Preventing Nonprofit Malfeasance: Internal Controls, Transparency, and the External Regulatory Environment

The forces working to counter nonprofit corruption can be broadly categorized as being either internal or external controls. When applied, the latter course is by far more effective in routing malfeasance (e.g., Federal Trade Commission actions), but legal remedies of this scale are relatively rare and so it is argued here that in-house strictures are the more practical approach to solving the problem. For example, wrongdoing is demonstrably lower at charities that maintain an independent voting board and conduct an annual certified audit. Equally important, it is argued that fraud is less likely to occur when an institution’s work environment is ethical in nature. Externally, while the IRS is the agency charged with recognizing nonprofit corruption, this oversight is to be complemented by legal actions undertaken by the FTC and at the state level by attorneys general and district attorneys. California’s Nonprofit Integrity Act, the only state statute to impose corporative-style anti-corruption measures for nonprofits, is discussed with a critical evaluation of whether this law is a suitable model for reforms in other states.