Help Desk FAQ: Reporting Fraud or Misconduct By a Maine Nonprofit

In the wake of nonprofit scandals both national (think Sandusky Foundation) and local (embezzlement by the chief executive of a York-based charity), fraud and misconduct are on people’s minds. While these cases make the front pages, it is important to note that the nonprofit sector is not more susceptible to this kind of fraud than the rest of the economy. According to the Association of Certified Fraud Examiners’ 2012 report,

…more than two-thirds of the victims in our study were for-profit organizations….Not-for-profit organizations made up the smallest portion of our dataset, accounting for slightly more than 10% of reported cases. Privately owned and publicly traded organizations also continue to suffer the highest reported median losses.

Nationally, the nonprofit sector represents approximately 10% of the economy so it appears we are no more and no less apt to suffer such abuses. The report’s key findings are instructive and a must read for nonprofit board and staff members with financial oversight responsibilities.

However uncommon, there are unfortunately instances of nonprofit mismanagement, and here’s what to do if you suspect fraud or misconduct by a Maine nonprofit.

Before You Report

1. Be Cautious

You may be certain that there has been wrong-doing or may just suspect misconduct, but either way, it is very important to be thoughtful about how you address your concerns.

• Be very careful about saying anything in public, by email or online that might damage the reputation of the organization or people who work there. You risk both personal and legal challenges if your understanding of a situation is wrong or cannot be substantiated.
• Understand your protections. Federal law prohibits all corporations, including nonprofits, from retaliating against employees who “blow the whistle” on their employer’s accounting practices. Many organizations have a “whistleblower protection policy” in place that applies to accounting practice reporting as well as other types of concerns. If you are a staff or board member, find out whether your organization has a policy in place and what it says to help you understand what procedures are in place to help you report a concern.

2. Gather Information

Public charities are required to make a number of organizational documents public. While these documents may not contain evidence of misconduct, it’s worth reviewing them. If you find the reports are incomplete or nonexistent, or if they contain information that is easily demonstrated to be false or misleading, these can be good starting points for calling for official investigation. Documents accessible to you that you may want to review include:

• Organizational documents
  An organization’s Articles of Incorporation and the corporation’s State of Maine Annual Report (which includes basic information about the organization’s directors) can be requested by visiting the Maine Bureau of Corporations “Interactive Corporate Services” and searching for the nonprofit by name. There is a fee per document ordered. Many organizations make their annual report to donors available on their websites and a few post their Articles of Incorporation and/or Bylaws online as well. For membership organizations, minutes and all books and records of accounts of the organization must be made available for inspection to any voting member for all legitimate purposes. Presumably, this includes Bylaws, financial information, and meeting minutes.

• Fundraising-related records
  Maine’s Charitable Solicitations Act makes publicly available a variety of fundraising-related records that must be filed with the State.  These include an annual registration application, an annual fundraising activity report, and contracts with professional fundraisers, which are available upon request from the Office of Professional and Occupational Regulation. You can look up charitable organizations that have filed for a license to see their license history and if any disciplinary action has been taken against them.
• Federal records
  Certain federal tax records must be disclosed, and copies must be provided for a reasonable fee upon request (usually immediately for in-person request and within 30 days in the case of written requests).  These include the IRS Form 1023 (the original application for 501(c)(3) status), the IRS’s 501(c)(3) determination letter, and the IRS Form 990 for the three most recent years. These documents can be requested from the IRS (usually for free, see IRS Form 4506-A).  Form 990s are available on Guidestar for free if you register. More details on these federal disclosure requirements can be found in IRS Publication 557, pages 13-15.  In general the disclosed information includes: the names and address (can be work addresses or simply the address of organization) of the organization’s officers, directors, or trustees; the names and salaries of the top five employees paid more than $100,000 annually; gross income for the year; dues received from members; expenses; the organization’s balance sheet; and total contributions, including gifts, grants, and government contracts. However, for reasons of privacy, charities are not required to publicly disclose the attachment to the 990 that includes an itemized list of all contributions of over $5,000, or any trade secrets.

