Fraud, Finance and   Freaking Out!Risk and Crisis Management      For Nonprofits             Presenter     Miriam Robeson,...
Why Are We Here?          Starting with 2010, the IRS has increased scrutiny of          nonprofits with an aggressive pro...
Why Are We Here – Part 2The Horror Stories and Bad Press - 2012NY church embezzler      CA sues veterans         MA man ad...
Why We are Here – Part 3    The IRS                   IRS increases nonprofit oversight                      Executive    ...
Financial Accountability for             Nonprofits Compliance Accountability Best Practices Risk Management Crisis M...
 Government and other  technical requirements                    Compliance
Compliance - State  Annual Business Entity Report  • Indiana Secretary of State  Entity Annual Report (E-1)  • Indiana Sta...
Compliance - Federal               IRS – 990 Form<$50,000 – 990 N                >$50,000 – 990 EZ/990                    ...
Updated slideCompliance – IRSIs your nonprofit “on the list?” IRS Publication 78– no longer published Search-able databa...
Compliance - Employment Employment taxes     Federal -- 941 –                                            State -- WH-1 –  ...
Compliance - UBIT     UBIT –       • (A) Trade or business   Unrelated      • (B) regularly carried onBusiness Income   • ...
 Requirements to protect the  financial integrity of the  nonprofit                 Accountability
Accountability                   Board reports    Are you Good                   to                Stewards of  The Buck S...
What is Financial Accountability?The Board is Responsible for:Knowing the financial status ofthe NP   Understanding the fi...
Handout – 10 Tips for Keeping an Eye on FinancesFinancial OversightWatch the money - Watch the peopleFinancial Oversight i...
Handout – 10 Financial Priorities for Nonprofit Boards       Accountability - Financial Financial Policies Financial Con...
Handout – Nonprofit Financial Control Policy   Accountability -   Financial Governance Policies Policies for –   Handlin...
Handout – Document Destruction PolicyAccountability - Financial Controls GAAP Standards Financial Procedures Manual Restri...
Handout – Conflict of Interest PolicyAccountability - GovernanceConflict of InterestEthical Standards
Accountability - Conflicts of Interest          Board                      Staff         Member                     Confli...
Accountability - Personal Benefit              A Nonprofit                CANNOT            distribute funds             t...
Abuse of Nonprofit Status Improper Conduct Executive Compensation “Private Inurement”   Excessive compensation   Unre...
Consequences of Abuse of Status IRS Consequences – $$   Fines to Nonprofit   Fines to Board of Directors   Fines to St...
Accountability - Ethics     When are your       actions…                    Question-     Un-Legal?   Illegal?     able?  ...
Nonprofit Ethical Issues - Examples Improper donor acknowledgements    Donations of time are not tax-deductible Donor “...
Handout – Whistleblower Policy         More Examples - EthicsFailure to properly accountand restrict use of donor-specifie...
Transparency – Credibility to Public     Regularly provide information to the PublicRequired disclosures            Recomm...
 Steps to Identify and manage  nonprofit financial risk                  Risk                  Management
Risk Management for          NonprofitsBest Practices to Prevent Financial Crisis  Identify Risk  Ranks Risk  Identify...
Risk Management – D&O InsuranceDirectors & Officers Insurance Protects - Board and Key Staff      D&O   Insurance         ...
Handout – Risk Management PolicyRisk Management PlanTypes of Risk to Manage                   • Board members, volunteers,...
Risk Management - People Poor economy has resulted in an increase in  criminal conduct against nonprofits Embezzlement b...
Issues of Fraud and the Nonprofit SectorNo comprehensive research on depth/breadthof fraud in the nonprofit sector (mostly...
Fraud in the Nonprofit Sector is on the Rise!  2012 Global Fraud Study, Association of Certified Fraud Examiners
How is Fraud Detected?                            Percent of Cases       Internal Controls    1.0%                   Other...
How Long Does it Take to Discover Fraud?                  Median Months to Detection             Register…                ...
