We sometimes think of nonprofit fraud as nonexistent. After all, these are the good guys. But today we see that nonprofit theft does occur–and to the detriment of those most in need.
We think of nonprofits as lovely places where only noble things happen. But some nonprofit leaders prey on not-for-profit entities, harming the very people the organization is designed to help.
One such nonprofit leader was charged with bid-rigging, receiving kickbacks, and making fraudulent payments to vendors.
The Department of Justice charged a “former director of operations at…a Manhattan substance abuse treatment center, with bid rigging, conspiracy to defraud, and income tax evasion, in connection with a conspiracy to embezzle approximately $2.34 million from the organization over an eight-year period.”
The Department of Justice stated the charges stemmed from the director “conspiring with several outside vendors to rig bids and allocate contracts awarded by” the nonprofit “for the supply of food, meat, health and beauty supplies, baby supplies, office supplies, printed materials, janitorial supplies, and medical supplies from 1990 until at least April 1998.” According to the charge, the director “steered nearly $10 million in contracts to those vendors.”
The director was charged with taking kickbacks totaling at least $364,000 in cash or goods and services from vendors to ensure receipt of contracts.
The Department of Justice went on to say, the director and seven vendors embezzled at least $2 million from the nonprofit “by issuing false and fraudulent purchase orders to each of the seven vendors, who in turn issued corresponding invoices for goods and services that were never delivered or provided.”
Later, the director pleaded guilty to bid rigging, fraud, and tax charges.
What was the harm to the nonprofit’s 600 substance abuse patients? Well, money that should have aided the needy went into the pockets of fraudsters.
The first weakness was having a leader who was concerned more about his wealth than the people he served. Auditors often refer to this as the tone at the top–it’s the ethical makeup of those in charge. COSO calls it the control environment. Without a positive, honest culture, fraud is more likely to occur.
The second weakness was the bidding process never happened. There’s a reason for bidding: It keeps everyone honest, and it ensures the lowest price for the organization.
The third weakness was a lack of accounts payable controls (or the circumvention of such policies, if they existed). Collusion between an organization’s leaders and vendors can wreak havoc. In such cases, the vendors send invoices, but no service or product is provided. Since someone in the nonprofit is approving the invoice (with knowledge the invoice is fictitious), there is no gatekeeper, no one to prevent the theft. The person approving the invoices is aiding in the fraud.
First, fire unethical leaders. Nonprofits can’t afford the reputational damage.
Second, solicit (real) bids. Sealed bids should be received and opened in a public meeting.
Third, ask board members to review and vet the nonprofit’s vendor list, especially those vendors receiving payments over a certain threshold (e.g., $50,000). Alternatively, ask your external or internal auditors to verify the work of key outside vendors.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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