When Fraud Strikes a Nonprofit, the Damage Goes Far Beyond the Money Stolen

Nonprofit organizations exist to serve missions that matter—supporting vulnerable populations, advancing education, protecting the environment, and strengthening communities. Yet when fraud occurs inside a nonprofit, the consequences extend far beyond the immediate financial loss. In many cases, fraud threatens the organization’s very ability to continue fulfilling its mission.

Nonprofits are often more vulnerable to fraud than for-profit entities. Limited staffing, high levels of trust, reliance on volunteers, and constrained budgets frequently result in weak internal controls and insufficient oversight. Criminals bring the intent; gaps in controls create the opportunity. Once opportunity is exploited, the impact can be devastating.

Once a criminal learns how to exploit weak internal controls—or identifies a nonprofit with little or no meaningful oversight—they often become a repeat offender. These individuals operate as financial predators, moving from one organization to the next, taking advantage of similar vulnerabilities such as limited segregation of duties, excessive trust, and under-resourced finance functions. Because nonprofits frequently share common structural weaknesses, a criminal who succeeds once can replicate the scheme elsewhere with minimal adaptation. The absence of strong internal controls not only enables the initial theft but effectively signals to the criminal the organization is an easy target—placing the broader nonprofit community at continued risk.

The Financial Loss Is Only the Beginning

Direct financial loss is the most visible consequence of fraud, but it is rarely the most damaging. Stolen funds may represent program dollars, grant money, or donor contributions earmarked for specific purposes. When those funds disappear, programs are reduced or eliminated, services are delayed, and beneficiaries suffer.

Equally damaging is the loss of donor confidence. Donors, grantors, and government agencies expect stewardship and accountability. A single fraud incident—especially one that becomes public—can erode years of trust. Even organizations which were themselves victims may find future funding delayed, reduced, or denied altogether.

Why Recovery Is So Difficult for Nonprofits

Unlike large corporations or government agencies, most nonprofits simply do not have the financial capacity to respond effectively once fraud is discovered. Investigating fraud properly requires specialized skills—transaction reconstruction, tracing of funds, interviews, documentation, and coordination with legal counsel and, at times, law enforcement.

Forensic accounting expertise is critical in these situations. Yet many nonprofits face an impossible choice: spend scarce resources on a forensic investigation or preserve what remains of their operating budget to keep programs alive. As a result, fraud investigations may be limited in scope, delayed, or abandoned altogether. Stolen funds go unrecovered, perpetrators may face little accountability, and internal control weaknesses remain unaddressed leaving the organization exposed to future fraud.

This creates a lasting impact. Stolen or misappropriated funds intended to support services are instead lost forever. Leadership time is diverted from mission delivery to crisis management. Staff morale suffers. Boards become risk averse. In the worst cases, organizations close their doors entirely.

The Human Cost of Fraud

Fraud in a nonprofit is not a victimless financial crime. The true victims are the individuals and communities the organization exists to serve. When an elder-care nonprofit loses funds, seniors lose services. When an education nonprofit is defrauded, students lose opportunities. Fraud undermines public confidence in the entire nonprofit sector, making it harder for honest organizations to do good work.

Education as Prevention and Protection

One of the most effective ways to combat fraud in the nonprofit sector is education—before a crisis occurs. Understanding how fraud happens, recognizing warning signs, and designing practical internal controls can significantly reduce risk.

At the University of Washington Bothell, this commitment to education is taken seriously. Through courses such as Forensic Accounting and Nonprofit Accounting, students are trained to understand not only accounting rules, but real-world risk, governance, ethics, and accountability.

In the forensic accounting course, students learn how fraud is committed, concealed, detected, and investigated. They work with real-world scenarios involving asset misappropriation, financial statement fraud, and misuse of funds—learning how evidence is gathered and how financial findings are communicated in legal and regulatory settings.

In the nonprofit accounting course, students gain a deep understanding of fund accounting, donor restrictions, governance responsibilities, and the internal controls necessary to protect mission-critical assets. The focus is not merely compliance, but stewardship—ensuring the resources entrusted to an organization are used for their intended purpose.

Together, these courses prepare future accountants, auditors, investigators, and board members to serve nonprofits with competence, integrity, and a strong sense of public responsibility.

A Broader Commitment to Community Impact

This educational mission extends beyond the classroom. By training students to recognize fraud risks and design effective controls, the University of Washington Bothell is contributing to stronger organizations—not only across Washington State, but wherever graduates carry these skills.

Prevention is far less costly than recovery and in the worst-case scenarios—total loss. A well-designed system of internal controls, an informed board, or a trained finance professional can stop fraud before it starts. Education is one of the most powerful tools available to protect nonprofits and the communities they serve.