Financial Difficulties                   27.1%                                                          Behavior Red Flags...
Handout -- Asset MisappropriationsWhat are the most common types of fraud?    3.60%             11.80%                14.6...
Who Commits Fraud? How Much?                            Median Loss                                                       ...
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 recove...
Handout – Fraud Prevention ChecklistWho Commits Fraud?                     Handout – Sample Board Anti-Fraud Policy High-...
Handouts – 10 Ways to Catch Fraud and Mistakes from Outside                            Handout – 15 Ways to Minimize Emplo...
Handout – Someone Stole the Cashbox!                              Handout – Preventing and Responding to FraudNonprofits a...
PR for Nonprofits           Handout – Public Relations During Nonprofit Crisis Public Relations During Fraud CrisisIf Frau...
Preventing FraudHave and use financial controlpolicies   Know who handles the   money      Remove temptation         Revie...
Crisis Management - The Good News120100                                                    Less than last year 80         ...
Crisis Management 101Surviving Financial DownturnStep 1 – Review the Organization  How well do you meet your budget   (t...
Crisis Management 101Surviving Financial DownturnStep 2 – Make a Plan  Risk Management Plan  What can you reduce and ma...
Crisis Management 101Surviving Financial DownturnStep 3 – Creative Options  New Fund Raising Opportunities      Social ...
Crisis Management 101Surviving Financial DownturnStep 4 – Acute Crisis Management  Reduction in programs      Prioritiz...
Financial Accountability       for NonprofitsComplianceAccountabilityBest PracticesRisk ManagementCrisis Management
Any Questions? Thank you for your attention!    Miriam Robeson, Attorney Today’s materials are available on          Miria...
Ff&f   lafayette september 18, 2012 4-3
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Transcript of "Ff&f lafayette september 18, 2012 4-3"

  1. 1. Fraud, Finance and Freaking Out!Risk and Crisis Management For Nonprofits Presenter Miriam Robeson, Attorney September 18, 2012
  2. 2. Why Are We Here? Starting with 2010, the IRS has increased scrutiny of nonprofits with an aggressive program to revoke nonprofit status for out-of-compliance nonprofits Economy has decreased available funds for nonprofit budgets, but increased criticism of nonprofit Since 2006, instances of nonprofit fraud have risen steadily with the decline in the economy It’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 2The Horror Stories and Bad Press - 2012NY church embezzler CA sues veterans MA man admits topleads guilty to $1M charity over spending $900K theft from theft pay and perks nonprofit he led In Indiana… DC council member • Indy Child Care organizationAZ man gets 14 years sentenced to 38 under investigation for Muslim charity months for stealing • Franklin woman sentenced scam $350K from youth to 3 years probation for programs $12K theft
  4. 4. Why We are Here – Part 3 The IRS IRS increases nonprofit oversight Executive Compliance (TaxEmployment Taxes Activist Agenda Compensation forms)Since 2008, the IRS has added more than 100 employees to the Exempt Organizations Section In June, 2011, the IRS “automatically revoked” the nonprofit status of more than 275,000 nonprofits, and continues to aggressively revoke status of delinquent NPs
  5. 5. Financial Accountability for Nonprofits Compliance Accountability Best Practices Risk Management Crisis Management
  6. 6.  Government and other technical requirements Compliance
  7. 7. Compliance - State Annual Business Entity Report • Indiana Secretary of State Entity Annual Report (E-1) • Indiana State Board of Accounts • Financial Reporting for Government Funds NP-20 • Indiana Department of Revenue
  8. 8. Compliance - Federal IRS – 990 Form<$50,000 – 990 N >$50,000 – 990 EZ/990 • Due 5 + 15• Change in threshold • 6 month automatic extension beginning 2010 • For most nonprofits – 990 EZ• On-line ONLY • Minimal property or real estate• Due 5 + 15 after end of • Normal gross receipts < $200,000 fiscal year • Total Assets < $500,000• NO extensions of time! Failure to file – automatic revocation of §501(c)(3) status
  9. 9. Updated slideCompliance – 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) status
  10. 10. Compliance - Employment Employment taxes Federal -- 941 – State -- WH-1 – Employer’s and reports must Quarterly Federal Employer’s State be timely filed! Tax Return Tax Return 2011 – ONLINE Federal – EFTPS requirement for (electronic federal State – IN-Tax many tax payment organizations system) “Exempt” versus Employee “non exempt” Wages and Hours Classification employees laws Applies if you Fair Hiring and Does not apply to receive Nondiscrimination all employers government $$
  11. 11. Compliance - UBIT UBIT – • (A) Trade or business Unrelated • (B) regularly carried onBusiness Income • (C) not “substantially related” to exempt purpose Tax • Rental income Examples: • Product sales (storefront) • Does not include investment incomeIf UBIT constitutes “substantial portion” of income, nonprofit can lose exempt status!
