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Trust, But Cut the Cards

By Put Barber, March 2006

This article was first published in the March 2006 edition of the Nonprofit Online News Journal.
 

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It makes you crazy.

You work day after day in some good cause - there are many - along with good friends and colleagues who bring great creativity to the tasks, put in long hours, pass up higher-paying job opportunities, and take real satisfaction in making a difference in other people's lives. You know for sure that this globe would be a much worse place to live today, and even more so in the future, if the work done by your organization and counterpart nonprofits around the world didn't happen.

And what do you read in the papers? See on TV? Mostly, not a word about all that. Every now and again, a story about how some nonprofit is in financial difficulty. (Who knew?!? Can that really happen?!?). And then, once in a blue moon but all over the front pages, "Board President Denies Knowledge of Faked Travel Reports!"

We all know it's true. Everyday good news about everyday good deeds is no news at all. Bad news may get a bit of notice. Terrible news is what people see. And remember. (To read a careful and detailed study of the relations between nonprofits and the media, done in Seattle in the '90s, look at GoodNewsGoodDeeds.org.)

To some extent, of course, this pattern is just a reflection of what the word "news" means. Media people would not be doing their jobs if they presented an accurate reflection of everyday life. Their work is to find and highlight events that are remarkable, reprehensible or threatening. Bad news at nonprofits, sadly, fits the bill.

To some extent, further, this pattern is a reflection of the fundamental success of local community work by nonprofits. Everyone expects them to be creative, hardworking, a little bit self-sacrificing, and valuable contributors to the quality of life. So when something goes wrong, when nonprofit people cheat or stumble, it simply is news - remarkable, reprehensible and threatening.

So the risk of unfavorable attention is, in fact, greater for nonprofits than for other sorts of organizations just because, most of the time, we live up to and reinforce the public's, and the news media's, expectations about us and our work. We're good. Of course. That's just the way we are. And that's just not news.

 

Higher Vulnerability

The truth is, though, that the risk of unfavorable attention is greater for two other reasons as well. Typically, the work of nonprofit organizations is supported by other people's money - donors' gifts, municipal contracts, endowments and restricted funds, and in a sense, the various tax advantages and other kinds of encouragement our society has put in place to help nonprofits. Wasting or misusing somebody else's money is worse than squandering your own.

Further, nonprofit organizations are vulnerable to their own special kinds of misdeeds, misbehavior that grows directly out of some of the best qualities of our work that we all take pride from.

  • People in groups working together closely on a good cause typically don't spend time worrying about whether others in the group might be cheating.
  • Creativity can be used to design scams as well as service programs.
  • When you're already working long hours, the extra time required for cross-checking and paperwork can easily be seen as something to be postponed or avoided altogether.
  • People who give a little extra, pass up opportunities for better pay and better conditions, stick to it because they believe in a cause - people who work beyond their compensation - can slip into bad habits.
  • The satisfaction of making a difference in people's lives can carry us a long way. But sometimes, for some people, those satisfactions wear thin, and they start to look for other forms of compensation.
     

These are just plain facts of life in nonprofit work. Believing that the destructive consequences of these risks are somebody else's problem creates the first weak spot in the system of defenses every organization really should have in place - in good times - as important protection against damage to its capacity to serve its mission and to guard against ending up in the news.

That's easy to say. And, frankly, hard to do.

The barriers pretty much follow the outline of our best qualities. Close-knit groups resist procedures that imply distrust. Creative scams are harder to find. Paperwork and formal authorizations are a pain in the neck. It's hard to call a co-worker out about some minor stretching of the rules, and even harder when I've stretched them myself. (And very very dangerous when a climate of tolerating small abuses gets established!) Burn-out is a widely recognized occupational hazard in nonprofits and notoriously hard to deal with.

It's important to be clear that these risks are real. The Association of Certified Fraud Examiners estimates that 13% of nonprofit organizations have been victimized. That's more than one in eight - look around the room the next time you're at a gathering of nonprofits and ponder which organization in your group has someone who's dipping into the till!

ACFE's investigations have turned up some spectacular cases of six- and seven-figure thefts. These are the crimes that make the front pages - as they should, in my opinion. But the really interesting, and really discouraging, finding from ACFE's work is that the losses from unspectacular scams and sleaze actually cost the nonprofit sector, and the clients and communities we serve, far more than all the first-class airfares and concealed leases of luxury condos that make the headlines. Small organizations, small frauds, everyday transactions in familiar settings - that, in fact, is where the bulk of the loss occurs.

 

What Can Be Done

There are three straightforward things I think every nonprofit should do to protect themselves and to prevent loss of public confidence in the work of all nonprofits.
 

