The Washington Post recently reported that an administrative assistant admitted to stealing more than $5 million from the Association of American Medical Colleges (AAMC) in one of the largest embezzlement schemes at a Washington area nonprofit organization.  AAMC said it would “apply the lessons we have learned from this experience, as well as share them with others in the nonprofit community.”  A few days earlier the Post reported on an alleged embezzlement at the Progressive Policy Institute (PPI).  A month earlier the Post reported that the American Legacy Foundation (Legacy) had allowed a $3.4 million diversion of assets to go unreported for 3 years and then minimized its impact on its Form 990.  Following the Post report, Senator Charles Grassley (R-IA) requested that Legacy provide context and understanding for its actions concerning the alleged $3.4 million embezzlement.  Beyond the embezzled funds, Grassley says that Legacy’s Form 990 contains several entries regarding fundraising, administrative expenses, travel expenses, and salaries that raise more questions.  In fact, Grassley’s letter contains 30 requests for information to which Legacy was asked to respond.  Many of the items relate to Legacy’s financial governance and, therefore, the underlying internal controls.

Why Does This Happen?

A primary responsibility of management and the board is to ensure that an organization is accountable for its finances to contributors, members, the public, and government regulators.  All too often, however, internal controls are poorly designed, misapplied, and misunderstood.  According to the Post, PPI’s CEO stated “We didn’t have our systems up and running, and it didn’t cross folks’ minds at that point as something that needed to be watched.”  AAMC’s CEO told the Post “We are truly stunned,” while acknowledging that “nonprofits have lacked some of the rigor that is enforced in for-profit organizations on monitoring finances.”  So why is this lack of rigor prevalent in even the largest and most prestigious nonprofits?  The problem stems from a lack of understanding about the controls that support effective financial oversight, as well as insufficient resource allocation for those controls.

Lessons Learned

The recent exposés of Legacy, PPI, and AAMC illustrate the consequences of poor internal controls.  Nonprofits should take this opportunity to review their governance and financial reporting activities, specifically the completion of the Form 990, the intake process for whistleblower reports, and the approach to internal controls.

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