Have you ever wondered what goes on behind the closed doors of nonprofit organizations? Join Ken Berger and Peter York as we pull back the curtain on the dark side of the nonprofit world, exposing the impacts of unethical and incompetent CEOs. In our candid discussion, we share firsthand experiences with leadership failures—from neglecting office duties to engaging in Medicaid fraud—and offer strategies to foster accountability and integrity within these organizations. We're not merely swapping war stories; we aim to arm you with the tools to confront these critical issues head-on.
As we traverse the complex landscape of nonprofit governance, we delve into the prevalence of fraud, the cultural factors that discourage whistleblowing, and the ways in which public perception can shape donor behavior. But it's not all about the problems; we also celebrate the sector's triumphs in combating fraud and reinforcing strong ethical practices. You'll hear how financial reporting and controls differ between nonprofits and for-profits and why transparency and rigorous financial oversight are non-negotiable for maintaining trust and efficacy in the social sector.
Wrapping up this eye-opening episode, Ken and Peter explore how advanced analytics and IRS data can serve as early warning systems for mismanagement. We extol the virtues of the cost per outcome metric and its transformative potential for the nonprofit world, while also touching on the variability of state audit requirements and the pivotal role of attorney general offices in nonprofit oversight. This episode isn't just a call to action; it's a testament to the many nonprofit CEOs operating with honor and a guide to ensure that integrity remains at the heart of social good. Tune in to gain a richer understanding and participate in the movement towards greater transparency and accountability in the nonprofit sector.
Have you ever wondered what goes on behind the closed doors of nonprofit organizations? Join Ken Berger and Peter York as we pull back the curtain on the dark side of the nonprofit world, exposing the impacts of unethical and incompetent CEOs. In our candid discussion, we share firsthand experiences with leadership failures—from neglecting office duties to engaging in Medicaid fraud—and offer strategies to foster accountability and integrity within these organizations. We're not merely swapping war stories; we aim to arm you with the tools to confront these critical issues head-on.
As we traverse the complex landscape of nonprofit governance, we delve into the prevalence of fraud, the cultural factors that discourage whistleblowing, and the ways in which public perception can shape donor behavior. But it's not all about the problems; we also celebrate the sector's triumphs in combating fraud and reinforcing strong ethical practices. You'll hear how financial reporting and controls differ between nonprofits and for-profits and why transparency and rigorous financial oversight are non-negotiable for maintaining trust and efficacy in the social sector.
Wrapping up this eye-opening episode, Ken and Peter explore how advanced analytics and IRS data can serve as early warning systems for mismanagement. We extol the virtues of the cost per outcome metric and its transformative potential for the nonprofit world, while also touching on the variability of state audit requirements and the pivotal role of attorney general offices in nonprofit oversight. This episode isn't just a call to action; it's a testament to the many nonprofit CEOs operating with honor and a guide to ensure that integrity remains at the heart of social good. Tune in to gain a richer understanding and participate in the movement towards greater transparency and accountability in the nonprofit sector.
Welcome to the Nonprofit Fix a podcast about the nonprofit sector where we talk openly and honestly about the many challenges that face the sector where we will discuss current and future solutions to those challenges where we explore how the nonprofit sector can have much more positive impact in the world. A podcast where we explore how the nonprofit sector can have much more positive impact in the world.
Speaker 2:A podcast where we believe that once we fix the nonprofit sector, we can much more dramatically help to fix our broken world.
Speaker 1:All right. So hello everybody to the newest episode of the Nonprofit Fix. I'm here with my colleague Peter.
Speaker 2:York. Hello, hello, good evening afternoon. It depends on what time you're listening. Good day, good day.
Speaker 1:And welcome to all of you fellow hopefully nonprofit fixers, or future nonprofit fixers, or supporters of nonprofit fixers, or future nonprofit fixers or supporters of nonprofit fixers. Today's episode continues one of the series that we have here that we've referred to as the exhausted sector, and this would be a third in that series of episodes. The last one we did was on nonprofit boards. I think that in the series, I think that was episode eight and this is, I think, the 10th episode, if we put them in that order At any rate. So today we want to move on to the other side person that reports to those boards, and that is the CEO or the executive director of the nonprofit organization, and for this podcast we're going to just use CEO as the title that encompasses both or comparable titles, you know, the leader of the nonprofit, the head staff person. And once again we're going to move into what I think is one of those uncomfortable conversations that we here at the Nonprofit Fix aspire to having more frank conversations about talking about CEOs that are unethical, incompetent or just plain not nice. So it's a big universe of things, but we're going to dive a little bit deeply into it and identify those things that are clear and perhaps measurable, and those things that are more ambiguous. And, as always, we hope to give you some suggestions for how to deal with these situations when you face a leader like this. And, of course, for those of you who are CEOs listening, hopefully it's just food for thought for you to avoid these things at all costs, if you can.