The first is to talk about the problem.

Put the risk of fraud and the need to do something about it on the agenda for board and all-staff meetings. Ask out loud what the effect of even small abuses will be on the morale of co-workers, on the services provided to the community, on the public's faith in your organization and nonprofits in general. Establish a climate in which the very idea of winking at anyone who crosses the line is clearly and solidly unacceptable. And don't do this just once; put the topic of ethical behavior on the agenda for review at least once a year.

This practice is ticklish, of course. To me a really important element of any such conversation is that no "us" is telling "them" what to do. The risks and temptations that lead to misdeeds apply to everyone; everyone should approach the topic with an open mind about the possibility that they themselves might become part of the problem. If there's a Code of Ethics for the organization (a very good idea!), it should be something everyone has a voice in writing and that anyone can challenge, revise and offer improvements for at any time. The whole point of this prescription is that no-one is beyond the reach of temptation.
 

The second is to develop some practical procedures and policies that build fences around the parts of the organization where damage could possibly happen.

There are some established standards on this subject. They go under the name of "Internal Controls". Advice from an accountant or expert in corporate ethics may be a help in figuring out what parts of the organization's work are vulnerable to abuses and bringing in examples of how other organizations have addressed similar risks.

In large for-profit corporations, the concept of internal controls has been given new emphasis in recent years by the requirements imposed by Sarbanes-Oxley. Comments in the financial press have suggested that companies are spending hundreds of thousands, even millions, of dollars creating and testing internal controls. Those reports may suggest that good internal controls are beyond the reach of, and an unrealistic burden for, community serving nonprofits. That conclusion would be a mistake.

A careful look at the organization with an eye to the parts of its work where something might go wrong is a task that can be undertaken by staff and volunteers in any group. (There's some guidance in a brief article at Canada's Charity Village website. And of course there are hundreds of other web pages that may be helpful, including one provided by the Alliance for Nonprofit Management.)

Some common rules that make good sense:

  • Make sure the person who opens and checks the bank statement is someone who doesn't write checks.
  • Whenever actual cash is received, have it counted independently by two people and have each record the amount.
  • Never make out checks to "cash" or have checks signed without the payee and the amount filled in.
  • Have someone who knows the organization and its work look over all the invoices and credit card statements. That person should feel free to question any transaction that doesn't appear right.

 

The third thing every organization should do is to set up a real system that allows effective reporting of suspected fraud or abuse.

There are inexpensive commercial services that will help with this process, but they are not really necessary, just a convenient shortcut. The key is to have a widely publicized name and phone number that connects to a person everyone can trust to handle such reports well; to listen carefully, investigate fully, insist on corrective action if needed, and protect everyone involved (including, of course, the person who makes the report in the first place) from unfair and unnecessarily damaging consequences.

Obviously, this person can't be someone who might be involved in fraud or abuse themselves. Such people are not hard to find. To me, the most promising place to look for a suitable candidate is among recently retired members of the board of directors.

Whoever does the job needs to have some guidance on how to proceed. Developing a handbook for this volunteer to use would be a good project for the board and staff to work on as part of the annual conversations about internal ethics recommended above. Before the handbook is finished, though, the organization will need to seek advice from an attorney about when, and how, to call for help because the situation is too risky, or the damage too substantial, to be handled by a knowledgeable and committed volunteer.

This kind of policy goes under the name of "whistleblowing". In government and business settings, there are often financial incentives offered to encourage people to take the risks that seem inevitably to follow calling attention to the misdeeds of co-workers, supervisors or contractors. The whole topic can be tainted by bitterness, recriminations and suspicions of retribution. It ought to be possible, though, to avoid that toxic atmosphere in small community-based nonprofits. The most important benefit of having a clear and safe whistleblower system in place is the assurance to everyone connected to the organization that there's an easy, low-risk way of dealing with anything that looks suspicious before it gets ingrained, before real damage has been done.
 

President Reagan famously commented "Trust. But cut the cards." That's the right formula for us in the nonprofit sector as well. Trust, creativity, self-sacrifice and generosity are the hallmarks of our work. A little time spent on respectful, cooperative, and tough-minded procedures to keep temptation at bay will be time well spent.

 

 

 

Note: The information about the work of the Association of Certified Fraud Examiners is derived in part from an unpublished paper presented at the 2005 conference of the Association for Research on Nonprofit Organizations and Voluntary Action: "Fraud in Nonprofit Organizations" by Janet Greenlee, University of Dayton; Mary Fischer, University of Texas at Tyler; and Elizabeth Keating, Harvard University.

 


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