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An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents

December 1, 2006

Losses due to fraudulent activities are particularly troublesome in the nonprofit sector because they directly reduce resources available to address tax-exempt purposes. The ensuing bad publicity may also reduce contributions and grants in subsequent periods. This paper uses data provided by Certified Fraud Examiners to report on the types of fraud they identified in nonprofit organizations and the characteristics of both the victims and the perpetrators of the fraudulent activities. Based on the analysis of the data, the authors suggest ways that fraud losses can be prevented or mitigated. In particular, governing boards are urged to consider important controls in addition to the annual financial statement audit.This publication is Hauser Center Working Paper No. 35. The Hauser Center Working Paper Series was launched during the summer of 2000. The Series enables the Hauser Center to share with a broad audience important works-in-progress written by Hauser Center scholars and researchers.

Assessing Financial Vulnerability in the Nonprofit Sector

January 1, 2005

Effective nonprofit governance relies upon understanding an organization's financial condition and vulnerabilities. However, financial vulnerability of nonprofit organizations is a relatively new area of study. In this paper, we compare two models used to forecast bankruptcy in the corporate sector (Altman 1968 and Ohlson 1980) with the model used by nonprofit researchers (Tuckman and Chang 1991). We find that the Ohlson model has higher explanatory power than either Tuckman and Chang's or Altman's in predicting four different measures of financial vulnerability. However, we show that none of the models, individually or combined, are effective in predicting financial distress. We then propose a more comprehensive model of financial vulnerability by adding two new variables to represent reliance on commercial-type activities to generate revenues and endowment sufficiency. We find that this model outperforms Ohlson's model and performs substantially better in explaining and predicting financial vulnerability. Hence, the expanded model can be used as a guide for understanding the drivers of financial vulnerability and for identifying more effective proxies for nonprofit sector financial distress for use in future research. This publication is Hauser Center Working Paper No. 27. The Hauser Center Working Paper Series was launched during the summer of 2000. The Series enables the Hauser Center to share with a broad audience important works-in-progress written by Hauser Center scholars and researchers.

Measuring Operations: An Analysis of the Financial Statements of U.S. Private Colleges and Universities

March 1, 2003

As events in the business sector have highlighted, companies can play by the rules and yet produce misleading financial statements. This study examines the nongovernmental organizations that provide a substantial portion of higher education in the United States. We seek to determine whether private colleges and universities take advantage of the discretion available to them under accounting and auditing standards by presenting an operating measure in their statement of activities. We find that nearly 60 percent of schools report an operating measure but the items included or excluded from operations vary widely.This publication is Hauser Center Working Paper No. 17. The Hauser Center Working Paper Series was launched during the summer of 2000. The Series enables the Hauser Center to share with a broad audience important works-in-progress written by Hauser Center scholars and researchers.

The Single Audit Act: How Compliant Are Nonprofit Organizations?

March 1, 2003

Audits are an important legal accountability tool used by resource providers (donors, grantors, and others) to assure that resources are spent by nonprofit organizations in accordance with the resource providers intentions. This paper reports on audits that are required by the government of the United States for organizations receiving large amounts of federal financial assistance. Since 1990, nonprofits receiving substantial federal funds are required to undergo this rigorous and expensive form of federal oversight. We report on 11,841 nonprofit entities that underwent such audits, and the 3,592 audit firms that conducted them, from 1997 to 1999. Overall, compliance with federal regulations appears to be high. Our study indicates that smaller nonprofits, those that are new to government grants, and those with prior audit findings have a significantly higher rate of adverse audit findings. Perhaps for cost or other reasons, these nonprofits are being audited by less experienced auditors. Current federal funding does not provide any additional funds for Single Audit Act compliance. One policy implication of our work might be to provide federal funding specifically for Single Audit Act compliance to these nonprofits.This publication is Hauser Center Working Paper No. 16. The Hauser Center Working Paper Series was launched during the summer of 2000. The Series enables the Hauser Center to share with a broad audience important works-in-progress written by Hauser Center scholars and researchers.