Speaker 1:First, I just want to give a brief history of my journey with bad CEOs. I think I may have covered some of this before, but I have to say that when I look back on the jobs that I've had where I reported to a CEO, unfortunately in the vast majority of cases they fell into one of these categories, that is, either unethical, incompetent or just really not nice people. However, I do know that when I compare notes with other nonprofit leaders, more often than not they can tell at least one similar story along their journey. So therefore, I think it's another example of something we don't like to talk about much, but we all face at one point or another in our careers, and for me, the first CEO I worked for wasn't necessarily unethical per se, but he often behaved frankly like a jerk. He'd yell at us both in public and private. He was hypocritical and he was often very cold and indifferent. I mean he was just not nice, was often very cold and indifferent. I mean he was just not nice.
Speaker 1:Next up was a CEO who had been in the job for many years, and when I got there, he averaged spending about 15 to 30 minutes a day at the office, and he would focus those 15 to 30 minutes on schmoozing with other people.
Speaker 1:He didn't really do any work. Or if he wasn't schmoozing with other people, he was calling a contractor that was building a retirement home for him in Florida because he wanted to talk about the molding on the wall and those kinds of details in his house. And so while I was there, there were government funding cuts, and so he assigned me, as one of the chief operating officers, the task of laying off many staff to cut the agency's budget by a few million dollars and also freezing everybody's salary. And while he did this, at the same time he got the board to double the amount of money they were putting into his lucrative pension fund because he was nearing retirement. So he did the two things at the same time that he did this, and when he finally retired he was hired and I've seen this a number of times and he got a hefty fee as a consultant to the new CEO, who could call him anytime, which ended up being almost never while he sat in his brand new home in Florida and took this major consulting fee.
Speaker 2:So where on your spectrum does that example fall? Unethical, incompetent, not nice, it sounds unethical, yes it's unethical.
Speaker 1:But I think as we go, there are levels of unethical behavior, and so he's ripping off the organization. He's ripping off, in my opinion, the public as well, but it would be something that it would be difficult to identify, necessarily. It would be harder to dig in deep to find that out if we just look at, let's say, the 990s or other data. But this is nothing compared to the next experience, which gets us to the end of the road. A CEO colluded with her boyfriend and engaged in massive Medicaid fraud for funds that were supposed to be dedicated to serving healthcare needs of homeless people my gosh, and then us actually. And then there was another organization where I was on the board. It was a very large organization. They had been found guilty of medicaid fraud in six states thanks to the unethical behavior of their ceo. So in and by the way, just so, those are the stories, but just in terms of how I dealt with it, really quick, in a couple of cases I left, I just quit, or they were basically don't let the door hit you on your way out. They wanted me out of there, but in one case I was able to get the problem reported to the board and the CEO was ultimately held accountable, and the CEO is ultimately held accountable. It was a hard road to get that accomplished, but we can talk about that in terms of solutions near the end of this.
Speaker 1:So, regardless, if you are someone who believes in the nonprofit sector and in honesty and integrity, these are really upsetting, stressful and disheartening kind of stories, and you were talking earlier, before we started recording this.
Speaker 1:You know part of the audience we hope for our podcast are people who are new to or are thinking about joining the sector, and our intention is not to scare you away by any means because, as Peter rightly points out, you can see just as much problems and you know, the way I would put it is the it is the grass always looks greener on the other side of the sewage treatment plant. But in fact, it's not to say that there aren't these kind of problems in for-profits or in government, but I just think you need to be prepared, because I think sometimes people go into the sector thinking well, these are the good people, these are the ethical people, because they're doing it on a mission and it's all going to be better than it might be otherwise. Well, people are people and there's a certain percent of people that are just not going to do things right. Go ahead, please.
Speaker 2:No, I was going to ask, actually, you know, just a question along those lines and what do you think are some of the root causes and how unique is this right to the nonprofit sector? Because I have some theories and you and I were talking about this before, but I think that's you know. There are hypotheses and I think you're kind of putting forth a hypothesis that the nonprofit sector has. It doesn't mean it's widespread, like it's 50 percent of the sector, but there's. There is a level of of unethical fraud and incompetence that the sector struggles from. Fraud and incompetence, that the sector struggles from. That at least as I listened to you talk about it and others as well and we've done some research on this before this episode is that it does appear that it happens, and maybe it's easier to happen in the nonprofit sector, in certain organizations. And why might that be?
Speaker 2:It doesn't mean fraud doesn't happen in the for-profit sector, but what are some of the differences and do you think that it happens more in the non-profit sector? And I do wonder how you know the answer to that question. Is it more likely? And I do think we have some interesting theories about this, but what are your thoughts? Does it happen more and, if so, what's the root cause about this? But what are your thoughts? Does it happen more?
