Financial ManagementFor NonprofitsPresenterMiriam Robeson, AttorneyJune 11, 2013Sponsored byUnited Way ofElkhart County
Why Are We Here?The IRS has increased scrutiny of nonprofits with anaggressive program to revoke nonprofit status for out-...
Why Are We Here – Part 2“Ripped from the Headlines”Charity LeaderAccused of SpendingNY State Funds onHerselfCA sues vetera...
Why We are Here – Part 3The IRSIn June, 2011, the IRS “automatically revoked” the nonprofit status of morethan 275,000 non...
Financial Accountability for Nonprofits Compliance Accountability Best Practices Risk Management Crisis Management
ComplianceGovernment andother technical requirements
Compliance - State• Indiana Secretary of StateAnnual Business Entity Report• Indiana State Board of Accounts• Financial Re...
Compliance - FederalIRS – 990 Form<$50,000 – 990 N• Change in thresholdbeginning 2010• On-line ONLY• Due 5 + 15 after end ...
Compliance – IRSIs your nonprofit “on the list?” IRS Publication 78– no longer published Search-able database:http://www...
Compliance - EmploymentEmployment taxesand reports must betimely filed!Federal -- 941 –Employer’s QuarterlyFederal Tax Ret...
Compliance - UBIT• (A) Trade or business• (B) regularly carried on• (C) not “substantially related” to exemptpurposeUBIT –...
AccountabilityRequirements to protect thefinancial integrity of the nonprofit
AccountabilityThe Buck Stopswith the BoardBoard reports to• Donors• Government• Sponsors• Grantors• ConstituentsAre you Go...
What is Financial Accountability?The Board is Responsible for:Knowing the financial status of theNPUnderstanding the finan...
Financial AccountabilityBasic Requirements Financial Policies Financial Controls Monitor appropriate use of nonprofit f...
Accountability - FinancialPolicies Policies for – Handling Money Recording Money Reporting MoneyHandout – Nonprofit Fi...
Accountability - Financial ControlsSSARS Standards (Statements on Standards for AccountingAnd Review Services)Financial Pr...
Accountability - FinancialOversightWatch the money - Watch the peopleFinancial Oversight is the review of both finances an...
Accountability - CharitableDonations• What can be considered a donation?• What paperwork is required?• Donations of goods ...
Accountability - AuditReviewFull AuditMost ExpensiveMost ComprehensiveReview of Finances,Financial Practices,Board practic...
Accountability -Governance• Personal Benefit• Abuse of StatusConflict of Interest• Board – Staff – Volunteer - DonorEthica...
Accountability - Conflicts ofInterestBoardMemberConflictsStaffConflictsDonorConflictsVolunteerConflicts
Accountability – No PersonalBenefitA NonprofitCANNOTdistribute fundsto members,officers ordirectors
Abuse of Nonprofit Status
Consequences of Abuse ofStatus IRS Consequences – $$ Fines to Nonprofit Fines to Board of Directors Fines to Staff PE...
Accountability - EthicsWhen are youractions…Legal? Illegal? Question-able?Un-ethical?
Nonprofit Ethical Issues -ExamplesImproper donor acknowledgementsDonationsof time arenot tax-deductibleDonor “influence-bu...
More Examples - EthicsFailure to properly accountand restrict use of donor-specified donations (illegaland unethical!)• Ca...
Accountability and Transparency– Credibility to the PublicRequired disclosures• Tax returns• Organizational Documents• Art...
Improving Fiscal Health General Tips for Healthy Nonprofits Pay attention to finances as well as mission Recruit Board ...
Risk ManagementSteps to Identify and managenonprofit financial risk
Risk Management forNonprofits Best Practices to Prevent FinancialCrisis Identify Risk Ranks Risk Identify Policies to ...
General Liability InsuranceDon’t LeaveHome WithoutIt!“Slip and Fall”insurance forbasic activitiesPersonalInjuryPropertyDam...
Risk Management – D&OInsuranceD&OInsurancecoversBreach of DutyWrongful acts ofthe boardMismanagementWhatD&ODoesProvides le...
