Charity Fraud Awareness Week

Posted on Wednesday, October 26, 2022

Charity Fraud Awareness Week (October 17-21, 2022) is a campaign run by a partnership of charities, regulators, and other nonprofit stakeholders from across the world.  

The purpose of the week is raise awareness of fraud affecting the nonprofit sector.  Every nonprofit is susceptible to fraud and needs to be aware of the risks associated with its own activities.  This campaign is for anyone working with nonprofits (executive directors, staff, board members, volunteers, auditors, regulators, etc.) to share best practices in preventing fraud.   

The IRS announced its support of the efforts and has provided helpful resources on how to verify a legitimate charity before giving donations.  

Verifying a Nonprofit

Reviewing Form 990, a nonprofit’s annual information return filed with the IRS, is one of the best ways to obtain information about a nonprofit.  Form 990 is open to public inspection, which means anyone can get access to an organization’s return (excluding parts of Schedule B).  In order to comply with this requirement, most nonprofit organizations post their 990 on their website.  The following are other sources that provide Form 990s to the public, as well as additional information on nonprofits.

The IRS’s website also provides information about nonprofit organizations registered with the IRS.  The Exempt Organizations Business Master File Extract (EOB MF) lists exempt organizations by state.  Information contained in this database includes the organization’s EIN, name, in care of name, address, group exemption number, subsection code, ruling date, deductibility code, filing requirement code, tax period, and other important data.  It also has been available Form 990 for the past 5 years.

In addition to the IRS website, there are also other sources to obtain information about a nonprofit before making a donation.  

GuideStar gathers information about every IRS-registered nonprofit organization.  Information is provided about the organization’s mission, finances, programs, etc.  By signing up for a free account, you can access the last 3 years’ Form 990 for any IRS-registered nonprofit organization.

Candid was formed in 2019 when GuideStar and Foundation center merged.  Candid combines GuideStar’s tools on nonprofits and Foundation Center’s tools on foundations with new resources to offer more comprehensive, real-time information about the social sector.

BBB’s Charity Report Program assists donors in making informed giving decisions.  Charities are evaluated based on the 20 BBB Standards for Charity Accountability that address four charity areas: governance, results reporting, finances, and truthful and transparent communications.

The issue of fake charities is only one aspect of fraud within the nonprofit sector.  Each nonprofit is subject to fraud occurring within the organization.  In order to understand how to prevent and deter fraud from happening in your organization, first you must understand the elements of a fraud.  For fraud to occur, there are typically three elements present: pressure/incentive, opportunity, and rationalization.  Together they make up the fraud triangle.

Fraud Triangle

Pressure or Incentive.  Pressure provides a motivation to commit fraud. Pressure may be actually placed on management and/or employees or there may be perceived pressures being placed on them.  For example, a nonprofit’s executive director may be told by the board of directors to achieve a certain level of fund raising by the end of the year (real pressure).  The executive director also may believe that if he does not meet the board’s expectations, his employment will be terminated (perceived pressure).

Opportunity.  A lack of personnel, or sufficiently qualified personnel, can result in the lack of controls or ineffective controls.  This provides an opportunity for fraud to occur.  For example, a nonprofit’s office manager is responsible for everything from answering the phones to writing checks to making deposits.  In this instance, there is no oversight of the office manager which gives the office manager an opportunity to commit fraud.  

Rationalization.  Being able to rationalize a fraudulent act as being consistent with an individual’s personal code of ethics.  For example, nonprofit employees are often paid less than their counterparts in the for-profit sector.  Some nonprofit employees may rationalize the misappropriation of assets as compensation for their low wages.

No matter the size of the entity, a fraud normally follows a similar patter; an individual commits a fraud, receives benefits from the activity, and conceals the fraud.  If the fraud goes undetected, the fraudster usually commits the fraud again and at a higher magnitude.  Although the Charity Fraud Awareness campaign highlights the concern of fraud for only a week, fraud prevention is important for all nonprofits all year long.

Contributed by: Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.