7 Critical Risks Facing Nonprofit Organizations

Nonprofit organizations face many of the same risks as for-profit businesses, but the impetus to honor donors’ contributions of time and money make those risks even harder to mitigate within constrained budgets. Financial instability, damaged reputation and D&O liability are just some of these key exposures are the top concerns for nonprofit institutions:

1) Theft

Theft of funds can be perpetrated by an employee, a third-party vendor or even a client. According to the “Report to the Nations on Occupational Fraud and Abuse, 2014 Global Fraud Study,” by the Association of Certified Fraud Examiners, not-for-profit organizations make up more than 10 percent of frauds committed.

For organizations with limited resources and liquidity, any lost dollars can have an impact on their ability to deliver services or otherwise fulfill their core functions. Those same limitations also make it harder for nonprofits to implement stringent anti-theft controls, as they can increase administrative costs.

2) Fundraising Fraud

Unscrupulous parties may impersonate a nonprofit organization to host fundraising events, keeping the profits for themselves. If the fraud is discovered, the organization risks losing donors’ trust and could be held liable for the losses incurred by those who donated to the fake fundraiser.

It is incumbent upon nonprofits to protect their brand and logo, monitor for any misuse and prosecute any impersonators to deter future instances of fraud.

5Ks, community fairs, bake sales and other fundraising events present their own set of safety, property and legal liability risks.

3) Reputation

Given that nonprofits’ operations are built on the generosity of others, they rely heavily on a positive public perception and the confidence of their donor base.

Losing those would make it impossible for a nonprofit organization to obtain the grants and charitable donations it needs to deliver the services it promises and could drive away clients who don’t want to accept the help of an institution that has garnered negative press for things like fiduciary mismanagement, theft or any claims of discrimination or harassment.

4) Regulatory Compliance

To maintain their tax-exempt status, nonprofits are subject to specific rules set by the IRS. Primarily, nonprofits must demonstrate that they are using funds for a charitable purpose and not for any type of financial or political gain.

The IRS prohibits any political activity beyond communicating with legislators as a constituent or responding to government inquiries. Lobbying, for example, is considered inappropriate for a charitable organization and could cost a nonprofit its tax exemption.

Even if a nonprofit maintains its status, it could be hit with painful fines.

5) D&O Liability

A board’s directors and officers are responsible for maintaining a nonprofit’s vision and long-term strategy. That includes managing funds so that the organization can keep the lights while also ensuring that the majority of the donor’s dollar goes to a charitable cause.

Directors and officers also increasingly take on personal risks from liabilities associated with their professional duties within the organization. They may be held personally liable for claims like wrongful termination, discrimination, harassment and misallocation of funds.

The organization’s standard D&O liability coverage likely will not extend to personal liabilities.

6) Special Events

5Ks, community fairs, bake sales and other fundraising events present their own set of safety, property and legal liability risks. Even if no injuries or damages occur, the organization is still at risk of losing money if the turnout is low.

Proper planning can help keep costs in check to mitigate the risk of financial loss, while clear safety procedures, training materials and emergency preparedness documents can minimize exposures like bodily injury and physical property damage.

Given that nonprofits’ operations are built on the generosity of others, they rely heavily on a positive public perception and the confidence of their donor base.

7) Volunteer Staff

Organizations tend to take a more relaxed approach to the screening and training of volunteers versus paid employees, thinking it overkill to question the intent or abilities of people who are willing to donate their time.

But if a volunteer causes injury or damage or even steals from an organization, the nonprofit can face claims of negligence — and the cost to defend or settle those claims is often more expensive than the injury or damages themselves.