy reliance on volunteers, it’s also more difficult to have separation of duties. For example, if only one person is in charge of payroll for a nonprofit, that already, “opens the door to all kinds of fraud schemes,” said Dieffenbach.

Another factor that contributes to fraud is the fact that since nonprofits can’t point to profitability as a measure of success, they often rely on different metrics that may not be as easily quantifiable. “Nonprofits have to continue to produce in order to continue to get money,” he said. He described the environment as a “pressure cooker to show progress,” which can lead to a correlation in increased pressure in The Fraud Triangle. If nonprofits measure their success by how many volunteers they sign up, or how many lunches they provide to those in need, it can be difficult for anti-fraud professionals to verify those numbers. He asked, “Do you have a mechanism to insure those are accurate, those are fair and reasonable claims?”

Luckily, there are many cost-effective ways that nonprofits can guard against fraud. Dieffenbach stressed the importance of ethics pledges and annual training. “Emphasize on a regular basis that tone at the top,” he said. He also suggested basic transparency for spending, like sending credit card statements to two separate locations for different people to review. “Nothing too complicated … everyone benefits when those transactions are public.”

He closed out his session by also telling anti-fraud professionals to think about volunteering their time to help nonprofit groups. “The most important thing we can do as CFEs is we can extend a hand and offer to train them,” he said. “Imagine the good we can do to prevent problems.”

The opinions expressed by the speaker, Kenneth Dieffenbach, covered in this article are those of the speaker and aren’t necessarily those of the U.S. Department of Justice or any other part of the federal government.