I took a lot of flak from the Diamond Governance story, so it behoves to move forward and make the point more clearly. The essential point is that there are less interested stakeholders in non-profits, and therefore governance likely needs to be stronger.
Another way of putting it is that if fraud is your thing, non-profits are fertile territory. Or if you think non-profits mean trust, you are fertile territory.
Why this is will take more than a blog entry to write up, and as Jean points out there is lots of study in governance for non-profits. However, I'm aware of a bunch of fraud patterns, and I'll post those for when I see them. Here's one I've been aware of for a couple of years. It is based on certain daft legal provisions, and would disappear in an instant if the law were changed.
The government sued AmeriDebt and Andris Pukke two years ago, seeking $172 million in damages.Regulators accused the Germantown- based nonprofit of charging excessive and poorly disclosed fees to consumers seeking help managing their debt and then channeling millions to Pukke's for-profit company, DebtWorks.
AmeriDebt once was one of the nation's largest credit counselors but is now out of business.
AmeriDebt was a non-profit. That's because there is some stupid law that says that a non-profit can do debt consolidation and gain certain privileges over a for-profit firm in the same business. A subsidy, in other words. So, obviously at least in hindsight, a smart operator starts a non-profit, consolidates a lot of debt for a lot of stricken people, and then funnels the cash somewhere else. Here's some more hints:
As consumer debt skyrocketed over the past two decades, a new breed of credit counselor emerged, one that relied heavily on television advertising to promote its services and toll-free telephone lines to dispense advice, replacing the person-to-person consultations offered by older firms.As more aggressive firms proliferated, so did consumer complaints, prompting the Internal Revenue Service to begin auditing 60 credit-counseling organizations, including AmeriDebt, in late 2003 to see if they were misusing their tax-exempt status to benefit their owners. Those audits continue.
"Non-profit" equals no taxes, no audits, no owners. Now fill it with cash and see what happens. Likely, I will take yet more flak for this. All I would ask is, do you believe that a non-profit is safe from fraud because it is doing good works?
Posted by iang at January 4, 2006 05:41 AM | TrackBack