  12. 12.  Requirements to protect the financial integrity of the nonprofit Accountability
  13. 13. Accountability Board reports Are you Good to Stewards of The Buck Stops • Donors the resources with the Board • Government the public • Sponsors • Grantors entrusts in • Constituents your care?
  14. 14. What is Financial Accountability?The Board is Responsible for:Knowing the financial status ofthe NP Understanding the financial status Acting on financial needs of the NP Preventing financial mishaps Mitigating financial crisis
  15. 15. Handout – 10 Tips for Keeping an Eye on FinancesFinancial OversightWatch the money - Watch the peopleFinancial Oversight is the review of both finances andfinancial practicesEnsures safe, ethical financial proceduresProtects Nonprofits and the Directors/StaffProvides integrity and transparency to the publicCatches financial difficulties before they become financialimpossibilities
  16. 16. Handout – 10 Financial Priorities for Nonprofit Boards Accountability - Financial Financial Policies Financial Controls Monitor appropriate use of nonprofit funds Audit - review
  17. 17. Handout – Nonprofit Financial Control Policy Accountability - Financial Governance Policies Policies for –  Handling Money  Recording Money  Reporting Money
  18. 18. Handout – Document Destruction PolicyAccountability - Financial Controls GAAP Standards Financial Procedures Manual Restrictions documented and honored • Donor restrictions • Grant requirements • Commingling Funds Training program for Staff and Board Document Retention/Destruction Policy
  19. 19. Handout – Conflict of Interest PolicyAccountability - GovernanceConflict of InterestEthical Standards
  20. 20. Accountability - Conflicts of Interest Board Staff Member Conflicts Conflicts Donor Volunteer Conflicts Conflicts
  21. 21. Accountability - Personal Benefit A Nonprofit CANNOT distribute funds to members, officers or directors
  22. 22. Abuse of Nonprofit Status Improper Conduct Executive Compensation “Private Inurement”  Excessive compensation  Unreasonable Rental Agreements  Unreasonable lending agreements  Unreasonable sales transaction
  23. 23. Consequences of Abuse of Status IRS Consequences – $$  Fines to Nonprofit  Fines to Board of Directors  Fines to Staff  PERSONAL LIABILITY FOR ALL! IRS Consequences – Revocation of Nonprofit Status
  24. 24. Accountability - Ethics When are your actions… Question- Un-Legal? Illegal? able? ethical?
