The Nonprofit World

If you follow the news closely enough, you're bound to read almost weekly about a case of financial scandal and/or embezzlement. And if you're keeping track, it doesn't usually involve the Enrons of the world. While the national media gives notoriety only to the biggest, the reality is that 4 out of 5 times these scandals invlove nonprofit institutions.

According to a 2008 New York Times report by Stephanie Strom, fraud and embezzlement in the non-profit charitiable sector account for a loss of $40 billion a year. It's an eye-opening read at:
http://www.nytimes.com/2008/03/29/us/29fraud.html?_r=1&scp=1&sq=strom+light&st=nyt
Before I get back to that article, let me say that I worked at a not for profit organization for 12 years. It was not a charitable organization, but it still relied on the kindness of strangers ('members') to provide the operational compensation and infrastructure. These 'members' were not individuals, but rather other organizations that banded together in the name of sharing services. Those other organizations, of course, got their funding from either end-use customers and/or taxpayers.

While this sounds like a great money-saving idea, in practice it doesn't work so well. Whether it's a nonprofit charittable entity, or a not for profit trade association, or (egads!) a governemntal entity, it lacks two things that matter the most to successful organizations: Competition and oversight. Without competition, no one has any external motivation to be above average, and eventually the organization will be run based on jumping over the lowest bar possible.

But to get back to the New York Times report mentioned earlier, it's oversight that's the real problem. Even though I was directly involved in more than one annual audit each year as a benefits/finance director, I could identify many instances where the wrong person in the right place could have misappropriated or embezzled funds. Even if that didn't happen, on many occasions I witnessed our executive director allow member dues to be used for questionable expenditures. The best example was always sending him or his favorite friends/employees to resorts for all-expense-paid conferences at which no one had any business attending. The board of directors either wasn't told or didn't care about this, after all, they got to go to some of those conferences, too. Take my word for it, this happens frequently at nonprofit/govermental institutions.

I was reminded of this again over the weekend when a financial scandal was revealed at the Iowa Association of School Boards. It's a classic case of lack of oversight in one of the most non-competitive worlds out there, public schooling. And it makes me ill, because it's another waste of my tax dollars. (Follow the trail....I pay property taxes, which go to my school district, which uses them to pays dues to the Iowa Association of School Boards, which misappropriates them.)

Anyone living in central Iowa will also remember the CIETC scandal of a few years ago, when a state jobs training agency was exposed to have misspent millions in Iowa taxpayer dollars. At least people went to jail for that, although I don't recall getting my tax money refunded.

Let's all wake up and smell the coffee. We don't need better oversight of nonprofits/associations/governments - we simply feed fewer of them and the noncompetitive, non-oversight world in which they exist.