Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER THIRTEEN

Financial Statement Fraud by Not-for-Profit Organizations

SO FAR, ALL OF THE SCHEMES DESCRIBED have involved commercial businesses, all of which have a motive of generating a profit. But there is another type of entity that operates quite differently, where making a profit is not the primary goal. There are more than 1 million not-for-profit organizations in the United States, and many more throughout the world.

Not-for-profit organizations do not have owners. As a result, their operating goals and objectives differ from those of a commercial business. Instead of maximizing profits, the goal of a not-for-profit organization, particularly a charitable organization, is to achieve a mission that forms the basis for an exemption from income taxes. Examples of charitable missions include social welfare, scientific and medical, religious, healthcare, and many others. Not-for-profit organizations with noncharitable missions include trade and professional associations, chambers of commerce, labor unions, and numerous other categories.

With a different goal, one that cannot be measured in terms of net profits, the financial reporting fraud risks differ as well. This is especially true when the most important financial measures revolve around demonstrating that a significant portion of an organization's available funds are devoted to its mission (which also means demonstrating that as little as possible is devoted to administrative costs and fund-raising expenses).

In connection ...