Federal authorities are prosecuting dozens of suspects in the biggest college admissions scandal ever exposed. The joint FBI and IRS investigation, dubbed “Operation Varsity Blues,” uncovered millions of dollars in bribe money wealthy parents are accused of paying to sneak unqualified children into Stanford, Yale and other elite universities on the pretext that they were star athletes with high standardized test scores.
William “Rick” Singer has pled guilty to committing fraud as the head of a college counseling and preparation business and a sham charity, acting as the ringmaster of the entire web of wrongdoing. He is cooperating with the authorities. Among the many interesting details to emerge have to do with how Singer’s company allegedly funneled much of the US$25 million his clients paid in unusually high fees for guidance counselor services through the nonprofit Key Worldwide Foundation, possibly to deflect attention.
We are accounting scholars who research nonprofit fraud. Our data indicate that outright fake charities like this one seem to be less commonly detected than other kinds of nonprofit fraud, such as when real charities get swindled through embezzlement schemes by rogue bookkeepers and the like. Our research also sheds light on why Singer and his dozens of accomplices allegedly got away with their scheme for years.
Sources of scrutiny
There are federal and state authorities whose job it is to catch and prosecute fraudulent charities and fake donations. The Internal Revenue Service’s Tax Exempt Government Entities division is in charge of granting nonprofit status through reviews of tax exempt status applications. This division also monitors compliance with tax filings requirements and audits of nonprofits.
But as nonprofit scholars like Dennis Neely have noted, state attorneys general are at the forefront of monitoring nonprofit activities. However, state budgets for nonprofit oversight and enforcement are too low to effectively monitor all charities within their jurisdictions.
Most states have fewer than three full-time employees working on charitable oversight. This leaves only a few hundred people in the country to oversee some 1.5 million nonprofits, despite the fact that these organizations make up 10 percent of our nation’s workforce.
In addition, these systems are set up to catch tax cheats and bring in missing tax revenues. We see a lack of resources dedicated to monitoring the revenue flowing into and out of nonprofits, possibly because the fact that they don’t owe any income tax makes them a lower priority.
Another factor is the presumption that do-good organizations are not going to get swept up in criminal activity like bribery and money laundering. Likewise, regulators may presume that accountants will heed their professional duties if they suspect their clients are breaking laws. However, accountants are more likely to quit to avoid signing off on fraudulent paperwork than blow the whistle.
This scandal makes us wonder whether the authorities are reading all the paperwork most tax-exempt groups are required by law to file with the IRS, known as 990 forms. Key Worldwide Foundation’s mission statement, which appears in these tax filings, itself is suspect.
Despite an allusion to providing “education that would normally be unattainable to underprivileged students,” it does not say that the students it helps face economic hardship. Instead, the organization emphasizes how Key Worldwide’s “contributions to major athletic university programs may help to provide placement to students that may not have access under normal channels.”
Even so, what’s the rationale for a charitable foundation to contribute to major athletic programs to enable students regardless of their means to pay for school to enter college if they are eligible for sports scholarships?
IRS documents indicate that supposed donations to Singer’s foundation grew eight-fold from less than half a million dollars in 2013 to nearly $4 million in 2016 as Singer’s alleged scheme used money parents pretended to be donating to the charity to pay off coaches, testing proctors and other people.