Who's Protecting My Donation from a “Significant Diversion”?

Donors around the country are asking themselves that since The Washington Post published a series of articles reporting that more than 1,000 nonprofit organizations have reported a “significant diversion” of assets since 2008. A significant diversion is one that is more than the lesser of $250,000 or 5% of an organization’s gross receipts or total assets. The Post has determined that most of these reported transactions are attributable to theft or embezzlement.

Organization’s that report a significant diversion must provide an explanation, including amounts of property involved and corrective actions taken to address the matter. But many organizations fail to make full disclosures or provide information sufficient for donors to decide whether the circumstances that allowed the diversion to occur in the first place have been addressed and corrected.

The American Legacy Foundation disclosed on its 990 that it had a significant diversion, but only explained that the fraud was committed by a former employee, the amount was more than $250,000, there was investigation and an insurance claim, and that the matter was successfully settled. This does not help donors understand what really happened or determine whether corrective action has taken place to ensure that it doesn’t happen again. And in fact, the Post reported that an estimated $3.4 million was taken and Legacy officials waited almost 3 years after an initial warning before bringing in investigators.

The Post has provided a full list of organizations that have self-identified as having significant diversions. The list also includes links to each organization’s 990 disclosure.

What steps should be taken to protect charitable assets from significant diversions? Accounting firm to nonprofits, FMJ, LLP, recommends that all nonprofits follow these three broad rules:

  1. Document Like Crazy: Every transaction should have a paper trail.
  2. Checks & Balances: The person who approves payment must be different from the person who prepares checks and then both should be different from the person who signs them.
  3. Review & Report: Management and the board must review financial statements that are prepared monthly and compare them to the annual budget.

For more information, download FMJ’s full report on implementing accounting procedures to avoid fraud. And let us know in the comments below what steps your organization has taken to protect its charitable assets.

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Casey Summar, Partner, The Law Firm for Non-Profits,1812 W Burbank Blvd, #7445, Burbank, CA 91506

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