Monday, March 31, 2008

Very Rich Philanthrocapitalist Frauds

When I recently blogged about the New Statesman's critique of "philanthrocapitalism", one thing I didn't address - but should have - was fraud.

Based on studies published in the Nonprofit and Voluntary Sector Quarterly, a NY Times article recently reported that fraud and embezzlement in the non-profit sector account for roughly $40 billion a year or around 13% of all philanthropic giving.

This is a gigantic number. Church-related organizations, government nonprofits, $25 million from Goodwill in Santa Clara County, all of them seem to be teeming with fraud.

The most costly cases, the study found, involved male executives earning $100,000 to $149,000 a year. In these examples the executives had generally been with the organization the longest. Perhaps the greatest reason why this is not being talked about more openly and publicly is the reason that one accounting professor gave,

'This has been going on for years, but there’s a feeling that it shouldn’t be discussed,' because of the effect it might have on donations.
Is this a case against philanthropic giving? Not necessarily. It certainly makes giving feel less secure, even though total U.S. giving is nationally on the rise. The original study, of course, lumped government and non-government "nonprofits" together, making it difficult to distinguish which forms of giving are more sound.

The Very Rich Philanthrocapitalists (VRPCs) donate large sums of their income to charities and foundations, which in turn are being appropriated by accounting frauds on a massive scale. When a private philanthropic foundation becomes a bureaucracy, not a privately-funded public interest organization, the risk of fraud increases. This seems to happen whenever large monetary surpluses are siphoned off to organizations with little or no oversight.

The article that I critiqued in on Saturday expressed disgust whenever philanthropists pay too much attention to the social returns from their giving, as if it were a contest. This study suggests that this expression is ultimately unfounded. With such high risks of fraud, greater accountability to the philanthropists makes more sense.

It is not feasible in my view to attack the intentions of philanthropists, or their social position in society, unless their positions were unjustly obtained. I don't assume, like many seem to, that their positions in society are ipso facto evidence of injustice. There is an important burden that must be met, as I explained in the comment section in Philanthrocapitalism. I do, however, think that the philanthropy sector itself can indeed be scrutinized and attacked for all its deceptive accounting practices and overt breaches of contract.

This study should sound the alarm for Very Rich Philanthrocapitalists, and perhaps everyone should be less careless about what happens with their stocks and flows.


Muser said...

Interesting blog. The 13% sounds a bit high. I wonder if there are other studies out there. The VRP's usually don't give much to something like a local Goodwill or the United Way (which as had some problems) but establish their own foundations and presumably have a strong interest in blocking embezzlement, and sharks for accountants. The non-profit "industry-standard" for fund-raising is that at least 75% of money taken in should be spent on the cause, with 25%, at most, going to cover the fund-raising efforts. By law, foundations have to give at least 5% of the principal to whatever their dedicated causes are. Parts of the non-profit sector can be interesting and satisfying in which to work; others, not so much. I think the ACLU is about to begin a big fund-raising campaign. I can't imagine why they're so alarmed by the Bush administration. Go figure!

Mike Edwards said...

There are certainly cases of financial fraud in non-profits, but the study you mention is worthless in both social science and policy terms. It doesn't use any hard data on the actual incidence of fraud among non-profits - it simply extrapolates a percentage lost from fraud in government and business and applies it to the non-profit sector. So your conclusions are mis-drawn. Studies like this should definitely carry a "government health warning!"

And while I'm here....instead of relying on the New Statesman's recent piece on "philanthrocapitalism", I'd recommend your readers take a look at the real thing by downloading "Just Another Emperor?" for free from makes a much more rigorous argument than the piece you attack.

Acumensch said...

I was going to write more about philanthrocapitalism when I found the Just Another Emperor link earlier yesterday. Thanks for posting it though. The New Statesman article was sent to me by someone who wrote a positive review of it, and that's why I wrote a response to *that* article in particular.

And, if the study I'm citing is useless as you say, perhaps I can be consoled by the fact that the New York Times used it. Were you suggesting there's more fraud or less fraud in philanthropy than the study said?

Mike Edwards said...

Well, you know as well as I do that not everything printed in the NYT is "gospel", as they say...I'm suggesting that we lack any reliable macro-evidence to compare the incidence of fraud in the non-profit sector as compared to government and business, and until we have it, I think it is irresponsible to make bold public claims about the matter.

Acumensch said...

Yeah, Judith Miller's WMD "gospel" from 2003, for example. But fair enough. I think your point is a good one. And I don't think my overall point that VRPs (or VRPCs) are not to be assumed "guilty" for simply being rich either then. Unless better evidence comes in, I should say. I still haven't had the time to check Justanotheremperor, but I have spent a lot of time reading about inequality in general from social-philosophical perspectives and reject many of the standard leftist analyses.