Speaker 1:And if so, what's the root cause? Well, to be fair, because I haven't spent more than a year thanks to you, because that's when I worked with you as a for-profit. I haven't had that much experience at that and it would be hard for me to make that comparison. It would be hard for me to make that comparison, but I think some of the unique circumstances that can create this in the nonprofit sector relate to things such as the thing that we ring the bell about constantly, which is that the metrics, the way that we measure how nonprofits do, how they perform, is really wanting and weak in terms of what matters most in terms of thinking about how do we meet our mission. More importantly, how do we achieve our outcomes? The metrics are just very, very vague. The people who are typically rewarded the most are those who are the best storytellers, and so you're a good salesperson. You don't have to be an ethical person. You should be a salesperson. There are ethical salespeople, but it's about sales and storytelling and also bringing in a lot of money. Bring in a lot of money, grow, grow, grow, and it's all about growth. Those kind of things are sort of like off the mark to what's most important to the nonprofit. So I think there's a cultural sort of incentivized structure that can lend itself to a certain number of people coming to it with skill sets. That may be good in one sense, but when it comes to the ethics and the core of the mission, they may not have those qualities. So I think that's that's one thing, and then you know the nature of of what we've talked about, all these other problems you have.
Speaker 1:As the author of Good to Great observed, one of the differentiators between the nonprofits and the for-profits is nonprofits typically have many more stakeholders. In one sense, that can make it a much more accountability to more people. But in another sense and if you have a board of 20, some odd volunteers that don't have the expertise, it's a great way for you to hide and duck and cover, because you've got all these people moving around and so there's no one person or one group of people necessarily that really know what you're doing. I know from my experience as a CEO that I can shape what the board knows. I can withhold information if I want to, or I can just bury them in information. There's all kinds of ways. If you want to abuse the system, there are ways you could do it if you want to, and if you don't have the appropriate checks and balances, well, it's interesting along those lines.
Speaker 2:So, in doing a little bit of research and asking this question does the sector have higher rates of fraud? There's really not a lot of good answers out there, but there were some papers out there that did find some interesting things, so let me share a little bit about that, as I know there's not a lot of research on this. I think this is an opportunity, and I think one that we're going to be examining a little bit here at BCT, as we have the 990 data is really start to begin to look at this and what can we learn and start to examine this issue. And there's some data trails and indicators, but a lot of this is hidden. Part of the challenge of this it's analogous to trying to find child neglect. By its very nature, it becomes underreported.
Speaker 2:But what we can say is that the available research does provide some insights into comparison of fraud rates between non-profit and for-profit sectors, albeit not great data. But the challenge is it really does not directly offer comprehensive comparisons. I will note that there was one study that addressed this comparison and found that, despite perceptions of higher fraud prevalence in nonprofit and smaller firms compared to for-profit and larger firms, there is a significant likelihood of whistleblowing in larger organizations, regardless of their for-profit status. So this suggests organizational size, rather than their profit orientation, if you will, might play a more crucial role in fraud reporting. So that's the reporting side of it and the intentions. So, and employees at for-profit organizations were more likely to whistleblow than those at nonprofits in this study, indicating that there are also differences be the culture, that culture in some way this study is indicating. It's not definitive, but it's indicating there might be something interesting about the nonprofit culture that creates a little bit less whistleblowing than you might find in for-profits, and size also matters.
Speaker 1:Yeah, you know, I think also the regulatory environment of a particular type of nonprofit can have an impact as well. Let me, let me, let me just say a couple couple things that sort of get back to and bring it back to this point. I just want to conclude a couple things, and I think part of the reason that this stuff is often not talked about is because I think people have a worry that if the public gets wind of this sort of thing and the severity of some of these cases, they'll be less likely to donate to nonprofits. Charity Navigator to be the one on television talking about these fraudulent cases and trying to figure out a way to mitigate that impression while that was what the reporter wanted to talk about and also in my experience, most donors are not typically swayed by the fraudsters and I think they tend to have the view that the organizations they support are not within that universe.
Speaker 1:But there are some silver linings in the stories that I just recounted, and one that I just want to emphasize again is in the cases where fraud occurred and there were more than one where fraud occurred, there was another one too the practices were discovered and they were discontinued. The practices were discovered and they were discontinued, and in most cases the bad CEO was fired. In some cases they weren't, but the bad news was they generally got to keep their ill-gotten gain and the agency and the public paid the price of the scandal, and governmental paybacks at least helped to mitigate some of the public's loss. But in every case and here's the final bit of good news in every case that I'm aware of, the agency was ultimately able to right itself and put in place controls to minimize these sort of things happening again in the future. But I think that the ultimate thing we need to look at is are there ways that we could identify?