Risk Management PlanTypes of Risk to Manage• Board members, volunteers, employees,clients, donors, the public.People• Buil...
Risk Management - People Poor economy has resulted in an increase in criminalconduct against nonprofits Embezzlement by ...
Risk Management andIssues of Fraud and the Nonprofit SectorNo comprehensive research on depth/breadth offraud in the nonpr...
Fraud in the Nonprofit Sector is on the Rise!2012 Global Fraud Study, Association of Certified Fraud Examiners
How is Fraud Detected?2012 Global Fraud Study, Association of Certified Fraud Examiners42.1%15.1%14.0%7.4%5.3%4.5%3.3%2.6%...
How Long Does it Take to DiscoverFraud?38302424242419181812120 10 20 30 40PayrollCheck TamperingFinancial Statement…Expens...
BehaviorRedFlags6.5%5.3%8.1%8.4%12.6%19.2%14.8%14.8%18.2%35.8%27.1%Refuses vacationsPast legal problemsPast employment pro...
What are the most common types of fraud?14.60%11.00%24.90%14.50%11.90%9.30%3.60% 11.80%SkimmingLarcenyBillingExpenseCheckP...
Who Commits Fraud? How Much is Lost?$50,000$150,000$373,000$86,000$0 $100,000 $200,000 $300,000 $400,000Employee (43.0%)Ma...
How is Fraud Punished? Termination of employment = 72% No punishment = 7% Quit/disappeared = 8% Referral to law enforc...
What is the likelihood of recovering funds?(1) Nothing recovered = 48% Complete recovery = 16% Partial recovery = 36% ...
Who Commits Fraud? High-level fraudsters (Officers/Directors) causegreatest damage – more than 3x morecostly, and take lo...
Primary Control Weaknesses for VictimOrgs.Handouts – 10 Ways to Catch Fraud and Mistakes from OutsideHandout – 15 Ways to ...
Nonprofits and FraudWhat to do when it happens to you!• Lock-down data• Start a formal audit process with outside auditor•...
PR for NonprofitsPublic Relations During Fraud CrisisIf Fraud orembezzlementfinds yourNonprofit,• How the publichears abou...
Preventing FraudHave and use financial controlpoliciesKnow who handles the moneyRemove temptationReview financial informat...
Crisis Management – Effect ofEconomy Nonprofits showed growth in contributions in 2011 compared with 2010, butslight redu...
Crisis Management 101Surviving Financial Downturn Step 1 – Review the Organization How well do you meet your budget(typi...
Crisis Management 101Surviving Financial Downturn Step 2 – Make a Plan Risk Management Plan What can you reduce and mai...
Crisis Management 101Surviving Financial Downturn Step 3 – Creative OptionsNew Fund RaisingOpportunities○ Social media, ...
Crisis Management 101Surviving Financial Downturn Step 4 – Acute Crisis Management Reduction in programs○ Prioritize – w...
Financial Accountabilityfor NonprofitsComplianceAccountabilityBest PracticesRisk ManagementCrisis ManagementHandout – Fina...
Any Questions?Miriam Robeson, AttorneyToday’s materials are available onMiriam’s Website:http://blog.lawlatte.com/index.ph...
