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Ff&f tipton february 8, 2012


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  • 1. FRAUD, FINANCE AND FREAKING OUT! Risk and Crisis Management For Nonprofits PresenterMiriam Robeson, Attorney February 8, 2012
  • 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. WHY ARE WE HERE – PART 2THE HORROR STORIES AND BAD PRESS Investigation of Fiesta, Sugar, and Orange In 2006, an estimated $40B Bowl games for abuse of was lost to fraud in the nonprofit status and nonprofit sector “extravagant compensation” Nonprofit Status of 30 credit Closer to home counseling organizations • 2011 – New Haven $1M Bingo Scam revoked for failure to achieve • 2012 Noble County Shelter ED pled a nonprofit purpose and for guilty to 4 counts theft • 2012 “Little Miracles” employees excessive executive arrested for providing false compensation information to gov’t officials
  • 4. WHY WE ARE HERE – PART 3 THE IRS IRS increases nonprofit oversightEmployment Executive Compliance (Tax Activist Agenda Taxes Compensation forms)Since 2008, the IRS has added more than 100 employees to the Exempt Organizations Section As of June, 2011, the IRS has “automatically revoked” the nonprofit status of more than 275,000 nonprofits
  • 5. WHAT IS FINANCIAL ACCOUNTABILITY?THE BOARD IS RESPONSIBLE FOR:Knowing the financial status of the NP Understanding the financial status Acting on financial needs of the NP Preventing financial mishaps Mitigating financial crisis
  • 6. ACCOUNTABILITY Board reports to • Donors Are you Good The Buck Stops with • Government Stewards of the the Board • Sponsors resources the public • Grantors entrusts in your care? • Constituents
  • 7. FINANCIAL ACCOUNTABILITY FOR NONPROFITS Compliance Accountability Best Practices Risk Management Crisis Management
  • 8. COMPLIANCE Government and other technical requirements
  • 9. 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
  • 10. 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• Due 5 + 15 after end of estate fiscal year • Normal gross receipts < $200,000• NO extensions of time! • Total Assets < $500,000 Failure to file – automatic revocation of §501(c)(3) status
  • 11. COMPLIANCE – IRSIS YOUR NONPROFIT “ON THE LIST?” IRS Publication 78 – Cumulative List of Nonprofit Organizations approved by the IRS,,id=96136,00.html Go to IRS website and search “Publication 78” Incorporation as a State (Indiana) nonprofit does not equal IRS nonprofit - 501(c)(3) - Status
  • 12. 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 State – IN-Tax many federal tax organizations payment system) “Exempt” versus Employee Wages and Hours “non exempt” Classification laws employees Applies if you Fair Hiring and Does not apply to receive Nondiscrimination all employers government $$
  • 13. COMPLIANCE - UBITUBIT – Unrelated • (A) Trade or businessBusiness Income • (B) regularly carried on • (C) not “substantially related” to exempt purpose Tax • Rental income Examples: • Product sales (storefront) • Does not include investment income If UBIT constitutes “substantial portion” of income, nonprofit can lose exempt status!
  • 14. FINANCIAL OVERSIGHT Handout – 10 Tips for Keeping an Eye on FinancesWATCH 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
  • 15. Handout – 10 Financial Priorities for Nonprofit BoardsACCOUNTABILITY - FINANCIAL Financial Policies Financial Controls Monitor appropriate use of nonprofit funds Audit - review
  • 16. Handout – Nonprofit Financial Control PolicyACCOUNTABILITY -FINANCIAL GOVERNANCE POLICIES Policies for –  Handling Money  Recording Money  Reporting Money
  • 17. ACCOUNTABILITY Handout – Document Destruction PolicyFINANCIAL CONTROLSGAAP StandardsFinancial Procedures ManualRestrictions documented and honored• Donor restrictions• Grant requirements• Commingling FundsTraining program for Staff and BoardDocument Retention/Destruction Policy
  • 18. Handout – Conflict of Interest PolicyACCOUNTABILITY - GOVERNANCE Conflict of Interest Ethical Standards
  • 19. ACCOUNTABILITY - CONFLICTS OF INTEREST Board Staff Member Conflicts Conflicts Donor Volunteer Conflicts Conflicts
  • 20. ACCOUNTABILITY - ETHICSWhen are your actions… Question- Un-Legal? Illegal? able? ethical?
