Employee theft ‘shockingly common’ at nonprofits
A board member for the Somerville Homeless Coalition was reviewing the nonprofit’s annual financial documents in 2015 when he spotted something odd. The forms said the chief operating officer, the No. 2 executive, earned $12,000 more than the organization’s top executive the previous year. Could that really be correct, he asked?
Turns out it wasn’t a typo. It was theft.
Somerville Homeless soon discovered that the COO — who handled all the finances — allegedly embezzled approximately $108,000 over 18 months. The charity said he brazenly added some of the money directly into his paycheck — where it showed up on the group’s annual financial forms — used the organization’s credit card for personal expenses, and added his middle-aged son to the group’s health insurance.
“The whole thing has been a nightmare,” said Mark Alston-Follansbee, executive director of the Somerville nonprofit, which provides food, shelter, and other assistance to about 2,000 people annually. “The money he stole from us could have prevented 100 families from going homeless.”
More than 1,100 tax-exempt organizations nationwide have reported theft, embezzlement, or other major diversions of assets over the past seven years, according to electronic filings with the Internal Revenue Service. And experts say the total number of thefts is almost certainly far higher, because most cases of fraud are either never detected or reported in the digital filings.
“It’s shockingly common,” said Gerry Zack, a certified fraud examiner who recently was named incoming chief executive of the Society of Corporate Compliance and Ethics, a Minneapolis-based organization.
To be sure, for-profit businesses are regularly victims of fraud as well. But some say nonprofits are particularly vulnerable for a variety of reasons: Many nonprofits are small organizations, led by people who are passionate about their causes but may not have a background in finance. Board members are typically volunteers, with limited time or expertise in oversight.
Thefts, in fact, can be hard to spot. For instance, when a contribution goes missing, the fraud may go undetected because donors generally don’t expect anything in return for their gifts, unlike business customers who usually complain when what they paid for never comes.
“There’s at least anecdotal evidence that would suggest nonprofits are more susceptible to fraud than traditional for-profit companies, said Zack, who also teaches classes for the Association of Certified Fraud Examiners, based in Austin, Texas.
The issue is particularly relevant in Greater Boston, where so many prominent institutions are nonprofits, including major hospitals, universities, museums, and research organizations. More than 70 nonprofits in New England have told the IRS they were victims of embezzlement or theft in recent years.
For instance, a bookkeeper was sentenced to two years in prison in 2016 for stealing $800,000 from the National Veterans Services Fund of Darien, Conn., from 2009 to 2014, writing checks to herself and then altering the ledgers to make it appear the money went to veterans.
Population and Development International, a nonprofit dedicated to helping the rural poor in Southeast Asia, reported its then-president diverted $950,000 for his personal use in 2012 when the group was based in Boston. The charity said the executive promised to make full restitution as part of a settlement, but a former director said no one was ever prosecuted.
And a former machine shop manager at Massachusetts General Hospital in Boston was sentenced to a year in prison in 2014 for stealing more than $640,000, in part by ordering tools and equipment for his own use as well as by selling leftover brass discs to scrap dealers after they were used in radiation treatments.
The problem is national in scope, touching some of the country’s best-known nonprofits. The American Museum of Natural History in New York City reported it lost $2.8 million in 2015 after an employee fell for an e-mail scam and erroneously wired the money. The museum reported the incident to police, but the perpetrators have yet to be identified or return the money.
The IRS asks tax-exempt organizations to disclose any significant, unauthorized diversions of assets (usually meaning theft or embezzlement) on a key annual filing with the agency, called a 990. The Globe found more than 1,100 organizations across the country have checked the box on forms filed electronically since 2011.
But the vast majority of nonprofits never even face the question. The IRS omitted the diversion question from versions of the form filed by foundations and most smaller organizations, while certain types of organizations, such as churches, are not required to file at all. And many organizations fill out paper forms, where the data are harder to compile. Overall, fewer than 1 in 7 nonprofits file the standard 990 electronically each year.
And even organizations that file electronic 990s aren’t required to report smaller thefts.
For instance, a temporary employee was caught in 2013 embezzling $68,000 from the Boston VA Research Institute, which supports medical research and education in the VA Boston health care system. The employee was sentenced to prison, but the nonprofit never reported the incident to the IRS, citing agency guidelines that say nonprofits need only report diversions totaling more than $250,000 (unless it amounts to more than 5 percent of the organization’s gross receipts or assets).
Many organizations fear news about employee theft could damage their reputations and make it harder to raise money from donors.
