Over the years, we’ve seen an increase in unethical practices by charities…very similar to the for-profit industry. There are five areas plaguing the nonprofit industry which can lead to fraud and financial abuse: accountability, salaries & perks, conflict of interest, fraud and tax evasion. Public confidence in nonprofits has decreased year-after-year. This loss of trust can jeopardize revenue (donations) and survival of the organization.
Salaries and Perks
Inflated salaries are more accepted in the for-profit industry. Nonprofits are offering inflated salaries, large travel budgets, housing allowances, forgiveness of loans and other perks, raising ethical concerns amongst the general public. These perks, whether given to employees and/or members of the board, are a grave concern, especially if at the same time the organization’s efforts are underfunded.
Additionally, I have seen firsthand where a Board of Directors gives an employee a title in a feeble attempt to justify a higher salary, even though the employee was not performing any responsibilities generally accepted for the title.
The IRS has extensive regulations and penalties in place for excess benefits, including the compensation of employees. A nonprofit (and the employee) may face the following penalties:
Initial penalty as high as 25% of the excess benefit
The individual who benefited from the transaction may be personally liable
Further penalties equal to 200% of the excess benefit may be imposed if the transaction is not corrected in a timely manner
To avoid this, boards must annually review salary survey data. Salary surveys are abound including those conducted annually by the NonProfit Times and the Chronicle of Philanthropy, to name a few. The board must annually compare staff salaries with those of other nonprofits of similar size (revenue, expenditures, number of program recipients reached, etc.). The comparison must also be for equivalent job responsibilities, no matter the employee title.
If you are considering making a donation to a charity, you can personally check the salary of the top employee at the nonprofit. This information is included in the organization’s annual IRS 990 reporting form. You can obtain a nonprofit’s IRS 990 reporting form online at the Foundation Center’s 990 Finder.