Helping a Nonprofit Prevent and Recover from Fraud

 Nonprofits with poor governance lost 23% of donations after experiencing a theft or embezzlement, but organizations with good governance retained all but 3% of donations.

Nonprofits with poor governance lost 23% of donations after experiencing a theft or embezzlement, but organizations with good governance retained all but 3% of donations.

Good governance practices are associated with lower fraud occurrences and, if a theft or embezzlement does occur, a quicker recovery. That’s the finding of a trio of researchers who used four years of IRS Form 990s to test the impact of governance on nonprofit organizations’ ability to avoid and weather asset diversions.

Erica Harris and colleagues first found that organizations with engaged, independent boards of directors were less likely to experience a theft or embezzlement. For instance, nonprofits with boards that engage in appropriate monitoring activities are less likely to be fraud victims. Monitoring includes practices as simple as having the full board review the Form 990 before filing—a step that more than one in five nonprofit boards do not complete.

Moreover, should a fraud occur, Harris found that the resulting downturn in donations is reduced when the nonprofit possesses strong corporate governance structures and is transparent about the nature of the fraud event. Both written policies and strong practices are helpful in ameliorating the negative response from donors. In the end, organizations who possessed all of the tested governance structures experienced a decrease in donations in the year after the fraud of just 3% — compared to a 23% downturn in organizations having the weakest governance structures.

In addition to helping to retain and bring back donors, good governance appears to play a role in achieving better organizational performance. BoardSource, in Leading With Intent (2017), reported that executive directors and board chairs believe that when the board understands its roles and responsibilities, has a majority of its members engaged in governance activities, and works as a collaborative team, organizational performance is strongly aided. And as Raymond Fisman and others have argued, achieving this performance through better boards necessitates building trusting relationships within the board and between the board and the executives, enacting structures and practices that give the full board the information and responsibility to act, and evaluating board performance. Although causation has not been established, both research and common wisdom suggests that good governance is one of the characteristics of a resilient and successful organization.

The era of underinvesting in governance and board development must certainly be over. Giving time, energy, and resources to improving governance practices and the performance of the board is vital for organizational survival and impact.