Speaker 2:these kind of situations, or at least the most egregious, start to dissect this, this problem becomes interestingly complicated. I do think that one of the issues that we also need to talk about, I think, has to do with the kind of financial accountability and where it lies and how it's different Again, not to try to pit nonprofit sector against the for-profit sector, but we do need to think about it as this when you have shareholders in a for-profit model that are expecting a return on their investment, they're expecting profit, they're expecting the analog of a dividend. They're expecting some payment, the analog of a dividend. They're expecting some payment. The accounting systems are going to. There's accountability to make sure your financial management, your accounting of what's going on is, if there are errors, your shareholders are going to dissect it because it's their bottom line, it's the money going into their savings account. It's their money, their return on their investment that they're expecting. And if you try to play with those numbers and you don't do the accounting right, it's probably quicker to find that kind of problem within a model where you've got all these shareholders, especially a model where there are shareholders I'm not talking about the small, you know family market on the corner, those you hear kind of the horror stories of some of the small businesses and what happens as kids take over, things like that all kinds of things happen, but when it comes down to this so another very relevant aspect when we're comparing this problem and where the nonprofit sector struggles with it, it really is at its root, and I'm also citing a paper here on this.
Speaker 2:Uh, by god, I know burks in 2015, but there's a comparison of accounting errors which can be indicated indicative of fraud or mismanagement.
Speaker 2:Public charities, um, a significant portion of the non-profit sector report accounting errors at a rate 60 higher than publicly traded corporations and almost twice as high as similar sized corporations.
Speaker 2:So this incidence errors it could suggest that there's a greater potential for fraud or financial mismanagement in the nonprofit sector due to less stringent financial controls or oversight. I would argue that that paper is not going far enough to be able to realize that the reason those financial controls or oversight are not there is again. We don't have a bottom line where there's a quid pro quo I'm giving you money and I expect a return. There's not some kind of profitability metric that is so dependent even for a small family business, in terms of their livelihood it's what they're going to live on. It's the gravy, and at some point you have to really get those numbers right. When you're essentially accounting for something where there's no consequence if you make accounting errors, it becomes easier for some people who are crooked, unethical or mismanagers. I would think to be able to mess with the books because there's there's less dependencies, if you will, of some of the folks out there.
Speaker 1:Now I'm throwing this out there, riffing on this, this article. What are your thoughts? Well, what I know from the non-profits that I've worked at, up to and including the one I work at now at spectrum 360 um, every year there is an annual audit by an independent third-party auditor and they go pretty deep into your financial records to check for any kind of errors, miscoding and the like, and so there is that control in place and you know if the nonprofit is doing things right. There's even a point at which the auditor will meet privately for at least a few minutes with the board to see if there's any concerns they have that haven't been reported. There is a management letter if there are fiscal practices that are problematic, and you know so. There is a tool like that.
Speaker 1:So, so, like in the cases that I think of the fraud was more like when it comes to Medicaid fraud, falsifying the records of of who was being served, which is harder, which is harder to track, track down than's, say, an accounting era. So they were. You know what I'm saying, you know it's just those were the type of things that or having you know, having somebody on a contract that's a close relative or your lover, or something like that, and not having, and then them cooking the books on the programmatic side. So when it gets to the accountant, on the face of it it appears to be accurate. That's what I ran into no-transcript.
Speaker 2:So, and part of the reason is because and that wouldn't happen in the for-profit sector either, but the bottom line is that. But when you have a bottom line, when you have profits that are trying to be calculated and there's all kinds of ways to do that I think that one of the challenges we have in our sector, in the nonprofit sector again and it comes back to stuff we've mentioned in previous episodes is the idea that you know, at best, what we have is outputs. You just talked about Medicaid and what you're really talking about is payment for service, fee for service, right, and a fee for service is something that depends upon outputs, just counting people served, and if you're a large enough organization, there's got to be margins of error just in the tracking and monitoring of all those individuals. At some point it was very hard to audit the actual service of numbers served.
Speaker 2:Those numbers served a lot of what you're describing too, by the way I just want to call out, are government-funded fee-for-service models right, and where there's opportunity Medicaid is a common one that there's just a lot of fraud stuff that's potential there because of, again, and I think it's because we have such a orientation just, you know, fee-per-service, I mean, you, you're basically tracking and monitoring all that and that, if that's the fundamental piece of where your dollars are coming from, um, and you have a lot of it uh, you're very much dependent, not just on your accounting systems, you're very dependent upon your program administrative systems that are telling you and the connection between those and your payment systems, and so there's a lot of, a lot of, um, human error potential, because all these systems are having to talk to each other, just receiving those payments.
Speaker 1:So let me just add fuel to your fire, especially when it comes to the limits of audits and the imperfections of audits. I've worked in a number of places where the auditors will say the organization has more than adequate internal controls. And if you ask the organizational leadership, show me your internal control manual. They don't have such a manual. So that's number one. So what does that mean in terms of checks and balances? What is the internal control manual? Would tell you. For example, what is the maximum amount that the CEO can authorize for payment without board approval? Well, if you don't have that specified anywhere, the CEO could just approve anything for anything without any real monitoring. Here's another example you have a system where you have to have two check signers and it turns out that one of the check signers uses a stamp, or they assign somebody else to stamp the checks, and so there's no. You know, it's like I run into stuff like this. And then, of course, we've talked about the art of how we record our overhead and you know our expenditures for this, that and the other thing.