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Ff&f elkhart june 11, 2013

  1. 1. Financial ManagementFor NonprofitsPresenterMiriam Robeson, AttorneyJune 11, 2013Sponsored byUnited Way ofElkhart County
  2. 2. Why Are We Here?The IRS has increased scrutiny of nonprofits with anaggressive program to revoke nonprofit status for out-of-compliance nonprofitsEconomy has decreased available funds for nonprofitbudgets, but increased criticism of nonprofitSince 2006, instances of nonprofit fraud have risensteadily with the decline in the economyIt’s easier to PREVENT problems with nonprofit status –after problems become public, it may be too late to fixInformation Level –IntermediateAssumes familiarity with nonprofit finance
  3. 3. Why Are We Here – Part 2“Ripped from the Headlines”Charity LeaderAccused of SpendingNY State Funds onHerselfCA sues veteranscharity over spendingpay and perksMA man admits to$900K theft fromnonprofit he ledOR Musician Accusedof Faking CharityAlbum to Bilk InvestorsDC council membersentenced to 38months for stealing$350K from youthprogramsIn Indiana…• Indy Child Care organizationunder investigation• Franklin woman sentencedto 3 years probation for$12K theft
  4. 4. Why We are Here – Part 3The IRSIn June, 2011, the IRS “automatically revoked” the nonprofit status of morethan 275,000 nonprofits, and continues to aggressively revoke status ofdelinquent NPsSince 2008, the IRS has added more than 100 employees to the ExemptOrganizations SectionIRS increases nonprofit oversightEmployment TaxesExecutiveCompensationActivist AgendaCompliance (Taxforms)
  5. 5. Financial Accountability for Nonprofits Compliance Accountability Best Practices Risk Management Crisis Management
  6. 6. ComplianceGovernment andother technical requirements
  7. 7. Compliance - State• Indiana Secretary of StateAnnual Business Entity Report• Indiana State Board of Accounts• Financial Reporting for Government FundsEntity Annual Report (E-1)• Indiana Department of RevenueNP-20
  8. 8. Compliance - FederalIRS – 990 Form<$50,000 – 990 N• Change in thresholdbeginning 2010• On-line ONLY• Due 5 + 15 after end offiscal year• NO extensions of time!>$50,000 – 990 EZ/990• Due 5 + 15• 6 month automatic extension• For most nonprofits – 990 EZ• Minimal property or realestate• Normal gross receipts <$200,000• Total Assets < $500,000Failure to file – automatic revocation of §501(c)(3) status
  9. 9. Compliance – IRSIs your nonprofit “on the list?” IRS Publication 78– no longer published Search-able database:http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check Search: IRS select check NOTE - Incorporation as a State (Indiana)nonprofit does not equal IRS §501(c)(3) statusUpdated slide
  10. 10. Compliance - EmploymentEmployment taxesand reports must betimely filed!Federal -- 941 –Employer’s QuarterlyFederal Tax ReturnState -- WH-1 –Employer’s State TaxReturn2011 – ONLINErequirement formany organizationsFederal – EFTPS(electronic federaltax payment system)State – IN-TaxEmployeeClassification“Exempt” versus“non exempt”employeesWages and HourslawsFair Hiring andNondiscriminationDoes not apply to allemployersApplies if you receivegovernment $$
  11. 11. Compliance - UBIT• (A) Trade or business• (B) regularly carried on• (C) not “substantially related” to exemptpurposeUBIT – UnrelatedBusiness IncomeTax• Rental income• Product sales (storefront)• Does not include investment incomeExamples:If UBIT constitutes “substantial portion” of income,nonprofit can lose exempt status!
  12. 12. AccountabilityRequirements to protect thefinancial integrity of the nonprofit
  13. 13. AccountabilityThe Buck Stopswith the BoardBoard reports to• Donors• Government• Sponsors• Grantors• ConstituentsAre you GoodStewards of theresources thepublic entrustsin your care?
