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my name is Natalie Goldberg and my project my project is on the prevalence and prevention of fraud in US and nonprofit so I want to start off with a story about a case study that I research for my project on the Cancer Fund of America so over a four year period this nonprofit raised 187 million dollars which they said went to wigs cancer treatment chemotherapy and medications but what it actually went to were lavish vacations cars personal expenses and telemarketing unfortunately this case is not unique within the nonprofit sector and though we usually hear more about for-profit scandals and for-profit corporations in the news this may not be because it's not happening in nonprofits it may just be because we're not hearing about it and so this case among many others brought up some questions that I wanted to research in my project which is is the Cancer Fund of America case just a bad apple in the nonprofit sector or it's just happening more often than we think and what are some of the tools and mechanisms that nonprofits have at their disposal to prevent and detect fraud within their organizations so I wanted to get into some terminology so a non-profit is a state term of incorporation that an organization uses when they seek to serve a public purpose and want to be a mission driven organization and so they can then receive taxes and status through applying federally and within the state that they're incorporated and so just to give you an idea of the influence of nonprofits across the United States in 2016 over 1.5 million tax-exempt organizations registered with the IRS in 2014 nonprofits accounted for five percent of u.s. GDP and and in that same year over three hundred billion dollars went to charities and contributions so now we get the fraud so the textbook definition of fraud is a knowing misrepresentation of the truth or a concealment of a material fact to induce another person to after his or her own detriment and so that can be a little confusing so the key to fraud and what makes it different from something like a misrepresentation is that somebody who commits the fraudulent Act does so with the intent to deceive another person and to make them act and do something harmful to themselves and so there's several types of fraud there's internal fraud journal fraud an individual fraud and for my project I'm mostly focused on internal fraud which is also known as Occupational fraud so that could include something like corruption misappropriation of assets or financial statement fraud so what you need to remember is that a non-profit has an intent to provide a public benefit and fraud somebody who commits fraud has an intent to deceive and so within my project I wanted to see what fraud looked like the prevalence of fraud in the nonprofit sector and prevention and detection mechanisms in the same sector and so to do so for prevalence I looked at past studies that saw the quantified fraud in the US nonprofit sector and worldwide and for prevention and detection I looked at external and internal controls so for the purpose of my study external controls include policy and regulations on a state and federal level and internal controls are voluntary best business practices or ethical business practices that nonprofits can voluntarily put in place and so the way that I research this is through some background research but also I interviewed some nonprofit executives and looked into some case studies of fraud in US nonprofits and so getting into the prevalence I looked at two different studies that found 40 cases in 2014 and 52 cases in 2016 of nonprofit fraud on a worldwide scale but really I wanted to focus on the United States and so I found one study that found 115 cases between 2008 and 2011 now looking at all these numbers it's kind of hard for me to determine exactly what the scope of fraud is in the US nonprofit sector and I mostly have to do with the fact that either these numbers are found from media reports which means that the fraud was already published or it was found through surveys which means that people are already in these nonprofits but on a worldwide scale and so really the answer is we don't know how prevalent fraud is in the nonprofit sector and based on the studies and the publicly available information I was unable to determine that within my study but I do have recommendations for that going forward because it is a bit concerning and so even though we may not be able to determine the prevalence of fraud in the nonprofit sector there are controls put in place that tries to detect and prevent it and so when nonprofits have to register they can do so federally and also on a state level and so the IRS Form 990 is a tax exempt form that nonprofits fill out and in 2008 they added some additional questions to actually fight fraud in the sector and one of those questions included whether a non-profit has experienced a diversion of assets within the past year now nonprofits have an incentive to lie about the answer to this question and the reason why they can do so is because first of all if they say yes there has been a diversion of asset and this form is made public people will be less inclined to donate to the organization and secondly they can because the IRS just doesn't have the capacity to go into every nonprofit and determine whether or not what they're saying on their forms are truthful however there is a lot more oversight on a state level so in 41 states nonprofits have to register if they want to solicit within the state they also have to refile that annually or biannually in all of those states and within those as well there are 29 states that require nonprofits to conduct an independent audit but the concern about these regulations is that they're not standardized across every state and so nonprofits constantly have to figure out how to remain compliant in all of the states they have to figure out what registration forms they have to fill out when they're due how to file them how much it costs and so that places a large burden on nonprofit and so what I've learned through my research is that internal controls are really the mechanisms that can help detect and prevent fraud in a non-profit not so much the external policy now internal controls as I mentioned are voluntary and they can include things such as a separation of duties having an ethical culture having a fraud hotline employee education maintaining a whistleblower policy and having a conflict of interest policy and so through the interviews when I talk to nonprofit executives one of the main points that they that one of them mentioned to me is that it's not the job of a financial department in a non-profit to seek out fraud that's not their day-to-day job it's not their day-to-day responsibility but what they do is a risk analysis of the nonprofit and they find areas where fraud could possibly happen and they put these controls in place to make it detectable and therefore also preventable and so the government again does not require nonprofits to put these in place but they choose to do so anyway because it boosts their image it helps their reputation and it can make them see more transparent unaccountable and so I also wanted to see how fraud manifests itself within the nonprofit sector when a case does come out publicly