Speaker 1:There's plenty of ways to play the system and still come out with a good audit. So I'm all about. I'm just saying that in terms of accounting errors. That may be one thing, but there's like lots of ways to play a system if you really want to, and I've seen those games played many times because of these kind of lacks. Oh, and the last thing I've mentioned is that who's the auditor want to make happy? Who's the auditor ultimately accountable to? Yeah, they want to keep their reputation and they want to make sure that they appear on the public's mind to be good. But you want to make the CEO happy, and so you want to make sure that they're as satisfied with the results as possible, because they could ultimately influence the board as to whether you continue to have the job, and so there is a necessarily not necessarily a lack an adequate amount of independence in some cases. So there's lots of ways that you could play that too.
Speaker 2:Absolutely and what I'm from the standpoint of audits. It's just important to note some data points to some facts about audits. Organizations that receive more than three quarters of a million in federal funding are required to have an audit. So there's a government element to this as well. About one third of the states require nonprofits to be audited if they solicit funds from the residents of their states and have over a certain annual revenue. Requirements for audits are significantly varied by state. Some states require audits when nonprofits reach a million dollars, for example. Others it's a different level. There's all kinds of ways. So across the country there's high variability and really still is a lack of a like we don't really know how many are doing audits and what those are. But, to your point, there are different motivating factors for those audits. Um, they're they're called upon by government, uh, for certain requirements. A state and federal is different, um, and the problem is there are a lot of ways that people that want to be unethical because of all that variance. If there's a lot of ways that people that want to be unethical because of all that variance, there's a lot of creative ways that people can figure some of this stuff out. And also, by the way.
Speaker 2:There are different nonprofit classifications that also change things. The 501c3s are treated very differently than other types of nonprofit classifications. Not all organizations are the same. For example, religious organizations, churches they're not the same as social service providing faith-based organizations. There's some interesting stuff going on in the news around that actually that might reach the Supreme Court related to that differentiation and paying of unemployment taxes. But sorry, I got distracted for a moment. But the point is that the data are even unclear on some of this, which also just speaks to the challenge and the ease with which, if somebody wanted to act unethically, they could probably find all kinds of loopholes and ways to work to create problems if they're truly unethical and the point we had before there's not the kind of bottom line accountability that profit and shareholders bring, even for incentivizing the best management. So it may not be that they're unethical, as in criminally fraudulent, but they might be mismanaging and it's not that easy to figure that out.
Speaker 1:it's not and so and so, if we kick around just ballparking, since we don't have hard data, uh, sort of raw percentages of what we think is the scale and scope of this, admittedly biased and admittedly based solely on personal stories and information and conversations with colleagues, my, my, if I, if you sort of broke these things into three buckets out and out fraud being the most severe, uh, the unethical, uh, ceo that's ripping off the company and, by extension, the public by, you know, you know, just not working, and just you know, taking the money and running um, and then the uh, and then the just just really bad in terms of how they treat people and so forth.
Speaker 1:If you put them in those three buckets, I would say, if you put them all together, I would say as much as half of nonprofits could fit. But then if you take away, if you just leave it with fraud and the ripoff CEOs, now you're shaving it down to, let's say, under 15, 20%, and then you know, when you get down to out and out fraud, my ballpark is somewhere between five to 10% and I know, peter, you'd you'd pulled some data on that one.
Speaker 2:Yeah, yeah, yeah, no, and and uh well, and it's one of those things that um needs and warrants a lot more study, and more data.
Speaker 2:But it, and again I'll come back to something you said a little bit ago, which is that a lot of the challenges we also have in the sector and the problem I have with this whole conversation and why it wasn't my favorite thought of an episode Ken knows this is because in the sector, the coverage that the nonprofit sector gets in the media is so limited in my opinion.
Speaker 2:I mean, we have an echo chamber of those that we talk to ourselves, don't get me wrong. We have the Chronicle, we have different publications and resources and everything that we 10% of the GDP or whatever the workforce is that works in the nonprofit sector, sector, philanthropic sector but we're not such large scale that by the time it gets to the general public in terms of what's going on in the sector and what the sector really looks and means and is, it's I can't count how many times, even in my own memory that stuff that's made the national attention has more to do with fraud or problems with the sector and a lot of it is like fraud and big fraud and and that's the storyline and it's so skewed, that's true.
Speaker 2:Really we have no. We have no nonprofit business channels that talk about the great things we're doing. We have no ways of celebrating all the things. So to me I I enter this conversation very cautiously because and you were just giving estimates of numbers and percentages that we think I'm certain that the problems exist and I'm pretty convinced by what we've read in terms of papers that are out there that the problem is something that has a unique quality to it in the nonprofit sector, perhaps even a little bit higher rates of problems with mismanagement and fraud because of the very structure of accountability or lack of accountability and metrics of success here in our sector. I do worry that there's more of it, but I also don't believe it's so high in high amount and I wish the distribution of news that was generally available and the public understood not just the 10 percenters would be different, you know Well.
