New Study: Insiders Who Steal from Charities Go to Jail

Posted on January 29, 2009

Queen’s School of Business researchers reveal first-ever study of Canadian nonprofits hit by fraud

KINGSTON, ON, JANUARY 29, 2009 — Nearly 70 per cent of insiders who defraud nonprofits face jail time, according to new research released today by the CA-Queen’s Centre for Governance. The study is the first in Canada to document the scope, severity and profiles of Canadian nonprofit frauds, using data gathered from reports in Canadian daily newspapers between 1998 and 2008.

“Our goal was to simply profile the types of insider frauds in Canadian nonprofit organizations, but after analyzing the data, we were surprised to learn how many of these thieves get caught and convicted,” said Professor Steve Salterio, Director of the CA-Queen’s Centre for Governance and co-author of the study with doctoral student Qiu Chen. “In fact, we found only one acquittal in 53 cases, and a high likelihood of jail time.”

Highlights of the Queen’s study

Profile of the nonprofit fraud:
• The average fraud cost to a nonprofit is $119,821 per occurrence.
• Smaller nonprofits (those under $100,000 in revenue) lost on average an entire year’s revenue when fraud occurred whereas slightly larger organizations (less than $1 million in revenue) lost nearly 50% of their revenue when fraud occurred.
• Fraud was more likely to occur in large urban centres than in smaller centres.  Almost 82% of the reported frauds were committed in census metropolitan areas of 200,000 or more.  Nonetheless, both the largest and smallest centres reported similar dollar averages in amount of reported fraud losses.

Profile of the “Fraudster”:
• More that 90 per cent of reported frauds of nonprofits are committed by one person.
• The most frequently reported fraudsters held senior management positions (Chief Executive Officer or Executive Director, 30%; Chief Financial Officer or Treasurer, 28%; and fundraisers, 28%).
• CEO-committed frauds cost nonprofits the most, at $176,000, while fundraiser fraud averaged $60,000.
• Men and women are equally likely to commit fraud.
• Very few fraudsters have criminal records.
• Age is highly correlated with fraud. Board members, management and employees who are older or longer serving are more likely to commit fraud.
• However, when younger employees do commit fraud it is for large amounts (average of $868,667).

The study documents jail sentences ranging from three to 90 months, with an average of 32 months behind bars where jail time was sentenced. The study found no difference in prosecution rates and convictions between individuals occupying senior levels in their organizations (i.e. board members, treasurers, presidents, and chief financial officers) and other levels (e.g., fundraisers, non-management employees). Other common sentences included probation and house arrest, sometimes in conjunction with jail time.

“This finding refutes the popular notion that white-collar crime, particularly involving charities, is punished by little more than a slap on the wrist,” said Chen.  The study acknowledges that the number of un-reported and non-prosecuted cases is unknown.

“As the world heads into an economic downturn, nonprofit managers and boards will come under increasing stress to deliver services,” said Professor Salterio. “In the rush to meet mounting pressures, there is a risk that the principles of good management including strong internal controls may be neglected, but the result can often to catastrophic both for the organization with its lost funds and for the individual facing cold hard jail time.”

Defrauded NFO Organization Classifications

Types

Cases

%

Welfare Organizations

26

22.81%

Service Clubs and Fraternal Societies’ Charitable

26

22.81%

Community Organizations

8

7.02%

Recreation, Playgrounds and Vacation Camps

7

6.14%

Services Other Than Hospitals

7

6.14%

Teaching Institutions or Institutions of Learning

6

5.26%

Support of Schools and Education

6

5.26%

Others

6

5.26%

Health Organizations

5

4.39%

Organizations Providing Care Other than Treatment

3

2.63%

Preservation of Sites, Beauty and Historical

3

2.63%

Education Organizations, (not elsewhere classified)

3

2.63%

(Welfare) Charitable Trusts

3

2.63%

(Health) Charitable Corporations

2

1.75%

Cultural Activities and Promotion of the Arts

2

1.75%

Other Denominations’ Congregations or Parishes

1

0.88%

Total

114

100.00%

NOTE: The full study is available at http://business.queensu.ca/centres/centre-for-governance/

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About the CA-Queen’s Centre for Governance at Queen’s School of Business
CA-Queen’s Centre for Governance goal is to raise the bar on Canadian governance research and convey that research’s implications to fellow academics, students and the public at large. Situated at Queen’s School of Business, one of the world’s premier business schools, the Centre conducts cutting edge basic and applied research on corporate governance issues dealing with such issues as fraud prevention through better internal control and improving Canadian securities regulation.  The Centre is also actively involved in the not for profit sector through the associated Fundamental of Governance for Boards of municipal, provincial and federal agencies, and not-for-profit organizations executive development course, case writing, applied research and the Voluntary Sector Reporting Awards, the first awards for transparency in financial reporting in the voluntary sector.
For more information about the study or to schedule an interview for either author (note that Mandarin language interviews are available), please contact:

Amber Wallace
Queen’s School of Business
613-533-3151


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