Codification

Abstract

This research paper examines the occurrence of fraud in non-profit organizations.  The purpose of this research paper is to compile data of non-profit fraud cases in the United States, and to research detection methods of the fraud.  In addition, this research paper will offer preventive measures management can use to protect the non-profit organization from fraud, and reduce the amount of losses attributed to fraud in the non-profit sector.

Background

A non-profit organization is one that does not declare a profit; instead, it uses all its revenues (after operating expenses) to service the public.  Non-profit organizations that are unincorporated is exempt from paying federal corporate income taxes.  Most organizations file a 501(c)(3) with the IRS in order to obtain its exempt status.  Also, unincorporated non-profits may be exempt from state, local, and property taxes depending upon state and local laws.  When a non-profit is incorporated, it shares many similarities with for profit companies, with the exception of having shareholders.  The organizations may have paid and/or volunteer staff; and employment taxes, as well as other federal and state workplace laws are the same as for profit companies.

        Non-profit organizations are at risk for occupational fraud just as for profit companies.  According to Flaherty and Stephens, from 2008 to 2012 more than 1,000 non-profit organizations had disclosed losses attributed to theft, investment fraud, embezzlement and other unauthorized uses of funds (2013).  However, the impact of fraud may be more detrimental to a non-profit organization because of strict regulations or budget restraints.   “By some estimates, more than 40 billion dollars of non-profit funds are misused or misapplied for personal enrichment rather than non-profit work in the United States each year” (Bradley, 2015, p. 711).  Also, a history of fraud could affect the public’s perception of the non-profit organization.  Since the sole purpose of a non-profit is to service the public, a negative perception due to a fraud incident, could affect the existence of the non-profit itself.  Non-profit organizations rely on the goodwill and confidence of the public.  That confidence may dissipate if the organization is victimized by fraud.  If the public doesn’t trust the intensity, the organization could see a decrease in membership, profits, and activism.  For instance, the Global Fund to Fight Aids saw a decrease in donors after the Associated Press reported fraud within the organization.  As a result, the organization had difficulty meeting their operational goals.

        Furthermore, fraud can be committed against the non-profit organization, and it also can be committed by the organization.  The most common type of fraud committed against non-profit organizations is asset misappropriations. In 2013, Flaherty and Stephens reported that a Maryland woman stole about 5.1 million dollars from the Association of American Medical Colleges (2013); which is a DC based non-profit organization that represents accredited medical schools and major teaching hospitals, and administers the MCAT. Asset misappropriations include revenue and cash receipt schemes such as skimming and theft of inventory (i.e. donated merchandise); purchasing and cash disbursement schemes such as credit card fraud and fictitious vendor schemes; and payroll and expense reimbursement fraud such as ghost employee and fictitious expenditure schemes.