  • 21. 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”)
  • 22. Handout – Whistleblower Policy MORE EXAMPLES - ETHICSFailure to properly account andrestrict use of donor-specified Purchases from Board-memberdonations (illegal and business without properunethical!) disclosure (the copy shop• Capital contributions used for example) operational expenses• “Borrowing” from restricted fundsFailure to consult professionals Improper oversight of spending for assistance, when needed (financial control policies) - (lawyer – accountant) Indianapolis Humane Society
  • 23. 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
  • 24. 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
  • 25. RISK MANAGEMENT – D&O INSURANCE Directors & Officers Insurance Protects the Board and Key Staff D&O Wrongful acts of Insurance Breach of Duty the board Mismanagement covers What D&O Provides legal Pays claims defense Does What D&O Normal liability Criminal acts claims Doesn’t
  • 26. Handout – Risk Management PolicyRISK MANAGEMENT PLANTYPES OF RISK TO MANAGE • Board People members, volunteers, employees, cli ents, donors, the public. • Buildings, facilities, equipment, mate Property rials, copyrights, trademarks • sales, grants, contributions, sponsors Income , fund raising • reputation, stature in Goodwill community, ability to raise funds and appeal to prospective volunteers
  • 27. 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”
  • 28. ISSUES OF FRAUD AND THE NONPROFIT SECTOR No comprehensive research on depth/breadth of fraud in the nonprofit sector (mostly from “headline news”) – most research includes nonprofit 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
  • 29. FRAUD IN THE NONPROFIT SECTOR IS ON THE RISE! 2010 Global Fraud Study, Association of Certified Fraud Examiners
  • 30. HOW IS FRAUD DETECTED? 2010 Global Fraud Study, Association of Certified Fraud Examiners
  • 31. HOW LONG DOES IT TAKE TO DISCOVER/DETECTFRAUD? 2010 Global Fraud Study, Association of Certified Fraud Examiners
  • 32. Financial Difficulties 44.70% BEHAVIOR RED FLAGS Living Beyond Means 45% Control Issues 23.40% Divorce/Family 22.90% Wheeler-Dealer 19.70%Close association w/vendor 16.10% Paranoia 14.50% Addiction problems 14.20%Past employment problems 9.70% Past legal problems 8.60% Refuses vacations 8.00%
  • 33. Handout -- Asset MisappropriationsWHAT ARE THE MOST COMMON TYPES OF FRAUD? 2.40% 11.50% 16.20% 10.60% 9.60% 16.90% Skimming Larceny 28% Billing 15.10% Expense Check Payroll Cash Register Cash on Hand 2010 Global Fraud Study, Association of Certified Fraud Examiners
  • 34. HOW IS FRAUD PUNISHED? Termination of employment = 72% No punishment = 7% Quit/disappeared = 8% Referral to law enforcement = 72% 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
  • 35. WHAT IS THE LIKELIHOOD OF RECOVERING FUNDS? (1) Nothing recovered = 50% Complete recovery = 34% Partial recovery = 16% 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 vulnerability 1. “An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents,” Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center for Nonprofit Organizations 2. 2010 Global Fraud Study, Association of Certified Fraud Examiners
  • 36. 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 difficulty DO ANTI-FRAUD MEASURES HELP PREVENT FRAUD? 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 2010 Global Fraud Study, Association of Certified Fraud Examiners
  • 37. Handouts – 10 Ways to Catch Fraud and Mistakes from Outside Handout – 15 Ways to Minimize Employee FraudPRIMARY CONTROL WEAKNESSES FOR VICTIM ORGS.
  • 38. 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
  • 39. Handout – Public Relations During Nonprofit CrisisPR FOR NONPROFITSPUBLIC RELATIONS DURING FRAUD CRISISIf Fraud or DO NOT HIDE Have a plan ofembezzlement or Minimizefinds your action forNonprofit, the response• How the public seriousness of • If employee: hears about the event suspension, termi and perceives nation the incident can • If you are • If board member: drastically contacted by the resignation, remo affect the press, answer! - if val nonprofit’s you don’t get your story out, no • Note appearance ability to move of impropriety is beyond the one will, and speculation will enough to take event. action for a board replace facts member, but more evidence is needed to take action against an employee
  • 40. PREVENTING FRAUDHave and use financial control policies 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!
  • 41. CRISIS MANAGEMENTTHE GOOD NEWS Nonprofits showed growth in contributions in 2010 compared with 2009 Source: Guidestar 2010 Nonprofit Fundraising Survey
  • 42. CRISIS MANAGEMENTTHE BAD NEWS Nearly ½ of Nonprofits are struggling to “Make Budget” Source: Guidestar 2010 Nonprofit Fundraising Survey
  • 43. 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?
  • 44. 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
  • 45. 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
  • 46. 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
  • 47. FINANCIAL ACCOUNTABILITY FOR NONPROFITSComplianceAccountabilityBest PracticesRisk ManagementCrisis Management
  • 48. Any Questions? THANK YOU FOR YOUR ATTENTION! Miriam Robeson, AttorneyToday’s materials are available on Miriam’s Website: /upcoming-workshops/