Part 1: Corruption Prevention, Deterrence, and Detection — Nonprofit Organizations

Preventing, Deterring, and Detecting Corruption in Nonprofit Organizations. The AACI Media Dept.

Tempe, April 28, 2017

Technical Staff

Nonprofit organizations are not immune to fraud and corruption. It is not unusual to find all kinds of fraudulent schemes and corrupt practices in such organizations.

Nonprofits economic contribution to the U.S. economy is significant.The minimum estimated annual monetary loss due to fraud and corruption in the U.S. nonprofits exceeds $40 billion. It is based on a conservative annual average loss of 5% of revenues. This annual average loss percentage of revenues would exceed 10% in developing countries. Because the nonprofit revenues come from donors, the reputation damages of fraud and corruption on nonprofits are sometimes devastating. When donors contribute to nonprofits, they donate to serve a cause and usually follow up to make sure that philanthropic causes are well served.

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Are Fraud and Corruption Risks Higher Than Those of For-Profit Organizations?

Nonprofits face higher fraud and corruption risks than those of for-profits. This mainly stems from their internal culture, business management, and organizational structure. Many nonprofits believe that their mission and noble objectives would automatically immune them from fraud and corrupt acts. Such a belief creates an opportunity for trusted management and volunteers to defraud them. Besides, the following heighten fraud and corruption risks for many nonprofits:

  1. Board members do not provide adequate governance and oversight, and many of them do not possess proper financial management expertise.
  2. Board members are usually volunteers and do not provide sufficient time to address internal control systems.

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Nonprofits in Developing Countries: Overview Nonprofits in developing countries share the same organizational and business weaknesses observed in those of developed countries. However, fraud and corruption magnitude, breadth, and extent are worse. As there is not reliable and verifiable fraud and corruption independent information in most, if not all, developing countries, this also applies to nonprofits. Though it is beyond the scope of this paper to discuss in details several relevant issues, we believe that the following, at the minimum, provides opportunities for fraud and corrupt practices:

  1. Lack of deterrent laws, rules, or regulations
  2. Inefficient and/or ineffective judicial systems
  3. Lack or absence of inadequate laws
  4. Establishing nonprofits as vehicles for corruption

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