Speaker 1:I can. You know, I think I might have mentioned this in an earlier episode, but I had a seminal moment where a bunch of nonprofit leaders and the Chronicle of Philanthropy, I remember, was there. We were meeting with reporters from major news outlets and saying basically what you just said, and the response was if it bleeds, it leads.
Speaker 1:For us, the answer, and the way that I see us as most likely to change the narrative, is when the stories become really evidence-based. Dramatic stories of outcomes that we can show are really changing lives in ways that are objective and powerful. Powerful stories like that. I think that we'll be armed with more of that. Look, I think there'll always be that dynamic. It's the nature of, unfortunately, what the media does but I think we will have a lot more ammunition. Listen, when I was talking with these reporters when I was a charity navigator, if, when they kept bringing up overhead and overhead, if I could say look, our rating system now considers outcomes as the key indicator and the weighting of overhead is 5%. It's a range, and we have this metric now and I could push back in public and had that it could have been so powerful. I didn't have it. That's why I think that's going to be a critical game changer for us, even though we'll always have this problem, but I think that'll be the real turning point for us Agreed, agreed.
Speaker 2:So along those lines, let's get to the which you've just alluded to a little bit more of the solutioning, and you and I, in the conversation leading up to this episode, I was pointing out that I, like we need an analog of profit, right, we need some outside accountability for being able to calculate, measure something that tells us something. It's not just fee for service, for outputs, or kind of you know general descriptive practices of accounting that really aren't speaking to some kind of a metric that we have to, we have to calculate. Therefore, the calculation depends on a lot more being measured and understood audits. I'm going to propose an idea, ken, to talk about, which is what could happen to the nonprofit sector if we shifted to a cost per outcome as a way of beginning to orient and making sure that that cost per outcome just like we have auditors that have to come in for state and federal laws based on revenue size and all that what if there was a way and we went in the direction to your outcome point, where we made outcome measurement and something that had to be externally validated and you need to be measuring your outcomes and calculating those outcomes and, by the way, bring a little bit more of the voice of those being served into that perceived answer.
Speaker 2:So it's not you.
Speaker 2:You shouldn't be able to evaluate your own outcomes and say we got them and just write and tally it based on what you're delivering, but an objective measure of outcomes, some objective way, and with technology we can actually bake that in, we've got tools to do that.
Speaker 2:And then we associate that with the cost and we start to require that programs start really not just accounting, general accounting, financial accounting methods, best practices but we start to work with the financial folks and the program folks to come up with a way to calculate the cost of a program per unit of delivery, per service, per person. And if we start to bring these two metrics in there really understanding the cost and understanding and measuring the outcome with some objectivity what would that do to? Could that? Could that start? And let's imagine it's a fanciful, fantasy-filled world that you know we could get there and that we could just like flip a switch and make cost per outcome something, that objective cost per outcome, something more that we calculate and hinge on in terms of thinking about how we do this. Would that help with some of the problems that we're currently under and suffering from that we're describing on this episode.
Speaker 1:So I think that would be a complete game changer, but I but I think that's the ultimate goal and I think that's where we need to get to. But what I'd like to suggest is I think it's going to be a while. When I say it's going to be a while, I don't mean I think the tools are available to get there, but in terms of the buy-in and the transformative nature of what was required. So I also just wanted to bring out a few other things in the shorter term what to do about this in the immediate solutions and some further analysis. So first, in terms of further analysis, of getting a clearer handle in advance, cases of fraud or becoming aware of cases of fraud, and there are two or three things I want to mention.
Speaker 1:First of all, you know when you were talking about, states vary so much in terms of requiring audits and in so many other ways their requirements change of requiring audits and in so many other ways their requirements change. Typically, though, each state has an attorney general's office, depending on the size and scope of the sector in the state. So states like New York, new Jersey, california, I believe as well those states actually have a separate bureau within the attorney general's office, that's their charities bureau or their nonprofit bureau, and that part of their task is to monitor and hold accountable those charities they're engaged in. When we say charities we also mean nonprofits. They're saying that they will investigate those and they will have consequences for that. So that is one place to go if you become aware of a situation like this and you feel that you're safe enough to report it.
Speaker 1:Place, when I was there, called a watch list, where we were looking at reports from journalists of court cases of you know, where there are results of findings of fraud or there were investigations ongoing. That has continued. Apparently they call it now an advisory system. Peter and I took a look at it and we saw that in the two highest categories of concern there are over 300 where they have a level of caution such that in one case they don't even show a rating anymore when it's the most egregious, and so we could see a way to extrapolate from that data to get a picture of the scope and maybe some of the qualities, the characteristics that you need to watch out for and also related to that. I know, peter, you had pulled some information on disclosures in the 990s.
