Nonprofit Fraud and Organizational Demise: The Role of Governance in Times of Crisis

Abstract

This study investigates how organizational fraud impacts the decline of nonprofit organizations, fo­cusing on the role of governance structures during crises, including the COVID-19 pandemic. Analyzing U.S. nonprofits that reported fraud between 2017 and 2019, the results show that 34% of these orga­nizations shut down within three years, compared to only 4.3% of those that did not report fraud. The study highlights key governance factors, such as internal control systems and board oversight, that significantly influence the likelihood of organization­al closure. Strong internal controls were linked to a lower risk of shutdown, emphasizing their protective effect during times of increased uncertainty. Addi­tionally, larger boards were associated with better oversight, which may help prevent organizational failure. The research also emphasizes the impact of organizational size and external funding, with larger nonprofits and those receiving government grants being less likely to close. Overall, the findings un­derscore the essential role of governance and finan­cial support in helping nonprofits endure fraud-re­lated challenges during crises like the COVID-19 pandemic.