FRAUD IN THE NONPROFIT SECTOR: REBUILDING A CHARITABLE IMAGE

Abstract

Nonprofit organizations are at an increased risk for the occurrence of fraud due to their inherently trusting nature and the limited availability of resources for fraud prevention measures. Because charitable organizations rely on positive public image and donor perceptions of organizational effectiveness for continued funding, it may be difficult or impossible for a nonprofit to remain financially viable once fraud occurs. We conduct an experimental investigation with potential donors to determine which actions improved the likelihood that they would contribute to a nonprofit organization following a material misappropriation of assets fraud. Modifying and enhancing board of director oversight had the highest and only statistically significant positive effect on potential donations. Moreover, firing an Executive Director, who was not involved in the fraud, reduced both the likelihood and amount of planned giving.
“Companies have products and services. Even if a company is criticized, selling products and services will continue to generate revenues. Nonprofits, on the other hand, depend on donations that are primarily given on the basis of the organization being an honorable and effective one. Put simply, their reputation is really all they have.” (Jaeggi, 2014)