  14. 14. What is Financial Accountability?The Board is Responsible for:Knowing the financial status of theNPUnderstanding the financial statusActing on financial needs of the NPPreventing financial mishapsMitigating financial crisis
  15. 15. Financial AccountabilityBasic Requirements Financial Policies Financial Controls Monitor appropriate use of nonprofit funds Rules for Charitable Donations Audit - reviewHandout – 10 Financial Priorities for Nonprofit Boards
  16. 16. Accountability - FinancialPolicies Policies for – Handling Money Recording Money Reporting MoneyHandout – Nonprofit Financial Control Policy
  17. 17. Accountability - Financial ControlsSSARS Standards (Statements on Standards for AccountingAnd Review Services)Financial Procedures ManualRestrictions documented and honoredTraining program for Staff and BoardDocument Retention/Destruction PolicyHandout – Document Destruction Policy
  18. 18. Accountability - FinancialOversightWatch the money - Watch the peopleFinancial Oversight is the review of both finances and financialpracticesEnsures safe, ethical financial proceduresProtects Nonprofits and the Directors/StaffProvides integrity and transparency to the publicCatches financial difficulties before they become financialimpossibilitiesHandout – 10 Tips for Keeping an Eye on Finances
  19. 19. Accountability - CharitableDonations• What can be considered a donation?• What paperwork is required?• Donations of goods or funds > $250 requirewritten acknowledgement• Magic language: “No goods or serviceswere provide in exchange for thisdonation”Watch the Rules regardingcharitable donations!NOTE – donations of TIME andEXPERTISE are NOT deductible!Handout: Top 10 Rules for Charitable Donations
  20. 20. Accountability - AuditReviewFull AuditMost ExpensiveMost ComprehensiveReview of Finances,Financial Practices,Board practicesReviewMedium Review (andcost)“Reasonable Basis”Does not reviewpolicies, procedures,internal controlsCompilationMost Basic (leastexpensive)Only reviews financialinformation on thesurfaceBank Statements,Financial recordsprovided by clientNo assurances, noopinionInternalPerformed “in house” orinformallyGenerally not acceptedfor grants orgovernmentSuitable for very smallnonprofitsProvides minimaloversight and protection
  21. 21. Accountability -Governance• Personal Benefit• Abuse of StatusConflict of Interest• Board – Staff – Volunteer - DonorEthical StandardsHandout – Conflict of Interest Policy
  22. 22. Accountability - Conflicts ofInterestBoardMemberConflictsStaffConflictsDonorConflictsVolunteerConflicts
  23. 23. Accountability – No PersonalBenefitA NonprofitCANNOTdistribute fundsto members,officers ordirectors
  24. 24. Abuse of Nonprofit Status
  25. 25. Consequences of Abuse ofStatus IRS Consequences – $$ Fines to Nonprofit Fines to Board of Directors Fines to Staff PERSONAL LIABILITY FOR ALL! IRS Consequences – Revocation ofNonprofit Status
  26. 26. Accountability - EthicsWhen are youractions…Legal? Illegal? Question-able?Un-ethical?
  27. 27. Nonprofit Ethical Issues -ExamplesImproper donor acknowledgementsDonationsof time arenot tax-deductibleDonor “influence-buying”Improper arrangements with donorsFailing to include both spouses in joint gift paperwork
  28. 28. More Examples - EthicsFailure to properly accountand restrict use of donor-specified donations (illegaland unethical!)• Capital contributions used foroperational expenses• “Borrowing” from restricted fundsPurchases from Board-member business withoutproper disclosure (the copyshop example)Failure to consultprofessionals for assistance,when needed (lawyer –accountant)Improper oversight ofspending (financial controlpolicies) - IndianapolisHumane SocietyHandout – Whistleblower Policy
  29. 29. Accountability and Transparency– Credibility to the PublicRequired disclosures• Tax returns• Organizational Documents• Articles of Incorporation• Bylaws• Funds used for lobbying• Application for ExemptStatusRecommendeddisclosures• Annual report• Basic Financial Statement• Report of Activities• Mission/VisionRegularly provide information to the Public
  30. 30. Improving Fiscal Health General Tips for Healthy Nonprofits Pay attention to finances as well as mission Recruit Board members based on need Embrace in-kind donations – but have a plan Make smart decisions about facilities Growth is not always good – watch “missioncreep” and inadequate capacityHandout – How Small Nonprofits Can Improve