and so we already talked about the Cancer Fund of America case which was a total sham charity from the executives the actual charity itself it was completely fraudulent but there are cases where there's a legitimate nonprofit where there's an executive who steals money from that nonprofit and so in the case of Jonathan Dunning he conspired to steal 14 million dollars from a non-profit in Alabama that was helping low-income residents receive health care and so the nonprofit itself is legitimate and still functioning today but he himself committed fraud against them and lastly there was a government collaboration case where called Operation Falls charity Suites where the federal government along with all 50 states NBC decided to file class-action lawsuits against police veterans and firefighter organizations that were completely sham charities and so 85 to 90% of the contributions given to these charities across the country we're going back into for-profit telemarketing and just to give you an idea of the scope of the damage at this cause there was one nonprofit in particular in California that out of the 30 million dollars that it raised its that a hundred percent of that was going to the cause only about 23,000 made it even somewhat there and so this brings up some further implications and questions about nonprofit fraud and especially within the United States so in terms of policy reform as I mentioned before the state regulations are not standardized and so this puts a large burden on nonprofits to either hire people to figure out what forms they need to fill out they're paying all these different fees and so there needs to be a better streamlined and efficient process for nonprofits to register because they have limited resources and they need to be using those resources to the cause or in order to put better management practices in place and secondly there's also talk about whether nonprofits whether there should be a regulation for nonprofits similar to the sarbanes-oxley act for for-profit corporations that would require them to put in more financial programs and different committees but then there's also people who argue that nonprofits need to be self regulated and so that's a question back and forth secondly with nonprofit fraud statistics so I mentioned that there was there's no public data base about nonprofits that have committed fraud or nonprofits to look out for and so should the government be collecting this information can they even collect it and should that data be made public or will that make people less inclined to donate to a charity and lastly talking about donations people say you know it's up to the donors the donors are the ones who need to go online and they need to look up a charity they need to read their financials and they need to be the ones to make a decision about whether or not a charity is legitimate but the question is is that they're using these watchdog organization sites like Charity Navigator charity watch Better Business Bureau which are nonprofits themselves and they're all using different parameters and equations to come up with whether or not a nonprofit is legitimate and so the question is is are they reliable and do they actually affect donor behavior and some studies have shown that they actually don't and that people will donate anyway even with a bad rating and so ultimately legitimate nonprofits they intend to provide a public benefit fraud harms the viability of the nonprofit sector and its reputation and nonprofits should be given the tools and resources that they need to prevent fraud and serve their purposes and donors should be able to feel confident in their contributions so thank you for listening to my presentation and I will now open up the floor question that was interesting very interesting I have a question for you and I honestly didn't friend I'm note one of the ways of displaying the prevalence of fraud nonprofits is but nonprofits have much leader governance procedures and much weaker kind of market on controls that a public company and you can see this in a variety of different ways it isn't that fraud doesn't occur in public companies we know it does and we know all kinds of mine ethical behaviors can break out any kind of environment public or private but governance does make a difference they're not something you considered in terms of discrepancy between rules like companies versus nonprofits yeah so I city that was done about whether or not the sarbanes-oxley Act should apply to nonprofits or if they should create a new legislation that's a similar form tailor to the nonprofit sector itself and I mean in that study in particular the researcher said no because because it was just it's too much of a burden on them and they want to be able to like put money towards the cause that they were putting it into creating something like an audit committee for example though I do think it is possible in some of the larger nonprofits it just depends on what the size is and so when I talk about internal controls like separation of duties that's something that's a lot easier to put in place and a larger nonprofit versus one that's run by three people but you also see that in companies as well and companies may not necessarily have to follow all of those rules either so that act in particular is really only for corporations and if they incorporate such as that way yeah mentioned there was a lot of variation not only that there are some states that don't require anything but did you have to portside 41 and do require something but you tell us a little bit about that variation and how you understand why things choose different paths sure um so it's depending on like what whether or not the state has the capacity to really monitor the nonprofit's is a huge factor in that so for example I interviewed somebody from the Wisconsin Department of Financial Institutions and they just created a new Bureau and got new staff that are now able to monitor nonprofits in their state where some are like Delaware for example which has no regulations whatsoever it's also pretty similar to how they act with corporations as well and so I think that if these states aren't able to really monitor corporations and businesses they're not going to put in extra controls for nonprofits as well they just don't have the capacity for it yeah ideological business or a financial strategy what are the what accounts for these variations why would Delaware go one route and responsible what we didn't talk especially with awesome state money well I think that it does have to do with money and that probably is the biggest factor I think that if they were to want to regulate nonprofits more than their state they'd have to bring on more staff and they'd have to create an entirely new office to do that right now it's monitored by the Attorney General's Office and sometimes the Secretary of State within those states and so if they believe that that's that's enough and that that's sufficient then that's just how they're going to keep it but for it in Wisconsin for example they were part of the Cancer Fund of America they played a large role in that case and and ensuing the different nonprofits involved in that case and following that case is really when they started adding on more regulations and changing their regulations as well oh okay you