A Question of Trust

A couple months back, I was killing some time on Twitbook or Facebird or some other social media site when I came across a type of article that seems to have become way too common in recent years: some folks had formed a nonprofit group in conjunction with an online fundraiser (GoFundMe or something similar), then absconded with all the money. The article didn't surprise me much, but one of the comments did. Something like, "Of course this happened. All nonprofits are scams."

There was one word that struck the most deeply: "All."

I've spent a decent chunk of my professional life here at GrantStation, where we do our best to help nonprofits find funding for their good work. I've talked directly to many organizational directors and other staff. I don't want to believe that any appreciable amount of these organizations could be scams. I volunteer locally; I've seen no indication of any scamming going on there.

Yet as I dug around, I found that the sentiment seems to be a common one. There is a story of charitable fraud, and such comments come out. But even more strangely, a lot of these comments are just put out into the ether, unprovoked, not in response to anything else. Someone in their timeline, among comments about what they had for lunch or the latest celebrity gossip, will just randomly blurt out, "BTW, all nonprofits are scams."

To be fair, there are plenty of tales of charitable malfeasance. We've seen a former president's foundation shuttered. In Minnesota in January, a child hunger charity was raided due to allegedly defrauding the U.S. Department of Agriculture out of millions of dollars, with funds being diverted to buy cars, luxury items, and real estate.

Even when charities and foundations are within the bounds of the law, their structures can stress the people's trust. Some spend an inordinate amount on fundraising compared to how much goes back to the community. Others pay their executives exorbitant salaries. I've personally seen IRS forms for foundations where several executives are making mid-six figures, and they all conveniently share a surname with the foundation. Maybe the organization just happens to be renting their office from the CFO's brother-in-law. These types of actions can be considered "soft corruption."

But there are over one-and-a-half million nonprofit organizations in the U.S. These tales of corruption are real, but how big of a portion are they? The Association of Certified Fraud Examiners estimates that organizations (including for-profits, nonprofits, and other types) lose approximately 5% of annual revenue due to fraud.

Some sources believe that nonprofits may be more vulnerable to fraud than other types of organizations. Reasons include "a lack of resources, poor internal controls, inadequate training, high turnover with low employee investment, poor technological resources, and other factors." Organizations that are already spread too thin may not have the resources to prevent, monitor for, or investigate fraudulent activities.

But even organizations with small staffs can take some steps toward mitigating fraud. A simple but powerful technique is intra-office transparency. If information is readily available to all organization members, the chances of a single person doing something illegal and hiding it from the organization are greatly reduced. CharityFirst breaks down the frequency of specific types of fraud schemes. The main takeaway is that if you have a single person in charge of monitoring money flow, you may not see fraud in your midst. Multiple eyes on the money increases awareness and the possibility of noticing fraud before it goes too far.

A very important statistic is that fraud is least likely to be carried out by standard employees (23%). The majority is perpetrated by managers and supervisors (35%) and owners and executives (39%). With higher-level staff often involved in the act, it is important to integrate all members of the organization in watching out for fraud. Cases of fraud are most often identified through a tip or complaint, rather than dedicated audits or reviews. Your own people are your best resource to prevent fraud.

Your organization must do its best to protect itself, but overall, corrupt organizations are a small part of the whole. However, they grab headlines and warp people's opinions. Hence, some folks believe that all organizations are corrupt. So how does your organization overcome these public stories? How do you build trust with your community?

We come back to that important word: transparency. If your organization is required to perform an audit, you should make the results readily available. And while the IRS Form 990 is readily available through multiple online sources, your audience may be unaware of that; be sure to make that documentation available as well. If you have a website, post the information there, or make copies available at your office or via email request.

If your organization does not currently produce an annual report, you may want to consider doing so. Make sure you include information not just about your organization's programming, but also about management and the use of donated money. While such a publication may be a bit of an arduous task for a small organization, it provides a way for your constituents to monitor your work from year to year.

Charity Navigator is a popular source for the public to evaluate nonprofit organizations. Take a look at your organization's profile and see if it presents the image you want for your nonprofit. Does the percentage of funds toward programming seem low? Is there a way for you to boost that number?

A lot of the previous suggestions are made much easier if your organization has a website and social media presence. If your organization chooses not to use those public-facing methods, you need to make sure that you respond to other outreach methods, such as email or phone calls, consistently and in a timely manner.

If your organization does find itself in the midst of a fraud investigation, follow the advice of your organization's lawyers, if you have that resource. Otherwise, here is some guidance on managing disclosures, both within and beyond your organization:

Nonprofits should carefully consider how much information should be disclosed, and to whom, in developing a communication plan to reassure key stakeholders of the organization. Such a plan may include descriptions of how a nonprofit has recovered or will recover stolen assets and the steps the organization is taking to prevent future theft. Organizations should carefully consider the contents of public disclosures—a public accusation linking a specific individual to a theft could lead to a defamation action if the accusation is shown to be false. Affected staff should be provided with "need-to-know" details to prevent rumors from spreading.

Your organization will need to be as truthful as possible, while also conveying that there is certain information that cannot be released until investigations—which may be internal or external—are completed. But you must do your best to keep stakeholders updated on the status of the investigation. It can be damaging to your organization if accusations arise and then no updates are released. This time of silence can lead to rumors forming.

After your organization has addressed its issues, you will need to rebuild the trust that you have lost. This will be a long and difficult road. There are several steps you will need to take, while being open with your constituents about the process.

First, you will need to analyze how the mistakes were made. What part of your internal systems were manipulated? How did it go unnoticed?

Next, you will need to strengthen or rebuild the systems that failed your organization. Can you add additional layers of oversight? Would more data-sharing help? Will you occasionally need to bring in people outside the organization to review your work?

Once the problem has been identified and steps put in place to correct the issue, you will need to craft a focused PR strategy to let stakeholders know what you've done to strengthen the organization. People, and the internet, have long memories. You can't just expect time to do the work for you; you need to work to actively rehabilitate your organization's image.

Whether your organization has suffered from fraud in the past or currently runs a clean ship, you may want to take a look at your internal policies for dealing with instances where fraud is suspected. Does your organization have a process for submitting concerns? Keeping in mind that most transgressions come from upper-level members of the organization, how will you deal with those types of situations? Does your organization have a written whistleblower policy?

If you are a volunteer or employee at a nonprofit organization, familiarize yourself with these policies. If something happens and your complaints fall on unlistening ears, there are several avenues beyond your organization that you can pursue: local law enforcement, state regulatory agencies, or the IRS. (The Nonprofit Risk Management Center offers guidance on how to approach these situations.)

In a perfect world, we wouldn't need to worry about corruption. But humans are imperfect creatures, and nonprofit organizations are not immune to the deeds of bad actors. If your organization cultivates a culture of openness and honesty, when the unfortunate occurs, you will have put yourself in a better place for recovery.

Outliers do exist, but the nonprofit field is far from being populated with nothing but scammers and frauds. Your organization needs to overcome failures to accurately communicate the work of the nonprofit field. Some people out there you just won't be able to reach. But with a policy of openness and a framework for addressing possible issues, you can help ensure that the majority of your audience sees your organization for what it truly is.