Contribution Fraud: Understanding Improper Cost Allocation
Every year, thousands of
American consumers generously give to the charity of their choice; some have a
few they make donations to. The
American Association of Fundraising Counsel reported that donations in 2003
totaled to more than $241 billion. While
these contributions are greatly appreciated for the most part, it is often
difficult for a donor to determine if their funds were adequately used. This was backed up by a recent survey by the
Better Business Bureau Wise Giving Alliance that reported 70% of all donors
surveyed found it difficult to determine whether or not their charity was actually
legitimate.
Though most charities
tend to use donated funds appropriately, the growing rate of fraud has brought
the subject of abuse to light. Some
organizations are simply lacking from a financial aspect; others are involved to
raise funds for the enrichment of their personal party. Many employ the strategy of improper cost
allocation to not only establish a fraudulent charity, but to keep it thriving
as well.
A Legal Struggle
The fight to prove that
cost allocation fraud is a federal crime has been controversial; the facts
unclear at times. In May of 2003, the
United States Supreme Court reversed a decision of the Illinois Supreme Court
which permitted a fraudulent act to proceed under state law. A Justice of the Supreme Court stated that
higher cost allocations, without more, do not constitute fraud. He went on to state that the failure to
disclose a fundraising fee when contacting potential donors, without more, is
not enough evidence to claim fraud. This
ruling remains to conflict with states declaring that misleading or false
information designed to deceive a potential donor on how their donation will be
used constitutes fraud.
There are however, other
instances were improper cost allocation is viewed in a completely different
light, a situation currently plaguing the U.S. government. When a particular company or contractor has
commercial contracts and government contracts, they are required to allocate or
spread their costs between both assignments.
If the proper guidelines are followed, this is a simple process and the
funds are distributed accordingly. When
costs aren't directly associated with a specific project, figuring the
appropriate allocation is a bit more complex.
Many contractors are tempted to
pawn more of their own costs off on the government. This occurs when a cost-plus contract is
signed in which the government pays for the project and additional
profits. A cost-plus contract is
separate from the private commercial client, who merely pays market price for
their items. Such cost allocation
enables the contractor to quote a much lower price to the commercial client
without enduring significant losses for the reduction.
When contractors and
companies knowingly employ improper cost allocation to disproportionate the
share of overhead or indirect costs to the United States federal government,
they are committing fraud under the False Claims Act.
The Verdict
Unless
you're employed by a federal agency or involved in the manufacturing of defense
items, it's very difficult to positively impact the rate of improper cost
allocation used to commit government fraud.
You can however, protect yourself against questionable charities. If an organization doesn't have much of a
verifiable history or fails to disclose important information, you may want to
contribute your donation elsewhere.