  31. 31. Risk ManagementSteps to Identify and managenonprofit financial risk
  32. 32. Risk Management forNonprofits Best Practices to Prevent FinancialCrisis Identify Risk Ranks Risk Identify Policies to manage risk Implement protections Implement procedures in event of crisis
  33. 33. General Liability InsuranceDon’t LeaveHome WithoutIt!“Slip and Fall”insurance forbasic activitiesPersonalInjuryPropertyDamageMost placesrequire itFacility rentalWorking withotherorganizationsNOTE –Usually DOESNOT COVERMEMBERS
  34. 34. Risk Management – D&OInsuranceD&OInsurancecoversBreach of DutyWrongful acts ofthe boardMismanagementWhatD&ODoesProvides legaldefensePays claimsWhatD&ODoesn’tNormal liabilityclaimsCriminal actsDirectors & Officers Insurance Protects - Board and Key Staff
  35. 35. Risk Management PlanTypes of Risk to Manage• Board members, volunteers, employees,clients, donors, the public.People• Buildings, facilities, equipment,materials, copyrights, trademarksProperty• sales, grants, contributions,sponsors, fund raisingIncome• reputation, stature in community,ability to raise funds and appeal toprospective volunteersGoodwillHandout – Risk Management Policy
  36. 36. Risk Management - People Poor economy has resulted in an increase in criminalconduct against nonprofits Embezzlement by employees Embezzlement by officers Fraud from “outsiders” Phrase of the Day – “Trust But Verify”
  37. 37. Risk Management andIssues of Fraud and the Nonprofit SectorNo comprehensive research on depth/breadth offraud in the nonprofit sector (mostly from “headlinenews”) – most research includes nonprofit as asubset of broader scope“Headline News” creates an inaccurate picture• Impression of more fraud than actually exists• Impression of “we’re not like that” fosters complacencyIgnorance of Full PR Impact of fraud in “headlinenews”• Every dollar lost to fraud = lost ability to achieve mission• Every fraud headline > public scrutiny of nonprofits• Every fraud headline < public donations to nonprofits
  38. 38. Fraud in the Nonprofit Sector is on the Rise!2012 Global Fraud Study, Association of Certified Fraud Examiners
  39. 39. How is Fraud Detected?2012 Global Fraud Study, Association of Certified Fraud Examiners42.1%15.1%14.0%7.4%5.3%4.5%3.3%2.6%2.0%1.7%1.1%1.0%0.0% 10.0% 20.0% 30.0% 40.0% 50.0%TipManagement ReviewInternal AuditBy AccidentAccount ReconciliationDocument ExaminationExternal AuditNotified by PoliceSurveillanceConfessionOtherInternal ControlsPercent of CasesPercent of Cases
  40. 40. How Long Does it Take to DiscoverFraud?38302424242419181812120 10 20 30 40PayrollCheck TamperingFinancial Statement…Expense…BillingSkimmingCash on HandCash LarcenyCorruptionNon-CashRegister DisbursementsMedian Months to DetectionMedian Months toDetection2012 Global Fraud Study, Association of Certified Fraud Examiners
  41. 41. BehaviorRedFlags6.5%5.3%8.1%8.4%12.6%19.2%14.8%14.8%18.2%35.8%27.1%Refuses vacationsPast legal problemsPast employment problemsAddiction problemsParanoiaClose association w/vendorWheeler-DealerDivorce/FamilyControl IssuesLiving Beyond MeansFinancial Difficulties
  42. 42. What are the most common types of fraud?14.60%11.00%24.90%14.50%11.90%9.30%3.60% 11.80%SkimmingLarcenyBillingExpenseCheckPayrollCash RegisterCash on Hand2012 Global Fraud Study, Association of Certified Fraud ExaminersHandout -- Asset Misappropriations
  43. 43. Who Commits Fraud? How Much is Lost?$50,000$150,000$373,000$86,000$0 $100,000 $200,000 $300,000 $400,000Employee (43.0%)Manager (34.3%)Executive (18.5%)Other (4.2%)Median LossMedian Loss2012 Global Fraud Study, Association of Certified Fraud Examiners
  44. 44. How is Fraud Punished? Termination of employment = 72% No punishment = 7% Quit/disappeared = 8% Referral to law enforcement = 65% Prosecutor declines to prosecute =25%(Note – numbers total greater than 100% because more than oneaction is taken)“An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents,”Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center for Nonprofit Organizations
  45. 45. What is the likelihood of recovering funds?(1) Nothing recovered = 48% Complete recovery = 16% Partial recovery = 36% Small organizations are much morelikely to be a victim of occupational fraud Lack of anti-fraud controls in smallerorganizations contributes to vulnerabilityWho is more likely to be victimized? (2)1. “An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents,”Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center for Nonprofit Organizations2. 2010 Global Fraud Study, Association of Certified Fraud Examiners
