SOURCE: Marks Paneth & Shron LLP

Marks Paneth & Shron LLP

February 21, 2012 12:54 ET

Fraud Risk Surges in Nonprofits; Boards Need to Step Up Oversight to Protect Donors and Make Sure Funds Aren't Being Skimmed or Misused, Says Marks Paneth & Shron Director and Fraud Specialist

Charismatic Executives Are Often the Culprits and Financially Pressed Organizations Have Trouble Putting "Police on the Street," but Fraud Can Cripple Donations; Boards Should Limit the Culture of Trust

NEW YORK, NY--(Marketwire - Feb 21, 2012) - Fraud has devastated for-profit corporations and investors. Now the risk of fraud in nonprofit organizations is surging as well.

A culture of trust, charismatic executives and limited resources for oversight combine to create ideal conditions for fund skimming, expense padding and other scams, says an experienced fraud examiner.

"A typical nonprofit fraud involves a charismatic executive who takes advantage of trusting relationships with boards and donors, and has authoritarian control over staff, says Sareena Sawhney, a Certified Fraud Examiner and director in the Litigation and Corporate Financial Advisory Services Group at New York accounting firm Marks Paneth & Shron LLP.

"The director or president diverts funds for personal use -- but staff members are afraid to ask questions," Ms. Sawhney says. "But that means that funds aren't being used for the organization's mission. And when the fraud is detected, donor support takes a nosedive and the organization is damaged even more."

Ms. Sawhney is available for interviews and can author a bylined article that discusses:

  • Why nonprofit fraud is on the increase. "The economic downturn drives fraud in all sectors," Ms. Sawhney explains. "For nonprofit organizations, hard times mean reduced staff, and that in turn means that there are fewer 'eyes on the street,' to detect fraud. Staff members may be more fearful of losing their jobs and are thus less likely to question an executive's actions."

  • Why nonprofit organizations are uniquely at risk for fraud. "Nonprofit culture is extremely trusting -- there are often close, interlocking personal relationships among executives, board members and donors," Ms. Sawhney says. "That makes it harder for board members to question an executive or for donors to question how their funds are used. Board members are usually unpaid volunteers with little or no financial expertise. Boards frequently experience a high turnover of members which makes continuity of more oversight challenging.

    "Presidents and directors can be charismatic individuals who use their relationships with donors to maintain their authority -- who would question a small expense by someone who brings in $10 million? And they enhance their positions by helping donor friends get board seats. Then they wield their authority over small, low-paid staffs that are unlikely to cross them. The director is king of the hill -- and a fraudster in that position can buy loyalty and silence.

    "The risk is particularly high at small and mid-sized organizations, where presidents and directors are often the sole high-powered executive, and where there often aren't separate CFOs or controllers to provide oversight."

    "Nonprofits are highly susceptible to the effect of negative publicity and as such are often reluctant to report fraud."

  • The kinds of fraud that hit nonprofits. "As a rule, nonprofit fraudsters aren't diverting donor checks or otherwise appropriating money on the way in," Ms. Sawhney says. "They're appropriating it on the way out. They pad their expenses, or treat themselves to five-star hotels, restaurants and car services, or introduce bookkeeping errors on expense reports. In one case, an individual ran $400 in expenses but put in an expense report for $1,400. The receipts didn't match but there was no one to review them. Also, many small to midsize nonprofits don't have policies in place that set limits on personal expenses. This makes it hard to maintain discipline or say what's excessive."

  • What boards must do to prevent and detect fraud. "Tracking down fraud can be difficult, especially when budgets are reduced," Ms. Sawhney says. "But there are still steps that boards can and should take to reduce the incidence of fraud, and detect it more effectively when it occurs.

    "The first step is to have policies and procedures in place, written out and clearly defined, which govern and set limits on personal expenses.

    "The second is to establish strict procedures for reviewing personal expenses and reconciling expense reports with receipts."

    If fraud is suspected, forensic accountants can be hired to help detect some of the "red flags." Examples of "red flags" of nonprofit fraud include an organization that allows almost all accounting matters to be handled by a select few individuals without a system of checks and balances. As an example, a check signer at a nonprofit could use their check signing authority to write personal checks to themselves without having the appropriate checks and balances. Another example of a "red flag" at a nonprofit organization is related-party transactions. Related-party transactions can sometimes create a perception of illegal financial activity. As such it is significant to understand the reasoning behind such relationships.

"The bottom line is this: The board needs to take steps to protect the donor base and ensure that dollars are being used toward the mission, and are being used efficiently and properly within the organization," Ms. Sawhney says. "By doing that, the board will also protect the reputation of the organization. Particularly in times like these, donors want to know that the director isn't out spending the money on Rodeo Drive. They want to know that it's wise to continue supporting the organization. Improved policies provide that reassurance -- and thus protect the stream of donations that the organization needs to survive."

For more information, or to schedule an interview or bylined article, contact Katarina Wenk-Bodenmiller of Sommerfield Communications at (212) 255-8386 or katarina@sommerfield.com.

About Marks Paneth & Shron LLP

Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom approximately 60 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, consulting, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services, and energy clients. The firm has a strong track record supporting emerging growth companies, entrepreneurs, business owners and investors as they navigate the business life cycle.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in Morison International, a leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world. Marks Paneth & Shron LLP, whose origins date back to 1907, is the 30th largest firm in the nation and the 13th largest in the New York area. In addition, readers of the New York Law Journal rank MP&S as one of the area's top forensic accounting firms.

Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands. For more information, please visit www.markspaneth.com.

About Sareena Sawhney

Sareena Sawhney, MBA, CFE, CFFA is a Director in the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. In this role, she provides comprehensive litigation consulting services encompassing the areas of complex fraud investigations, including white collar crimes, forensic accounting, and anti-money-laundering.

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