Pitfalls For Nonprofits That Receive Federal Funds: Lessons Learned From ACORN

Author:Mr Jeffrey Tenenbaum and Dismas Locaria
Profession:Venable LLP

On the heels of an embezzlement scandal, in September 2009, allegations of voter registration fraud and other questionable behavior by employees of the Association of Community Organizations for Reform Now ("ACORN" or the "Organization") surfaced following the release of several undercover videos. The alleged conduct of ACORN employees gained national attention, led to federal legislation prohibiting the distribution of federal funds to the Organization, and ultimately led to the Organization's bankruptcy and dissolution in 2010. The downfall of ACORN serves as an important lesson to all nonprofit organizations.

ACORN and Its Downfall

Founded in 1970, ACORN, a tax-exempt nonprofit organization, was a collection of community-based organizations that advocated for low- and moderate-income families on issues ranging from affordable housing to neighborhood safety, as well as other social issues. At its peak, ACORN reportedly had over 500,000 members across more than 1,200 neighborhood chapters spread throughout more than 100 North and South American cities. As ACORN grew it was not without issues, especially in its later years, when its founder's brother embezzled funds and allegations arose that the Organization allowed tax-deductible charitable contributions to be used for political purposes.

In the wake of the release of several videos in September 2009 that depicted conservative activists eliciting damaging responses from ACORN employees, a nationwide controversy erupted over, among other things, taxpayer funding of such an organization. Due to the groundswell of public sentiment and fueled by election-year politics, in a fiscal year 2010 appropriations bill, Congress prohibited the awarding of federal funds to ACORN and ACORN-related organizations. As it turned out, after Congress took action, the videos were discovered to have been "heavily edited," and were ultimately discredited.

Not surprisingly, in the wake of the federal prohibition, grant money from state agencies and private donations dwindled. As a result, it took only a little more than year after the by-then discredited videos were made public for the Organization to file for bankruptcy, effectively shutting down the 40-year-old organization.

GAO's Review of the Agency Response to the Defunding of ACORN

As part of the Consolidated Appropriations Act of 2010, Congress directed the Government Accountability Office ("GAO") to conduct a review and issue a report on the federal...

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