Why These Cases Matter (Teaching and Practice Takeaway)

Why I selected these fraud cases to highlight in this article—even though they span more than a decade—is because together they demonstrate the core drivers of nonprofit occupational fraud have not changed over time. While funding mechanisms, technology, and regulatory environments evolve, the underlying elements of fraud—access, authority, pressure, opportunity, and rationalization—remain remarkably consistent across organizations of all sizes and missions. By examining cases separated by years, this article shows fraud is not a product of a specific era or crisis, but of governance failures that repeat when internal controls, board oversight, and accountability are weak. These examples reinforce a critical lesson for nonprofit leaders, boards, donors, and students alike: time does not mitigate fraud risk—effective controls do, and organizations relying on trust alone will eventually face the same vulnerabilities, regardless of when or where they operate.

Feeding Our Future (Minnesota) – Pandemic-Era Nonprofit Fraud and the Fraud Triangle

Feeding Our Future, a Minnesota-based nonprofit, was at the center of one of the largest nonprofit fraud schemes in U.S. history, involving the theft of federal COVID-19 child nutrition funds. Senior leaders and affiliated individuals exploited their positions to submit fraudulent meal claims, inflate participation data, and launder millions of dollars through shell companies and personal accounts. The scheme clearly demonstrates all three elements of the fraud triangle: pressure, created by the sudden influx of emergency pandemic funds and financial incentives tied to reimbursement volume; opportunity, driven by weak internal controls, limited oversight, and the relaxation of compliance safeguards during the COVID-19 response; and rationalization, as perpetrators justified their conduct by framing the fraud as temporary, deserved, or victimless within a government relief program. Prosecutors ultimately secured multiple convictions, confirming the misconduct was not mismanagement but deliberate, organized occupational fraud, and illustrating how mission-driven organizations can become vehicles for large-scale fraud when intent meets opportunity.

Disabled Veterans National Foundation (DVNF) – Deceptive Fundraising and Misuse of Donations

Disabled Veterans National Foundation (DVNF), a nationally recognized veterans’ charity, became the subject of a major Federal Trade Commission (FTC) enforcement action for deceptive fundraising practices and misuse of donated funds. Investigations revealed that DVNF’s leadership and professional fundraisers solicited tens of millions of dollars by representing the donations would directly support disabled veterans, while in reality only a small fraction of funds were used for direct veteran assistance, with the majority consumed by fundraising fees, executive compensation, and overhead. The case reflects the core elements of occupational fraud risk: pressure, driven by aggressive fundraising targets and compensation incentives; opportunity, created by concentrated executive authority, limited board oversight, and opaque donor disclosures; and rationalization, as leadership justified minimal program spending as necessary to “grow” the organization. Although the matter resulted in civil penalties and restrictions rather than criminal convictions, it remains a powerful example of how mission-based nonprofits serving veterans can be exploited when governance fails, eroding donor trust and harming the very population they claim to serve.

Cancer Fund of America and Related Cancer Charities – Systemic Charity Fraud Scheme

Cancer Fund of America and several affiliated cancer charities were exposed as part of a massive nonprofit fraud scheme orchestrated by senior executives and family members who controlled multiple organizations. The leaders used their authority to solicit millions of dollars in donations while directing only a small fraction to actual cancer patients, instead diverting funds to excessive salaries, personal expenses, and self-dealing contracts. The case squarely reflects the fraud triangle: pressure, driven by personal financial gain and lifestyle demands; opportunity, created by concentrated control, lack of independent board oversight, and minimal transparency in fundraising and spending; and rationalization, as perpetrators portrayed their compensation and conduct as justified by their roles and the charities’ missions. Federal prosecutions resulted in convictions and prison sentences, making this case a powerful illustration of how charitable purpose can be weaponized to mask occupational fraud when governance fails.

Kent Little League Feud Case – Kent, Washington

The Kent Little League case in Kent, Washington, was a highly publicized local dispute involving allegations of financial improprieties within a youth sports nonprofit. The conflict reportedly centered on accusations that a volunteer officer—often a treasurer or board member—misused or improperly controlled league funds, leading to internal fractures, accusations among parents and board members, and eventual involvement by law enforcement or city officials. What made the case notable was not just the alleged financial misconduct, but how personal conflicts, lack of segregation of duties, and informal governance structures common in small nonprofits escalated into a public feud. The situation illustrates how even modest community organizations can become vulnerable to occupational fraud when trust replaces controls and disputes turn financial oversight into a battleground.

A Personal Note

As a member of the accounting faculty at the University of Washington Bothell, I am proud to be part of an institution that recognizes the real-world consequences of fraud and the importance of preparing students to address them. Teaching forensic accounting and nonprofit accounting is not just about debits and credits—it is about protecting missions, preserving trust, and ensuring the organizations can continue to do the vital work our communities depend on.

Fraud may take money, but the true cost is measured in lost services, broken trust, and diminished impact. Through education, awareness, and strong internal controls, the cost of fraud can—and must—be reduced.