The Big Short in the Nonprofit Sector

Over this past weekend, I watched The Big Short. I’ll be honest in that I hadn’t read any of the reviews or seen the trailers, so I didn’t know what to expect. But I loved the movie. Finally, I have an understanding of the 2008 housing crisis and ensuing financial collapse and why it happened. (Ummm….thanks to Selena Gomez and Margot Robbie for the layman’s explanation!)

Undoubtedly, the movie doesn’t tell the full story, as this Politico article points out. I’m not surprised: it’s Hollywood! I wouldn’t expect the movie to get all the facts right. But at the same time, I walked away from the movie disappointed in financial and regulatory sectors, and grateful to have felt little if any impact from the recession.

And then I asked myself: What if we bet against the nonprofit sector, similar to how Dr. Burry bet against housing? And then I realized: we already do that everyday. While I’d like to think that the risk of fraud is lower in the nonprofit sector, it is not. On October 26, 2013, the Washington Post reported that from 2008 through 2012, over 1,000 nonprofit organizations disclosed hundreds of millions of dollars in losses attributed to theft, fraud, embezzlement, and other unauthorized uses of funds and organizational assets. According to a study cited by the Post, nonprofits and religious organizations suffer one-sixth of all major embezzlements, second only to the financial services industry.

The result is that we’re less willing to give to nonprofits. And those organizations are already at a disadvantage because many of us don’t give consistently to the same charities year after year. Revenue is never certain or a guarantee – and there definitely won’t be a government bailout. Those organizations suffer financially, and then don’t have the infrastructure to put controls in places to protect their resources. And so begins a vicious cycle.

What do we do to stop it? Offer deserving nonprofits unrestricted contributions and general operating funds. You might ask: what is the definition of “deserving?” They are those organizations which have a history of demonstrating success at all levels – impact, operations, financial, governance, communications, etc. Ask the organization your most difficult questions, and then probe for details. And once they pass your “test,” invest in them on a regular and consistent basis. A flawless sector does not exist. So don’t short nonprofits just because their entire sector is not perfect.

 

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