Financial accountability 2014 07-09 lafayette

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Financial Accountability for Board Members. Sponsored by the Lafayette Community Foundation and the Indiana Nonprofit Resource Network, this program provides basic information and tools to help nonprofit board members understand and comply with their fiduciary responsibilities

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Financial accountability 2014 07-09 lafayette

  1. 1. Important Stuff Nonprofit Boards MUST Know Presenter Miriam Robeson, Attorney July 9, 2014
  2. 2. The Board of Directors is responsible for the financial integrity of the nonprofit organization  What must a Director know about nonprofit finances?  Things we will learn today:  Basics of Nonprofit Finances  Accountability  Best Practices  Risk Management  Basic - Intermediate Level
  3. 3. Financial Accountability for Nonprofits  Finance  Best Practices  Accountability  Risk Management  Crisis Management
  4. 4. Finance Basics of Financial Statements
  5. 5. What are Financial Reports? How Complicated Must They Be?  Basic Reports  Income/Expense  Balance Sheet  Intermediate Reports  Compilation  Review  Advanced Reports  Audit  Statement of Financial Position
  6. 6. Basic Reports Nonprofits < $50,000/year annual income  Income/Expense  (aka: Profit & Loss, P&L, Cash Flow)  Reports income from all sources, all expenses  Include Restricted Funds  Should be provided at every board meeting  What’s missing from this one? Handout: Sample Financial Report
  7. 7. Basic Reports Nonprofits < $50,000/year annual income  Account Balance  (aka: Balance Sheet)  Cash account balance  Asset balance  Should be provided at every board meeting (in some form)  What are Retained Earnings? ○ Accumulated net income from all previous years
  8. 8. Basic Reports Nonprofits < $50,000/year annual income  Year-End Accounting  Accounting method ○ Cash versus Accrual  Year-End Review ○ Internal (Audit/Review) ○ Compilation ○ Review ○ Audit  Government Reporting ○ IRS 990N ○ State NP20
  9. 9. Intermediate Reports Annual Income $50,000 - $250,000  Same as Basic -PLUS:  Internal Audit Team  CPA Review or Audit  Some detailed reports  Additional Financial procedures  IRS 990 EZ (not 990N)
  10. 10. Advanced Reports Nonprofits > $250,000 Annual Income Also - significant government grants  All Reports in Basic and Intermediate  PLUS –  Additional Financial Procedures  IRS 990 required  Full Audit ○ Financial Information ○ Financial Management ○ Assets and Inventory Handout: Sample Financial Statement
  11. 11. Finance - Audit Review Full Audit Most Expensive Most Comprehensive Review of Finances, Financial Practices, Board practices Review Medium Review (and cost) “Reasonable Basis” Does not review policies, procedures, internal controls Compilation Most Basic (least expensive) Only reviews financial information on the surface Bank Statements, Financial records provided by client No assurances, no opinion Internal Performed “in house” or informally Generally not accepted for grants or government Suitable for very small nonprofits Provides minimal oversight and protection Comprehensive Basic
  12. 12. Financial Compliance - Federal IRS – 990 Form <$50,000 – 990 N • Change in threshold beginning 2010 • On-line ONLY • Due 5 + 15 after end of fiscal 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 real estate • Normal gross receipts < $200,000 • Total Assets < $500,000 Failure to file – automatic revocation of §501(c)(3) status
  13. 13. Other Compliance - State • Indiana Secretary of State Annual Business Entity Report • Indiana State Board of Accounts • Financial Reporting for Government Funds Entity Annual Report (E-1) • Indiana Department of Revenue NP-20
  14. 14. Financial Compliance - UBIT • (A) Trade or business • (B) regularly carried on • (C) not “substantially related” to exempt purpose UBIT – Unrelated Business Income Tax • Rental income • Product sales (storefront) • Does not include investment income Examples: If UBIT constitutes “substantial portion” of income, nonprofit can lose exempt status!
