In the United States, 88% of nonprofits run on less than $500,000 a year. When fraud schemes hit, they can be devastating. In two recent published studies, Roosevelt University accounting professor Dr. Husam Abu Khadra explores how nonprofit organizations can proactively reduce the misuse of funds.
Nonprofits employ 12.3 million people in the United States, with larger payrolls than the U.S. construction, transportation and finance industries. “Despite the role of nonprofits in the U.S. economy, not much attention was given to nonprofit organizations’ governance and fraud research,” Abu Khadra said.
The Roosevelt professor’s current research was ignited by a 2013 article in the Washington Post which revealed that over 1,000 nonprofits had reported losses totaling more than $250 million from fraud, embezzlement, theft or other illegal use of funds.
“That was troubling to me knowing that for many nonprofit entities, financial resources are extremely limited, and any loss of resources may often be devastating,” Abu Khadra said. “Nonprofits are a vital part of our communities, and not much was done to cure this problem.”
New published studies offer insight into fraud prevention
According to Abu Khadra, “All organizations are vulnerable to fraud, but nonprofit organizations are subject to a higher risk of fraud due to their greater reliance on human decency, their moral missions, and ethical values and messages.”
Many factors could be behind an uptick in fraud activity: an increase in the availability of funds, lack of enforcing regulations, or weak or nonexistent internal or external control measures.
“Unfortunately, very little empirical research exists on fraud in nonprofits to provide answers as to why the uptick is occurring or recommendations on how to reduce the occurrence of fraud in the nonprofit sector,” Abu Khadra said.
In a study in International Journal of Accounting & Information Management, Abu Khadra and his colleague Dr. Dursun Delen used data from 428 nonprofits to analyze measures from their IRS filings. The study identifies prevailing factors that affect the odds of nonprofits reporting fraud. “My goal is to shed more light on the topic and encourage more proactive policies regarding governance and fraud prevention in nonprofit organizations,” Abu Khadra said.
In another study he published in the Journal of Accounting, Business and Management, the Roosevelt professor hoped to test the association between audit committees and nonprofit governance. Publicly traded companies are required to have an audit committee, but there’s no such requirement for nonprofits.
Roosevelt graduate assistants in the master’s in accounting forensics program assisted Abu Khadra in analyzing the IRS records of 124,980 nonprofit organizations from 2010 to 2015. “The University and the college were very supportive of my research,” he said.
- Nonprofits help drive the economic engine: Nonprofit organizations make up a significant percentage of U.S. private sector employment. As examples, nonprofits comprise 19.1% of private employment in Vermont and 17.8% in New York.
- Fraud affects nonprofits, too: According to a 2018 ACFE report, nonprofits made up 9% of reported and analyzed fraud cases. Those organizations suffered a median loss of $75,000, which could be devastating for many community groups.
- Critical factors that affect fraud reporting: Abu Khadra and Delen’s research found that the most influential governance factors were compliance with the law, board of directors’ independence, federal audit and the use of independent accountants to compile and review financial statements.
- Audit committees make a difference: Abu Khadra found significant evidence that the existence of audit committees improves the of nonprofits’ governance.