Real Frauds Found in Not-for-Profits

Chapter 2Case 2: Grant Expense Allocations

Learning objective

• Analyze how procurement and expense allocation policies in a fictitious not-for-profit (NFP) entity can be circumvented and lead to possible fraud.

Before we start

Grantors and grant recipients may have a long-term and close relationship that could create fraud risks. For example, an NFP may be the only organization in a rural area that is able to provide certain services to a targeted population. Likewise, an NFP may have an excellent reputation in the community or region relating to the provision of specific types of services. In these situations, a grantor might be willing to provide less oversight to such organizations in exchange for the NFP providing exclusive or high-quality services (or both) to program beneficiaries.

Allocation of grant expenses can be a complex area if an entity has a number of grants from various grantors, with different compliance requirements, or complex compliance requirements.

An inherent fraud risk in NFPs receiving grants is they may feel pressure to misstate functional amounts to comply with grant provisions or debt covenants. Additionally, mission-driven employees and directors may be willing to allocate unallowable costs to grants in order to provide more program services.

Background

Happy Campers, Inc. is a 501(c)(3) corporation whose mission is to enrich the lives of at-risk elementary and middle-school aged children through a quality summer camp experience. The organization ...