  46. 46. Who Commits Fraud? High-level fraudsters (Officers/Directors) causegreatest damage – more than 3x morecostly, and take longer to detect. More than 85% have never been previouslycharged or convicted. Behavior warning signs: Living beyond meansand experiencing financial difficulty YES – The 2010 Global Fraud Study foundthat organizations that had common controls inplace had Significantly fewer losses (in # and $) Shorter time-to-detection2012 Global Fraud Study, Association of Certified Fraud ExaminersDo anti-fraud measures help preventfraud?Handout – Fraud Prevention ChecklistHandout – Sample Board Anti-Fraud Policy
  47. 47. Primary Control Weaknesses for VictimOrgs.Handouts – 10 Ways to Catch Fraud and Mistakes from OutsideHandout – 15 Ways to Minimize Employee Fraud
  48. 48. Nonprofits and FraudWhat to do when it happens to you!• Lock-down data• Start a formal audit process with outside auditor• Change procedures and rotate staff responsibilitiesIf you suspect fraud – act immediately!• All of the above, PLUS• Confront the perpetrator (employee, officer, outsidecontractor)• Copy and compile evidence in a separate, protected andconfidential file• Contact the police, if appropriateIf you verify fraudHandout – Someone Stole the Cashbox!Handout – Preventing and Responding to Fraud
  49. 49. PR for NonprofitsPublic Relations During Fraud CrisisIf Fraud orembezzlementfinds yourNonprofit,• How the publichears about andperceives theincident candrastically affectthe nonprofit’sability to movebeyond theevent.DO NOT HIDEor Minimize theseriousness ofthe event• If you arecontacted by thepress, answer! - ifyou don’t get yourstory out, no onewill, andspeculation willreplace factsHave a plan ofaction forresponse• If employee:suspension, termination• If board member:resignation, removal• Note appearance ofimpropriety is enough totake action for a boardmember, but more evidenceis needed to take actionagainst an employeeHandout – Public Relations During Nonprofit Crisis
  50. 50. Preventing FraudHave and use financial controlpoliciesKnow who handles the moneyRemove temptationReview financial information• ALSO - have independent review of financesBe aware that it can happen toyour nonprofit!
  51. 51. Crisis Management – Effect ofEconomy Nonprofits showed growth in contributions in 2011 compared with 2010, butslight reduction from 2011-2012Source: Guidestar 2012 Nonprofit Fundraising Survey0204060801001202009-2010 2010-2011 2011-2012Less than last yearApproximately the sameMore than last yearDont Know
  52. 52. Crisis Management 101Surviving Financial Downturn Step 1 – Review the Organization How well do you meet your budget(typical year)? What shortfall do you anticipate? How long can you survive atreduced budget levels? How are you affected by eachfunding source?
  53. 53. Crisis Management 101Surviving Financial Downturn Step 2 – Make a Plan Risk Management Plan What can you reduce and maintaincurrent levels of service? What can you reduce and maintainminimum service? Where can you increase funding○ Lapsed donors, new donors, alternate fundingsources
  54. 54. Crisis Management 101Surviving Financial Downturn Step 3 – Creative OptionsNew Fund RaisingOpportunities○ Social media, networking, micro-fundraising Collaborations with similar orcomplementary nonprofits Spin-off/Re-Master current activities
  55. 55. Crisis Management 101Surviving Financial Downturn Step 4 – Acute Crisis Management Reduction in programs○ Prioritize – what MUST you retain?○ Reduce scope/ Increase fees Reduction in Staff○ Reduction in Staff ≠ previous service levels○ Reduction in Staff = do it right What is your “limit”?○ Minimum financial - resource - program - mission PR in times of Crisis – Preserving public image
  56. 56. Financial Accountabilityfor NonprofitsComplianceAccountabilityBest PracticesRisk ManagementCrisis ManagementHandout – Financial Accountability Further ReadingHandout – Where to Go for Government Compliance
  57. 57. Any Questions?Miriam Robeson, AttorneyToday’s materials are available onMiriam’s Website:http://blog.lawlatte.com/index.php/2013-workshops/

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