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Dealing with fraud or abuse

Help. I am an employee in a California non-profit whose management is rumored to be embezzling money. In two years we have had over seven CFOs/controllers; we can't be audited because our books are intentionally divided among dozens of programs; we have a 90% yearly turn-over of management except for the top executive; the CEO blatantly violates our own policies by hiring family members to be executive assistants; the board meetings are held in strict secrecy; the board members are personal friends of the CEO; and no one has ever seen an agency-wide budget, yearly summary, etc. In short... we are in a mess! How does a little guy employee even begin to make a difference/ask for some accountability from upper management? Are there non-profit watch-dog agencies? Anybody been in a similar situation?
—– Posted anonymously to a nonprofit discussion board

The topic of how to deal with suspicions of wrongdoing in nonprofit organizations (signs of mismanagement, improper payments, insider self-dealing, conflict of interest, etc.) comes up frequently. This page includes two bits of advice on how to approach that problem: in the first case, the advice assumes that wrongdoing is occurring; the second offers more general advice for anyone who thinks there might be someting amiss.

Note: There's a discussion of the special problems that arise out of fraud or abuse in fundraising on the Abuses in fundraising page.

Advice with a difficult situation:

When you are certain wrongdoing is occurring

If you are seriously interested in taking action to change the situation you need to treat it very carefully. There are considerable personal risks, even if you are right that outrageous misbehavior is occurring. The risks are, of course, greater if your impressions turn out to be wrong, or cannot be substantiated.

Be careful

As a protective policy, you should be very careful about saying anything in public that might damage the reputation of the organization or people who work there. This caution should include avoiding making any kind of damaging remarks in email or elsewhere online, since it is likely that someone who knows you can infer the identity of the organization you are talking about. If that person doesn't share your view of the situation, you risk both personal and legal challenges that at best would be time consuming and distracting and at worst might be personally devastating.

That said, there are still things you can do.

Assemble information

The first is to assemble whatever information you can get from official sources. Registered charities must file reports with both the federal government and (in most states, including California) local authorities.

The federal report is called Form 990. It is due each year on the 15th day of the fifth month after the end of the organization's fiscal year (extensions are allowed). Effective June 8, 1999, new regulations govern public access to copies of this form. The IRS offers summary of these regulations and other helpful information at http://www.irs.gov/charities/charitable/article/0,,id=182722,00.html

Basically, these rules mean that anyone can get copies of three recent years of the Form 990 for any recognized exempt organization. Note that the organization is not allowed to demand any information from the person making the request and (of course) it is not necessary that you ask for it yourself. Anyone who wants to remain anonymous can get help from a friend who won't be known to the people at the agency in question.

There are penalties for failing to follow these requirements, and the IRS will back up members of the public when resistance is reported.

There are state reports required as well. Usually there is an "annual report" to corporations officials which provides limited information about the operations of the organization and "campaign reports" and "registrations" required by charities regulators from any organization that does fund-raising from the general public. There is a list of these state charity officials online at http://www.nasconet.org/agencies

What next?

The second step will be to figure out what to do next. It is unlikely that any public reports will contain obvious evidence of misfeasance. You will still be interested in them for two reasons. First of all, failure to file them is itself a problem. If you find that they are incomplete or nonexistent, it may be possible to get officials to launch an investigation of the organization based on that fact alone. Secondly, if they contain information that is easily demonstrated to be false or misleading, that too is a good starting point for calling for official investigation. As an insider in the organization, you may have access to documents that are inconsistent with the filed reports. Bringing them to the attention of regulators would be easier than trying to document on your own the sorts of misbehavior you describe.

The state attorney general's office (See help the AG below) usually has general oversight responsibility over nonprofit corporations.

The AG is unlikely to be willing to intervene in an internal fight within an organization, though. So you need to be able to demonstrate that more is at stake than a disagreement about sound business practices or agency direction.

Consider a proxy

Also, you need not take these steps yourself. It may be more prudent, and more effective, to have someone who has no direct connection to the issue work with you to collect the information and evaluate what you find. Complaints about the behavior of nonprofit organizations do not, in fact, rank high on the list of concerns of state and federal officials. They are particularly cautious about becoming involved in internal squabbling; you can protect yourself and bolster your case by not getting directly involved.

When you suspect something may be wrong, help the Attorney General

Dave Horn, who was then an Assistant Attorney General in the Consumer Protection Division of the Office of the Attorney General for Washington State, wrote this advice about how to help the attorney general approach a possible case of fraud or abuse in a nonprofit.

All of us appreciate it when members of the public bring suspicious or unlawful activity to our attention. If you do so, here are some tips for making your complaint effective:

  • Provide the most specific information possible: Who, what, where, when, and how. Keep the expressions of opinion to a minimum or put them in a separate document.
  • Provide names, addresses and telephone numbers, if you have them, for individuals and organizations about whom you are complaining, or who may have knowledge of the violations. If your nonprofit receives calls from citizens who are being solicited by a copycat organization (one that is pretending to be your group), remember to get their names and phone numbers so law enforcement officials can call them back. No case can be brought without witnesses.
  • Put your complaint in writing. Make it succinct. Begin with a summary: "I am aware of a fundraising campaign which claims funds support the XYZ program, but they don't." Follow with some details. If it is complicated, include a chronology. Offer to provide other information if needed.
  • Attach copies of any pertinent documents.
  • Be as specific as you can be about the conduct you regard as illegal or wrong.
  • Identify yourself. If you have a very good reason not to identify yourself, at least provide names of persons who can corroborate your story or documents that help substantiate it.
  • Be patient. Most enforcement and regulatory offices are short-staffed, but want to help you as well as they can. Most will at least contact the organization complained of to obtain their response to the allegations (unless it is the rare kind of matter best investigated first by other means). This can take a little time.
  • Lastly, don't threaten. It is not likely to help you get attention for your complaint to threaten to publicly embarass the officials whose help you are seeking. Such threats are too common these days and are usually simply ignored. If the complaint has merit, and the agency has sufficient resources, it will be pursued. If it does not have merit, no agency is going to push aside pressing work just because someone has threatened to make them look bad.

(The author added at the end of his message: "Speaking for myself and not necessarily the attorney general of Washington.")