Avoiding Issues of Fraud (or Perceived Fraud)

Among the many issues covered in discussions of nonprofit financial management, the issue of fraud, or avoiding the appearance of fraud, can be distressing. No one likes to think of their nonprofit falling into the ‘fraudulent’ category.

Yet GuideStar recently announced that they have rescinded their Seal of Approval for five charities that violated their policies for transparency.

The FTC investigated complaints against charities purporting to use donations to help veterans. Among these charities investigated, 100 received notice of legal action. GuideStar took it a step further and examined the 100 under legal notice and found that five had earned their Seal of Approval. They published a list of the charities for which the Seal has been rescinded along with the reasons for the change.

Among the many reasons stated are nonprofit financial management issues related to fraud or incidents that give the appearance of fraud even if the charity isn’t doing anything wrong per se. According to GuideStar’s report, charities were cited and censured for the following reasons:

  1. State regulators found that the charity had misrepresented its financials.
  2. The organization had dissolved but had not notified GuideStar.
  3. State regulators ordered the organization to cease activities.

Charities obtain a Seal of Transparency after adding information to the GuideStar site. Charities are required to disclose with honesty and integrity their financial information and other information that adds to their public profile. The concept is simple: honest, complete information informs the public and helps the public make an intelligent decision about where and how to donate their money.

What the GuideStar and FTC Findings Tell Us About Nonprofit Fraud

Nonprofit financial management includes the prevention of fraud. The information obtained from the FTC review and the subsequent GuideStar article tells us a lot about issues pertaining to nonprofit fraud.

First, most of the fraud discovered wasn’t necessarily someone stealing money from the nonprofit, although that could be happening too. Instead, it was all around disclosure and failure to either disclose where and how the funds were being used or the activities of the organization.

Another problem was taking in money for an activity but then spending it elsewhere. Nonprofits who receive restricted funds, for example, that are earmarked for a specific project or program by the donor cannot spend them on anything other than what they were apportioned for in the first place. You can’t receive money for a scholarship for athletes and spend it to build a tennis court on campus, for example.

Nonprofits Have a Duty to the Public

Nonprofits have a duty and responsibility to the public, to their donors and constituents to be open, honest and transparent about their financials. It is then up to the public whether or not they choose to continue donations.

Some of the nonprofits receiving scrutiny from the FTC may be doing nothing wrong, but the perception of wrongdoing lingers. Why? It’s all in the financials. If the financials are poorly presented, if money isn’t categorized properly and if there is insufficient details included in the financial statements and annual report it can seem as if the nonprofit is trying to hide something.

This is where hiring a nonprofit accounting audit service can help. Professional nonprofit accounting audit services understand the changes to the FASB rules, for example, and can help you streamline net asset categories as well as assign the proper “nature” to expense items. The right amount of detail, the proper categorization and similar nonprofit financial management tasks undertaken during an audit can help clarify and communicate information in ways that help rather than hurt your nonprofit’s status.

If you’re ready to examine your nonprofit’s financials or you need nonprofit accounting audit services, contact Beck & Company today. We’re an independent certified accounting firm offering accounting and tax services for nonprofits, nonprofit financial management, auditing services and more. Since 1987, we have helped many nonprofits in the Washington D.C. area and along the Eastern seaboard with their accounting and financial management needs. We provide audit, tax, accounting, and consulting services that address all aspects of a small to mid-sized nonprofit organization’s business. Contact us or call 703-834-0776 x8001.