  15. 15. Best Practices Best Practices For Financial Oversight And Management
  16. 16. Nonprofit Financial “Best Practices” Compliance, Competence, and Confidence  Practice clear, decisive financial governance  Adopt Ethics and Conflict of Interest Policies  Implement Financial Controls  Engage regular, independent financial review  Promote transparency of Reporting  Develop a Risk Management Plan  Know emerging nonprofit financial issues
  17. 17. Clear, Decisive Governance Best Practices for Conduct  Proper policies in place  Review all financial documents  Procedures to verify data  Safeguard Nonprofit assets  Compliance with legal and tax reporting
  18. 18. Accountabilit y Requirements to protect the financial integrity of the nonprofit
  19. 19. Accountability The Buck Stops with the Board Board reports to • Donors • Government • Sponsors • Grantors • Constituents Are you Good Stewards of the resources the public entrusts in your care?
  20. 20. 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
  21. 21. Financial Accountability Basic Requirements  Financial Policies  Financial Controls  Monitor appropriate use of nonprofit funds  Rules for Charitable Donations  Audit - review Handout – 10 Financial Priorities for Nonprofit Boards
  22. 22. Accountability - Financial Policies  Policies for –  Handling Money  Recording Money  Reporting Money Handout – Nonprofit Financial Control Policy
  23. 23. Accountability - Financial Controls SSARS Standards (Statements on Standards for Accounting And Review Services) Financial Procedures Manual Restrictions documented and honored Training program for Staff and Board Document Retention/Destruction Policy
  24. 24. Accountability - Financial Oversight Watch the money - Watch the people Financial Oversight is the review of both finances and financial practices Ensures safe, ethical financial procedures Protects Nonprofits and the Directors/Staff Provides integrity and transparency to the public Catches financial difficulties before they become financial impossibilities Handout – 10 Tips for Keeping an Eye on Finances
  25. 25. Accountability - Charitable Donations • What can be considered a donation? • What paperwork is required? • Donations of goods or funds > $250 require written acknowledgement • Magic language: “No goods or services were provide in exchange for this donation” Watch the Rules regarding charitable donations! NOTE – donations of TIME and EXPERTISE are NOT deductible! Handout: Top 10 Rules for Charitable Donations
  26. 26. Accountability - Governance • Personal Benefit • Abuse of Status Conflict of Interest • Board – Staff – Volunteer - Donor Ethical Standards Handout – Conflict of Interest Policy
  27. 27. Ethics/Conflict of Interest Best Practices for Integrity  Conflict of Interest Policy  Signed by Board and Staff annually  Practiced openly  Transparency critical to credibility!  Ethics  Newspaper Headline Test  Appearance of Impropriety
  28. 28. Best Practice Watch Conflicts of Interest Board Member Conflicts Staff Conflicts Donor Conflicts Volunteer Conflicts
  29. 29. 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
  30. 30. More Examples - Ethics Failure to properly account and restrict use of donor- specified donations (illegal and unethical!) • Capital contributions used for operational expenses • “Borrowing” from restricted funds Purchases from Board- member business without proper disclosure (the copy shop example) Failure to consult professionals for assistance, when needed (lawyer – accountant) Improper oversight of spending (financial control policies) - Indianapolis Humane Society
  31. 31. Accountability – No Personal Benefit A Nonprofit CANNOT distribute funds to members, officers or directors
  32. 32. Abuse of Nonprofit Status
  33. 33. 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
  34. 34. Accountability and Transparency – Credibility to the Public Required disclosures • Tax returns • Organizational Documents • Articles of Incorporation • Bylaws • Funds used for lobbying • Application for Exempt Status Recommended disclosures • Annual report • Basic Financial Statement • Report of Activities • Mission/Vision Regularly provide information to the Public
  35. 35. 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 “mission creep” and inadequate capacity Handout – How Small Nonprofits Can Improve
  36. 36. Risk Management Steps to Identify and manage nonprofit financial risk
  37. 37. 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
  38. 38. General Liability Insurance Don’t Leave Home Without It! “Slip and Fall” insurance for basic activities Personal Injury Property Damage Most places require it Facility rental Working with other organizations NOTE – Usually DOES NOT COVER MEMBERS
  39. 39. Risk Management – D&O Insurance D&O Insurance covers Breach of Duty Wrongful acts of the board Mismanagement What D&O Does Provides legal defense Pays claims What D&O Doesn’t Normal liability claims Criminal acts Directors & Officers Insurance Protects - Board and Key Staff