  25. 25. Nonprofit Ethical Issues - Examples Improper donor acknowledgements  Donations of time are not tax-deductible Donor “influence-buying” Improper arrangements with donors  Failing to include both spouses in joint gift paperwork Staff/ED/Board/Volunteer accepting gifts from donors Failing to take responsibility (“Not My Fault”)
  26. 26. Handout – Whistleblower Policy More Examples - EthicsFailure to properly accountand restrict use of donor-specified donations (illegal Purchases from Board-and unethical!) member business without•Capital contributions used for proper disclosure (the copy operational expenses shop example)•“Borrowing” from restricted funds Failure to consult Improper oversight ofprofessionals for assistance, spending (financial control when needed (lawyer – policies) - Indianapolis accountant) Humane Society
  27. 27. Transparency – Credibility to Public Regularly provide information to the PublicRequired disclosures Recommended• Tax returns disclosures• Organizational Documents • Annual report • Articles of Incorporation • Basic Financial Statement • Bylaws • Report of Activities• Funds used for lobbying • Mission/Vision• Application for Exempt Status
  28. 28.  Steps to Identify and manage nonprofit financial risk Risk Management
  29. 29. Risk Management for NonprofitsBest Practices to Prevent Financial Crisis Identify Risk Ranks Risk Identify Policies to manage risk Implement protections Implement procedures in event of crisis
  30. 30. Risk Management – D&O InsuranceDirectors & Officers Insurance Protects - Board and Key Staff D&O Insurance Breach of Duty Wrongful acts of the board Mismanagement covers What Provides legal Pays claims D&O Does defense What D&O Normal liability claims Criminal acts Doesn’t
  31. 31. Handout – Risk Management PolicyRisk Management PlanTypes of Risk to Manage • Board members, volunteers, People employees, clients, donors, the public. • Buildings, facilities, equipment, Property materials, copyrights, trademarks • sales, grants, contributions, Income sponsors, fund raising • reputation, stature in community, Goodwill ability to raise funds and appeal to prospective volunteers
  32. 32. Risk Management - People Poor economy has resulted in an increase in criminal conduct against nonprofits Embezzlement by employees Embezzlement by officers Fraud from “outsiders” Phrase of the Day – “Trust But Verify”
  33. 33. Issues of Fraud and the Nonprofit SectorNo comprehensive research on depth/breadthof fraud in the nonprofit sector (mostly from“headline news”) – most research includesnonprofit as a subset of broader scope “Headline News” creates an inaccurate picture •Impression of more fraud than actually exists •Impression of “we’re not like that” fosters complacency Ignorance of Full PR Impact of fraud in “headline news” •Every dollar lost to fraud = lost ability to achieve mission •Every fraud headline > public scrutiny of nonprofits •Every fraud headline < public donations to nonprofits
  34. 34. Fraud in the Nonprofit Sector is on the Rise! 2012 Global Fraud Study, Association of Certified Fraud Examiners
  35. 35. How is Fraud Detected? Percent of Cases Internal Controls 1.0% Other 1.1% Confession 1.7% Percent of Cases Surveillance 2.0% Notified by Police 2.6% External Audit 3.3% Document Examination 4.5% Account Reconciliation 5.3% By Accident 7.4% Internal Audit 14.0% Management Review 15.1% Tip 42.1% 0.0% 20.0% 40.0% 60.0%2012 Global Fraud Study, Association of Certified Fraud Examiners
  36. 36. How Long Does it Take to Discover Fraud? Median Months to Detection Register… 12 Median Months to Non-Cash 12 Detection Corruption 18 Cash Larceny 18 Cash on Hand 19 Skimming 24 Billing 24 Expense… 24 Financial Statement… 24 Check Tampering 30 Payroll 38 0 10 20 30 402012 Global Fraud Study, Association of Certified Fraud Examiners
  37. 37. Financial Difficulties 27.1% Behavior Red Flags Living Beyond Means 35.8% Control Issues 18.2% Divorce/Family 14.8% Wheeler-Dealer 14.8%Close association w/vendor 19.2% Paranoia 12.6% Addiction problems 8.4%Past employment problems 8.1% Past legal problems 5.3% Refuses vacations 6.5%
  38. 38. Handout -- Asset MisappropriationsWhat are the most common types of fraud? 3.60% 11.80% 14.60% 9.30% 11.00% Skimming 11.90% Larceny Billing 25% Expense 14.50% Check Payroll Cash Register Cash on Hand 2012 Global Fraud Study, Association of Certified Fraud Examiners
  39. 39. Who Commits Fraud? How Much? Median Loss Median Loss Other (4.2%) $86,000 Executive (18.5%) $373,000 Manager (34.3%) $150,000 Employee (43.0%) $50,000 $0 $100,000 $200,000 $300,000 $400,0002012 Global Fraud Study, Association of Certified Fraud Examiners