“Donors don’t want to be associated with anyone in the nonprofit world who has a bad news cloud over their head,” said Tom McLaughlin, a nonprofit consultant in Andover who has published several books on financial management in the sector.
So nonprofits typically avoid publicity when they discover someone pilfered funds. In some cases, nonprofits try to quietly negotiate deals to have workers leave or repay the organizations instead of reporting theft to police.
“I have had cases where they don’t want to prosecute,” said Janet Fohrman, a certified fraud examiner and chief executive of Fohrman & Fohrman, a nonprofit accounting firm in Laguna Hills, Calif. “They just want to sweep it under the rug.”
And even when organizations go to police, it doesn’t always result in criminal charges, because embezzlement cases can be difficult to prosecute — especially when they involve organizations with messy financial records or cash contributions that don’t leave a financial trail.
CRAIG F. WALKER/GLOBE STAFF
Pantry associate Marni Berliner worked at the Somerville Homeless Coalition’s food pantry.
The Somerville Homeless Coalition said it quickly fired executive Warren McManus after discovering the theft in November 2015. It also sent a letter to donors in March 2016 and reported the incident to the US Department of Housing and Urban Development, which supplies about one-third of its funding.
“We recently discovered that one of our employees engaged in financial misconduct that has led us to terminate his employment,” the group told donors. “We at SHC were shocked and disappointed, to say the least, by our former colleague’s breach of trust.”
A 2017 HUD report confirmed that independent auditors found funds were misappropriated. HUD said it referred the matter to its Office of Inspector General, which is charged with investigating fraud and misconduct.
But no one has ever been prosecuted or publicly accused of the theft. The group’s initial letter to donors did not include McManus’s name, and it asked recipients to treat details confidentially. And it hasn’t been previously mentioned in the media.
Indeed, the news was kept so quiet that the city of Cambridge passed a glowing resolutionpraising McManus, five months after his firing, for his years of service to young and disadvantaged people. Cambridge officials said they weren’t aware of the embezzlement allegations at the time.
Alston-Follansbee said he did not report the theft to Somerville Police because an agent with HUD’s Office of Inspector General told him he was handling the investigation and would notify other key officials. “I would like to see this guy in jail,” Alston-Follansbee said. HUD’s inspector general said it could not confirm or deny any investigatory actions.
McManus, who now lives in upstate New York, initially hung up on a reporter calling for comment. But he later called and e-mailed to explain the situation after the Globe sent him a letter by certified mail.
The 71-year-old said he handled the finances, purchases, and other key duties for the organization for more than two decades. “I ran the show,” he said.
McManus said he typically worked seven days a week and took only three holidays a year. Instead of taking vacations, he said, he generally paid himself extra for the time he had earned. But at some point, he apparently lost track of his hours.
“The problem became that I took more vacation time than I earned,” McManus said.
McManus also acknowledged that he added his adult son to the agency’s health insurance policy, even though Somerville Homeless said the son was never eligible. “He is a bad diabetic, so I put him on for a short time,” McManus said, adding that he later forgot to take him off the policy. “It is entirely my fault,” he said.
McManus said he met with federal investigators last Thursday, signed a statement concurring with several allegations, and agreed to pay back $61,854. (It’s not clear why the figure is less than the $108,000 Somerville Homeless’s executive director estimated McManus owes.)
“I’ll own up to it,” McManus said. “I’ll make full restitution.”
CRAIG F. WALKER/GLOBE STAFF
Carolina Deleon comforted her daughter Jereiwi De Los Santos, 4, at the Somerville Homeless Coalition Family Shelter, where they are guests.
But McManus said he hadn’t seen any allegations that he misused the agency’s credit card, so he wasn’t sure whether those allegations were correct.
And McManus said he feels the organization owes him as well. Shortly before he was fired, he said, he submitted an invoice for more than $50,000 for extra hours he worked. He said he got no response.
Meanwhile, Somerville Homeless said it has learned from the experience.
“We thought we had good controls and financial systems,” Alston-Follansbee said. “We found out we had neither.”
The organization has since replaced its auditors, hired additional finance staff, spread out the financial responsibilities, and implemented a new 150-page set of policies. It has also worked with HUD to address any outstanding concerns.
Alston-Follansbee said many donors were understandably upset after they learned about the embezzlement. But he said they have continued to support the organization. The group ended last year with a small surplus.
“People were angry, but they did not desert us,” he said. “We’re still here.”
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