Speaker 2:So, yeah, in the 90s they're supposed to be the IRS requires to get a sense of what's the scale of the challenge. Um, they had actually pulled a number of of uh uh news articles and other types of stuff identified. I forget how many, but there were it was like a hundred something uh, different organizations that they knew had committed fraud. And then they look to see how they reported it, if and how they reported it in their IRS 990s. Because part of this problem is we can't study a problem if we don't know how to count it. It's like homelessness, right. If you don't know what your numbers are, you're probably going to underestimate what the scale of it is.
Speaker 2:What they found in that study was that 58% of the cases they found of fraud that were being publicly aired in the news when they looked those up, they had self-reported that fraud.
Speaker 2:So that means if we were to look from that and let's be clear, we don't know that this was a representative sample of the nonprofit sector, so the limitations of any kind of a study like that.
Speaker 2:But if you were to look at 58%, that gives you some sense and it makes me think because we have access through our equitable impact platform data, the 990 data. It makes me want to go and at least look at the self-reported issues of unethical behavior that are in the governance section of the IRS 990. And if you apply that 58%, we could come up with an interesting estimate that would give us a sense and, by the way, we could look at it by sector. This paper also showed that the reporting of the fraud that's in the news when they poured through the news articles and stuff like that, that there was a larger proportion was coming from health and human services. And again, I think that's some of the government funding stuff that you were talking about and issues like that and, of course, some of the stuff we were just talking about about big organizations.
Speaker 1:So I think there's ways that we can begin to study this a little bit more and investigate it a little better, and I do want to just circle down to some specific suggestions. One thing more, though, that I wanted to say on the 990s. You know, a few years back probably more than a few years back now the IRS made some changes to the 990 form for nonprofits, and there are now questions like do you have a conflict of interest policy, Do you have a whistleblower policy? Do you have an independent, a certain number of independent, board members? I think all of those things were, in part, meant to be ways to mitigate the risk of fraud and abuse of funds. Like so many other things, you can check the box and the chances that the IRS is going to check on. That is not great, but those things you should have those things. They are a good measure.
Speaker 1:The other thing that is not on that form, the 990 form, but I really emphasize its importance, and I can't encourage people enough, if you don't have this is to have what is either called an accounting manual or an internal control manual. Who has authorization to sign checks? What are the checks and balances on signing checks? What are the thresholds and a whole host of other controls of how you manage your finances as your Bible for how you conduct yourself. That kind of thing can be really, really helpful. And then there's one other thing, and I had success because of this when we were able to overcome the Medicaid fraud. I think every organization of a certain size not just health care organizations they're typically often required to have this, but all nonprofits of a certain size should have a role for somebody in the organization as a corporate compliance officer, and it doesn't have to be an elaborate system like that some health care systems require and it's not just about Medicaid, where sometimes Medicaid requires this but someone who is not the CEO, that's on the staff that people can anonymously report unethical and fraudulent behavior to Anonymous email, a box where you can put paper down a phone number that you can call anonymously and report any examples of fraud or unethical behavior. We did that at one of the places I worked at. That's how we got to this, overcoming this. And that person maybe it's the head of HR or something in the event that there's an allegation against the CEO, that person reports directly to the board president, does not report to the CEO. In the event that it's somebody else that's doing something unethical, then the corporate compliance officer lets the CEO know, and that's a really powerful tool I have found. So I want to, just before we close, emphasize that.
Speaker 1:Last thing to say is there's other things that I would suggest, as well as your mindset, as how you conduct yourself in facing challenges like this and others. I do hope down the road a bit, once we're done with the exhaustion of the sector, we can talk about how you, as a nonprofit fixer, or a future nonprofit fixer, can survive these kinds of things and keep a steady pace and be able to sleep at night. There are some other things personally, I think you need to do, but in terms of systemically, corporate compliance, financial control manuals, conflict of interest, whistleblower, independent boards and the like, all of those things are important, I guess. Yeah, Years ago the independent sector put out a publication called Principles of Good Governance and Ethical Practices, and they polled a number of nonprofit leaders for best practices in a whole array of areas, and I think some of these things that we've talked about are there. So if you want to dig deeper, that's one place I'd recommend that you check out as well.
Speaker 2:So along those lines and I know we're wrapping up here I just want to share that one of the things this has got me thinking about is the potential for a big data study where we could start to take some of the sort of an analytically driven study, and we, bct, have the Equitable Impact Platform where we've got the 990 data. It's an opportunity to begin to think about how we can expand our research on this topic. One is you know there's a good methodology around news articles that has been applied. You go out and find the news on these organizations. You find and identify those within the database of 990s and, by the way, all are filing 990s electronically now, so we have a census of those that do. If we find those news articles, go to places like Charity Navigator. Imagine we go to Charity Navigator, like we were just talking about a moment ago, ken, and we go to Charity Watch and some others Identify a pool of organizations that are well known as having certain problems and some kind of a typology. Then what you can imagine is here's an opportunity for the future. And, by the way, if there are any researchers out there interested in partnering on that, please reach out to me at BCT Partners and let me know BCT partners and let me know.