  40. 40. 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 morethan one action is taken) “An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents,”Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center for Nonprofit Organizations
  41. 41. What is the likelihood of recovering funds? (1)  Nothing recovered = 48%  Complete recovery = 16%  Partial recovery = 36% WHO IS MORE LIKELY TO BE VICTIMIZED? (2)  Small organizations are much more likely to be a victim of occupational fraud  Lack of anti-fraud controls in smaller organizations contributes to vulnerability1. “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
  42. 42. Handout – Fraud Prevention ChecklistWho Commits Fraud? Handout – Sample Board Anti-Fraud Policy High-level fraudsters (Officers/Directors) cause greatest damage – more than 3x more costly, and take longer to detect. More than 85% have never been previously charged or convicted. Behavior warning signs: Living beyond means and experiencing financial difficultyDO ANTI-FRAUD MEASURES HELP PREVENTFRAUD? YES – The 2010 Global Fraud Study found that organizations that had common controls in place had  Significantly fewer losses (in # and $)  Shorter time-to-detection 2012 Global Fraud Study, Association of Certified Fraud Examiners
  43. 43. Handouts – 10 Ways to Catch Fraud and Mistakes from Outside Handout – 15 Ways to Minimize Employee FraudPrimary Control Weaknesses for Victim Orgs.
  44. 44. Handout – Someone Stole the Cashbox! Handout – Preventing and Responding to FraudNonprofits and FraudWhat to do when it happens to you! If you suspect fraud – act immediately! • Lock-down data • Start a formal audit process with outside auditor • Change procedures and rotate staff responsibilities If you verify fraud • All of the above, PLUS • Confront the perpetrator (employee, officer, outside contractor) • Copy and compile evidence in a separate, protected and confidential file • Contact the police, if appropriate
  45. 45. PR for Nonprofits Handout – Public Relations During Nonprofit Crisis Public Relations During Fraud CrisisIf Fraud or DO NOT HIDE Have a plan ofembezzlement or Minimizefinds your action forNonprofit, the response seriousness of• How the public •If employee: hears about the event suspension, termination and perceives • If you are •If board member: the incident resignation, removal contacted by the can drastically •Note appearance of press, answer! - impropriety is enough to affect the if you don’t get take action for a board nonprofit’s your story member, but more ability to move out, no one evidence is needed to beyond the will, and take action against an event. speculation will employee replace facts
  46. 46. Preventing FraudHave and use financial controlpolicies Know who handles the money Remove temptation Review financial information • ALSO - have independent review of finances Be aware that it can happen to your nonprofit!
  47. 47. Crisis Management - The Good News120100 Less than last year 80 Approximately the 60 same More than last year 40 Dont Know 20 0 2009-2010 2010-2011 Nonprofits showed growth in contributions in 2011 compared with 2010 Source: Guidestar 2011 Nonprofit Fundraising Survey
  48. 48. Crisis Management 101Surviving Financial DownturnStep 1 – Review the Organization How well do you meet your budget (typical)? What shortfall do you anticipate? How long can you survive at reduced budget levels? How are you affected by each funding source?
  49. 49. Crisis Management 101Surviving Financial DownturnStep 2 – Make a Plan Risk Management Plan What can you reduce and maintain current levels of service? What can you reduce and maintain minimum service? Where can you increase funding Lapsed donors, new donors, alternate funding sources
  50. 50. Crisis Management 101Surviving Financial DownturnStep 3 – Creative Options New Fund Raising Opportunities  Social media, networking, micro-fundraising  Collaborations with similar or complementary nonprofits  Spin-off/Re-Master current activities
  51. 51. 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
  52. 52. Financial Accountability for NonprofitsComplianceAccountabilityBest PracticesRisk ManagementCrisis Management
  53. 53. Any Questions? Thank you for your attention! Miriam Robeson, Attorney Today’s materials are available on Miriam’s Website:http://blog.lawlatte.com/index.php/ 2012-workshops/
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