By Elicia Tedrow

In recent years, the questionable and dishonest practices of a few charities has cast a shadow on the whole nonprofit sector. One of the biggest and most appalling cases of charity fraud uncovered recently is the $187 million fraud carried out by four affiliated cancer charities operating from Tennessee and Arizona. James T. Reynolds Sr. and his family members ran The Cancer Fund of America, The Breast Cancer Society, Cancer Support Services, and the Children’s Cancer Fund of America under the guise that funds were going to help cancer patients.

However, the Federal Trade Commission (FTC) and over 50 state and local agencies have filed suit against the organizations and their operators, because they didn’t use the funds the way they claimed. Instead of going to cancer patients, 97 percent of the funds raised went to the defendants, their family and friends who used them to pay for luxury vehicles, gym memberships, vacations and other personal expenses.

Even well-known organizations are subject to scrutiny. For example, the American Red Cross has been criticized for the mismanagement of Haiti relief effort funds leading to media and governmental investigations.

Because of the actions of a few charities, legitimate nonprofits that are using funds honestly are increasingly faced with the challenge of gaining donor trust. What steps can nonprofits take to overcome that challenge and avoid any implications of fraud?

Transparency

Transparency is key to establishing trust with donors and constituents. In order to do that, organizations must be open to sharing information about fundraising such as: what the funds are going to, who is receiving them, how they are raised and other data that is safe to share publically. Organizations like UNICEF make their financial annual reports accessible online, so that potential and current donors can view them.

Nonprofit fundraising software has made it even easier for organizations to actively track their donations and other finances in one place.  For instance, DonorPro CRM users can use the reporting tools to create and download custom reports or download a basic finance summary. This also decreases the chances of human error that can be common for organizations that still manually input figures into spreadsheets.

Restricted Gifts

According to a study by researchers from the College of William and Mary, Rutgers University, and the University of California at Davis, restricted gifts could help prevent charity fraud. Restricted gifts allow donors to specify how donated funds will be used. For example, a university scholarship or the building of a new hospital or nonprofit facility could be considered restricted donations. In the study, those that received restricted gifts were 20 percent less likely to be fraudulent.

This doesn’t mean that all of your donations must be restricted. Some donors, especially lower level ones, may just want to give whatever they can and prefer that it is used where it is needed most. However, offering restricted gifts to donors and then acting out based on those specifications can help nonprofits build trust and a reputation of honesty.

Governance

It is important for nonprofits to establish a documented process to review forms and data internally to avoid clerical errors that could result in fines and a tarnished reputation. If one person within an organization makes a mistake or uses funds negligently, it could ruin the reputation of the entire nonprofit. This is why good governance practices are essential. In addition to restricted gifts, the study found that practices like undergoing financial audits and asking board members to review tax filings and conflict-of-interest policies helped decrease the chances of fraud by 20 percent.

After all those precautions, you can offer givers ways to research your organization, so that they feel more comfortable supporting. For example, Charity Navigator evaluates nonprofits on several factors and ranks them on “best of” lists.

With all the forms and staff to manage, legitimate charities can make honest, unintentional, or overlooked mistakes that can get them in serious trouble. Furthermore, smaller organizations may be understaffed and overworked, causing them to simply overlook an important detail. Givers are more keen to do their research before supporting, now that they have more technology and tools at their disposal to help them. Nonprofits need to take necessary measures to prevent fraud and preserve their integrity.