NGOs need help in halting increase in fraud

By Tshikululu Social Investments on 26 August 2011

Categories: Corporate Interest, NGO Interest

Have you noticed an increase in reports of nongovernmental organisation (NGO) fraud? Tshikululu’s CEO, Tracey Henry has, and doesn’t believe this means investors should run scared.

This article was first published by Business Day.

Our grant-making oversight has picked up as many cases (some not yet proven) this year as in the previous 12 years combined. And all around us we hear more stories of misrepresentation of accounts, or hidden extra payments to staff, or even outright theft. This is happening in a development sector under severe financial stress and holds lessons for private-sector funders of “good works”.

Although some reports of financial shenanigans are anecdotal, and there are too few definite cases to be sure of a trend, the danger of this proving to be one could result in greater fall-offs in funding to organisations and institutions whose work is especially important in tough economic times such as these.

Of the cases I know of, it is striking that they are not confined to poorly resourced, unknown nonprofit organisations, but often involve high-profile nonprofit brands with good developmental track records, including well-regarded schools and national organisations caring for the destitute. So what is happening here?

A polite interpretation may be that tightened governance requirements of funders of NGOs means fraudulent activity is more easily being picked up.

A less charitable view would be that these organisations present a relatively easy target to the unscrupulous, precisely because financial and other governance controls aren’t tight enough. Indeed, organisations set up to tackle socioeconomic problems tend to attract people whose main interests are social problems rather than organisational oversight and management.

That can be heaven-made for the predatory financial manager, admin clerk or fund raiser. Add the temptations that flower in a recession to the generally tight financial circumstances of people working with “good causes”, and it is a recipe for untoward behaviour. Playing in the background is a societal get-rich-quick mentality that celebrates material possessions over ethics and morality.

Where does this leave the private- sector social investor? First, now is not the time to be a fair-weather friend. In tough times, the social work of developmental NGOs increases but funding support falls. So it is that international funding of local NGOs has been cut back these past few years; corporate social investment spending has stalled; and state subsidies in some areas have been reduced.

It is a very hard climate for organisations whose work will always primarily rely on donations. Those with limited donor bases struggle to the point of closure and many cannot simply be replaced in the next economic upswing.

This is why corporate funders of developmental work need to add to their cash donations the provision of managerial, strategic and financial guidance. Basic things such as risk-management processes in NGOs are often lacking, sometimes through ignorance and a lack of money to implement them. Help in this, and in embedding stronger financial controls, along with mentorship provided through participation on NGO boards and other governing structures, is crucial.

Managing funding risks will always be important, and especially so when it behoves the funder to spot fraudulent accounts and reporting that NGO executives sometimes cannot see. Funding of NGOs needs to be strongly backed by other types of managerial and strategic support if business isn’t to find itself sucker-punched by the unscrupulous while being blinded by good intentions and sentiment.

An essential part of managing donor risk is to do your homework. This means diligently assessing financial reporting, scrutinising audited financial statements, reviewing the composition of recipient boards and identifying the people responsible for the day-to-day management of the organisation. This is in addition to a comprehensive review of the project objectives and anticipated outcomes.

While we shouldn’t take a simplistic view to restrict funding to NGOs and others working for positive social change, it would be wise to be more prudent in our choice of social investments and ensure the right checks are in place. And if fraud does affect a beneficiary partner, that doesn’t mean we should run for the hills. We should work with them to ensure that those responsible for malpractice are brought to account and that systems and processes are improved. That, after all, is what partnerships should be about.