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Saturday, December 25, 2004

Tax Analysts: Fremont-Smith on Charitable Embezzlement and Fraud

Tax_analysts_1 Marion R. Fremont-Smith (The Hauser Center for Nonprofit Organizations, Kennedy School of Government, Harvard) has published a Special Report, Pillaging of Charitable Assets: Embezzlement and Fraud, 46 Exempt Organization Tax Review 333 (Dec. 2004), available on the Tax Analysts web site at 2004 TNT 247-29.  Here is the conclusion:

Evidence from the surveys of press reports of wrongdoing by officers, directors, trustees, and employees of charitable organizations indicate a persistent degree of criminal activity. They also indicate a high degree of success in prosecutions, but this may be attributable to the fact that it is these cases that catch the attention of the press. There is no paucity of grounds on which criminal prosecutions can be brought -- both state and federal -- and there is some evidence that matters referred for prosecution are pursued. It is not possible to gauge whether increased attention to fraud by the accounting profession will be effective in reducing the extent of criminal activity within the nonprofit sector and, in fact, it is far too soon to tell. What is clear is that the proposals of the June 2004 Senate Finance Committee staff have mobilized support among organizations representing the nonprofit sector -- notably Independent Sector, the Council on Foundations, BoardSource, and many others that speak for specific segments of the sector -- as well as the American Bar Association and members of the accounting profession. They are reassessing the impact and effectiveness of current laws and efforts at self-regulation.

Most of Congress's interest and the sector's efforts are directed toward preventing breaches of fiduciary duty, although, as noted, some will result in a tightening of the criminal laws designed to punish "pillaging." In regard to criminal acts, I am not persuaded that new laws will greatly change the situation. There will always be individuals who take advantage of positions of trust for their private benefit and, for at least a time, their deceptions will go unnoticed. At best one can hope that organizations will become more aware of the risks of fraud that they face and take appropriate steps to impose internal controls that might minimize those risks -- or at the least reduce the time it takes before they are discovered.

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