  40. 40. Risk Management Plan Types of Risk to Manage • Board members, volunteers, employees, clients, donors, the public. People • Buildings, facilities, equipment, materials, copyrights, trademarks Property • sales, grants, contributions, sponsors, fund raisingIncome • reputation, stature in community, ability to raise funds and appeal to prospective volunteers Goodwill Handout – Risk Management Policy
  41. 41. 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”
  42. 42. Risk Management and 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
  43. 43. How is Fraud Detected? 2014 Global Fraud Study, Association of Certified Fraud Examiners 42.2% 16.0% 14.1% 6.6% 6.0% 4.2% 3.0% 2.6% 2.2% 1.1% 0.8% 0.5% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Tip Management Review Internal Audit Account Reconciliation By Accident Document Examination External Audit Surveillance Notified by Police Internal Controls Confession Other Percent of Cases Percent of Cases
  44. 44. What are the most common types of fraud? 22.20% 17.50% 15.50%14.40% 14.10% 11.90% 11.80% 10.70% Billing Non-Cash Expense Cash on Hand Skimming Check Payroll Larceny 2014 Global Fraud Study, Association of Certified Fraud Examiners Handout -- Asset Misappropriations
  45. 45. Who Commits Fraud? How Much is Lost? $75,000 $130,000 $500,000 $250,000 $0 $200,000 $400,000 $600,000 Employee (48.6%) Manager (31.9%) Executive (17.3%) Other (4.3%) Median Loss Median Loss 2014 Global Fraud Study, Association of Certified Fraud Examiners
  46. 46. 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 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
  47. 47. Who Commits Fraud?  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  YES – The 2014 Global Fraud Study found that organizations that had common controls in place had  Significantly fewer losses (in # and $)  Shorter time-to-detection 2014 Global Fraud Study, Association of Certified Fraud Examiners Do anti-fraud measures help prevent fraud? Handout – Fraud Prevention Checklist Handout – Sample Board Anti-Fraud Policy
  48. 48. Primary Control Weaknesses for Victim Orgs. Handouts – 10 Ways to Catch Fraud and Mistakes from Outside Handout – 15 Ways to Minimize Employee Fraud Lack of Reporting Mechanism Lack of Clear Lines of Authority Lack of Employee Fraud Ed Lack of Independent Audit Other Lack of Competent Oversight Poor Tone at the Top Override of Existing Controls
  49. 49. Nonprofits and Fraud What to do when it happens to you! • Lock-down data • Start a formal audit process with outside auditor • Change procedures and rotate staff responsibilities If you suspect fraud – act immediately! • 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 If you verify fraud Handout – Someone Stole the Cashbox! Handout – Preventing and Responding to Fraud
  50. 50. PR for Nonprofits Public Relations During Fraud Crisis If Fraud or embezzlement finds your Nonprofit, • How the public hears about and perceives the incident can drastically affect the nonprofit’s ability to move beyond the event. DO NOT HIDE or Minimize the seriousness of the event • If you are contacted by the press, answer! - if you don’t get your story out, no one will, and speculation will replace facts Have a plan of action for response • If employee: suspension, termination • If board member: resignation, removal • Note appearance of impropriety is enough to take action for a board member, but more evidence is needed to take action against an employee Handout – Public Relations During Nonprofit Crisis
  51. 51. Preventing Fraud Have 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!
  52. 52. Crisis Management 101 Surviving in an Uncertain Economy  Step 1 – Review the Organization  How well do you meet your budget (typical year)?  What shortfall do you anticipate?  How long can you survive at reduced budget levels?  How are you affected by each funding source?
  53. 53.  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 Crisis Management 101 Surviving in an Uncertain Economy
  54. 54.  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 Crisis Management 101 Surviving in an Uncertain Economy
  55. 55.  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 Crisis Management 101 Surviving in an Uncertain Economy
  56. 56. Know Emerging Nonprofit Issues Best Practices to Staying Current  Subscribe to Nonprofit forums  Board Source, INRN workshops  Listen to your stakeholders  What concerns affect them?  Listen to your professionals  Attorney, CPA
  57. 57. Financial Accountability for Nonprofits Handout – Financial Accountability Further Reading Handout – Where to Go for Government Compliance  Finance  Best Practices  Accountability  Risk Management  Crisis Management ***BONUS: Board Governance Quick Quiz
  58. 58. Any Questions? Miriam Robeson, Attorney Today’s materials are available on Miriam’s Website: http://blog.lawlatte.com/index.php/2014-workshops/ Contact Miriam at: MiriamRobeson@lawlatte.com

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