3. Learn About Appropriate Nonprofit Practices + Resources to Prevent Fraud/Misconduct

It is important to recognize that actions by an organization that you do not agree with or approve of are not necessarily illegal. An important step in any case of suspected fraud or misconduct is to educate oneself before making a report. There are many resources available to help nonprofit staff, leaders and board members learn about legal responsibilities as well as best practices in nonprofit management.

• The Maine Attorney General’s office has compiled links to sections of Maine law relevant to public charities.
• Maine Attorney General’s Guide for Board Members of Charitable Corporations is meant to help board members understand their rights and responsibilities during service to a charitable organization.
• Association of Fundraising Professionals publishes a Code of Ethics.
• MANP’s Guiding Principles + Practices for Nonprofit Excellence in Maine provides nonprofits with a framework of best principles and practices related to a range of aspects of nonprofit management, including financial management, transparency and accountability, fundraising and governance. Tools are available to help organization assess their own practices.
• MANP’s Answer Centerincludes information a wide range of resources that describe and support nonprofit management best practices.
• Members of MANP can access phone or email support through our Nonprofit Help Desk. Staff can guide you to resources to help you determine whether the situation of concern is an instance of poor management or illegal activity.

Addressing Your Concerns

If after gathering information you still have concerns, you have a few options:

1. Work to Solve the Issue Internally

Consider trying to raise your concerns directly. The CEO or board president may be the most appropriate person to approach, but any board member or leadership team member who you trust can be a good starting place. It is a good idea to request a private meeting and come prepared with specific concerns and any evidence you have gathered. Be clear that you are bringing the issue to their attention because you wish to see it resolved rather than because you are seeking to place blame. If you are a staff or board member, be sure you are familiar with any organizational policies and procedures regarding the submission of complaints and/or whistle-blower protection.

2. Seek a Change in Leadership

A common complaint in the nonprofit world involves an Executive Director or Board President who is mismanaging the organization, whether or not fraud or misconduct is suspected.  Board directors and organizational members have certain rights under most bylaws and under the Maine Nonprofit Corporation Act that can be effective in forcing leadership change, such as calling a special meeting of the Board (or of the members, if it is a membership organization).  Sometimes even making preparations to call a special meeting is enough to persuade an ineffective leader to resign.

3. Make a Formal Report

It may be more appropriate, or feel safer, to make a complaint or report to the appropriate government entity.  You may wish to consult with an attorney before doing so, to better understand the implications for yourself, the organization, and any other individuals involved in the suspected wrongdoing. The process for reporting a complaint depends on the type of misconduct you suspect:

• Inappropriate Charitable Solicitation
  If you believe the organization has violated the public trust in relation to charitable solicitations (activities related to asking the public for money, selling products, using the charity’s name to entice sales) you can submit a complaint to the Maine Department of Professional and Financial Regulation, Office of Professional and Occupational Regulation.
• Violations of the Maine Nonprofit Corporation Act
  If you suspect violations of the Maine Nonprofit Corporation Act (Title 13-B M.R.S.) you can submit a complaint to the Maine Attorney General’s Consumer Protection Division. Common concerns include conflict of interest transactions, board composition problems, or board members not exercising appropriate “duty of care”.
• Violations of State Gaming Laws
  Reports about violations of gaming laws (such as illegal raffles, gambling activities, etc.) should be reported to the Maine State Police at 624-7210.
• Tax Law Violations
  If you suspect violation of tax laws, such as unreasonable compensation, excess benefit transactions (i.e., transactions in which an insider derives an undue benefit), or excessive lobbying or campaign activities, you can submit a report to the Internal Revenue Service (IRS).

Share Your Experience – Good + Bad

There are a number of charity and business watchdog organizations that allow members of the public to submit comments about organizations, such as:

• GuideStar
• Better Business Bureau Wise Giving Alliance
• Charity Navigator  (registered users may submit reviews)