Speaker 2:But essentially, imagine being able to then also and what we do a lot of is building models that could find matching organizations of a similar type, size and location as those organizations that are fraudulent or having kind of borderline, unethical or mismanagement issues. We find all those let's say there's 500 of them. We match them with 500 organizations from our database that are similar just in terms of what they do and kind of where they're located. We could then build a model that could help us understand by using the data from the 990. We could build a predictive model that would give us a better sense of how we can identify and start to appreciate, kind of what are the factors from the 990 that might trigger things. And let me give you an example. When you were talking about you know, when people are in an environment like this, you see high turnover. You have longitudinal IRS data, which we do. You can start to see that. You can see board, maybe, board turnover, leadership turnover. You can also do evaluations of salaries, comparative salaries, with benchmarking salaries of the executive staff amongst similar organizations and see if there's something there. There's other types of data points and so the key here is, I believe we could build some predictive models that would allow us to better understand that there are certain key indicators coming through the IRS data that could give us some at least some early warning signs that hey, even though it's not shown up in the news, this organization looks awfully like a similar type of organization that has fraudulent consequences or mismanagement problems, and so the potential for some of this work and this is part of the solutioning is to get the research community and I know I'm thinking about this in terms of the data that we have begin to sit there and figure out how we can study these things. So that's another opportunity.
Speaker 2:And, lastly, I want to hit home again the whole role of a better accountability metric and cost per outcome. I truly believe that, with something like cost per outcome that was being more objectively measured and so think of it like external audit, but you know and getting data from the clients, their perception as to whether their lives are better for what they're getting I think it would enhance transparency, increase accountability. I think cost per outcome transparency increase accountability. I think cost per outcome creates a whole nother level of efficiency and cost effectiveness. I think you can lead more to data-driven decision-making and, quite frankly, if we were really doing that deliberately, effectively, objectively, with client voice in there, I think would also build and create a bridge to better stakeholder confidence, so that when we talk about what I talked about at the first episode, the nonprofit sector what if it were one?
Speaker 2:You know that was one third of the economy and we had a model that brings the benefits of that to the US. We're never going to get there and I know, ken, it's going to be one of those things. That's a challenge, but I think it could start by an accountability metric like cost per outcome. Yeah, and actually again.
Speaker 1:Peter and I were talking earlier in our earliest episodes, when Peter was talking about this vision of a third of the economy. Part of my reticence in saying why I wasn't ready to take that leap was because of the stories like the ones I have told today, that we've got a lot of work to do to get there. So I just want to these are my closing remarks here, peter, which is I want to make clear, in spite of all this that I think that most nonprofits out there are doing good and are not fraudulent by any means.
Speaker 1:I say that if I said over half of the leaders are jerks. There are organizations out there that I know of that I've worked at where, in spite of jerks and leadership, the organization, thanks to middle management and other things, are able to still leap tall buildings in a single bound. They are still amazing, mission-driven organizations even in spite of that, still amazing mission-driven organizations even in spite of that. So we just are trying to say here we need to do a better job of calling out the scoundrels and thieves so that we can make the sector even better than it is, so we can get to a vision closer to the one Peter talked about from the very beginning of our podcast.
Speaker 2:Well, thank you, ken. I think that puts a wrap on a very important topic that, like I said, I was a little hesitant because I don't like the improportionate levels of news on this and the way you really introduced this topic and kind of led this episode, ken. I think that we did it a better justice than I think what happens in the mainstream media, which is just a conversation about another fraud, another fraud, and that's when the word nonprofit enters CNN or Fox Business News, oh yes, and so what we needed to do was.
Speaker 1:Those are the places that was on.
Speaker 2:But, dear listeners, that's what our podcast is about is trying to unpack this stuff and put it in its right perspective and put forth some interesting solutions and ideas, pushing the envelope. I also just want to highlight something, ken, that you said there were some great resources that you mentioned or tools that organizations can do to really help with this, and so I encourage everybody to hit rewind on some of that, because there was a real good nuggets in here that you gave almost checklist of things, so you don't feel like you're kind of stuck. You were talking about things like the attorneys general. You were talking about other types of mechanisms that you can put in place to make sure you know whistleblower policies, other things. So take, take some of that and checklist that out. I think, as you're listening to this, if you're struggling with some issues within your organization. So that's it.
Speaker 1:All right. Well then, that's it for today so another episode of the nonprofit fix. Go in peace, not in pieces, see you later Like that.
Speaker 2:Thank you, See you everybody. See you next episode.