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Financial accountability for nonprofits 2012
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  • 1. AvoidFinancial Accountability commonfor Nonprofits mistakes Prevent loss of Sponsored by : §501(c)(3) Greene County Foundation status Presenter: Prevent Miriam Robeson, Attorney Fraud www.lawlatte.com
  • 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 Increase in media attention on unscrupulous nonprofits and nonprofit directors/officers It’s easier to PREVENT problems with nonprofit status – after problems become public, it may be too late to fixInformation Level –Intermediate
  • 3. Why Are We Here – Part 2The Horror Stories and Bad Press Investigation of Fiesta, Sugar, and Orange In 2006, an estimated Bowl games for abuse of $40B was lost to fraud in nonprofit status and the nonprofit sector “extravagant compensation” Nonprofit Status of 30 Closer to home credit counseling •2011 – New Haven $1M Bingo organizations revoked for Scam failure to achieve a •2012 Noble County Shelter ED pled guilty to 4 counts theft nonprofit purpose and for •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 oversight  Employment Taxes  Executive Compensation  Activist Agenda  Compliance (Tax 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. Handout – 10 Tips for Keeping an Eye on Finances Financial Oversight Watch 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 financialimpossibilities
  • 7. Financial Accountability for Nonprofits Compliance Accountability Best Practices Risk Management Danger Zones
  • 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• Change in threshold EZ/990 beginning 2010 • Due 5 + 15• On-line ONLY • 6 month automatic• Due 5 + 15 after end extension of fiscal year • For most nonprofits –• NO extensions of 990 EZ time! • Minimal property or real estate • Normal gross receipts < $200,000 Failure to file – automatic revocation of §501(c)(3) status • Total Assets <
  • 11. Compliance - Employment Employment Federal -- 941 – State -- WH-1 – taxes and reports Employer’s Employer’s State must be timely Quarterly Federal Tax Return filed! Tax Return January 1 – Federal – EFTPS ONLINE (electronic requirement for federal tax State – IN-Tax many payme nt organizations system) “Exempt” versus Wages and Hours Employer conduct “non exempt” laws employees APPLIES FOR Fair Hiring and Does not apply GOVERNMENT Nondiscrimination to all employers FUNDING!
  • 12. Compliance - UBITUBIT – Unrelated • (A) Trade or business • (B) regularly carried onBusiness Income • (C) not “substantially related” to exempt Tax purpose • Apartment rental income Examples: • Charity gaming income If UBIT constitutes “substantial portion” of income, nonprofit can lose exempt status!
  • 13. Accountability Board reports to Are you Good • Donors Stewards of theThe Buck Stops • Government resources thewith the Board • Sponsors public entrusts • Grantors in your care?
  • 14. Handout – Nonprofit Financial Control PolicyAccountability -Financial Governance Policies Policies for –  Handling Money  Recording Money  Reporting Money
  • 15. Handout – Document Destruction Policy Accountability Financial ControlsFinancial Procedures ManualRestrictions documented and honored• Donor restrictions• Grant requirements• Commingling FundsTraining program for Staff and BoardDocument Retention/Destruction Policy
  • 16. Handout – Conflict of Interest PolicyAccountability - Governance Conflict of Interest Ethical Standards
  • 17. Accountability - Conflicts of Interest Board Staff Member Conflicts Conflicts Donor Volunteer Conflicts Conflicts
  • 18. Accountability - Personal Benefit A Nonprofit CANNOT distribute funds to members, officer s or directors
  • 19. Accountability – Ethics Executive Compensation Exempt Organizations with budgets of $100,000 or more are expected to have paid staff EO’s can pay market rates to staff EO’s can look to “for-profit” compensation when determining “market rates” IRS has no standard formula, but looks at compensation as percent of budget, success of nonprofit mission If IRS finds abuse  IRS can fine the Board and Executive  IRS can revoke nonprofit status For “higher” compensated ED’s, document salary decision with supporting research and recorded (written) board discussion
  • 20. Accountability - Ethics When 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  Lunch versus bequest in a Will?  “Professional Fund Raiser?” Failing to take responsibility (“Not My Fault”)
  • 22. 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 of professionals for spending (financial control assistance, when needed policies) - Indianapolis (lawyer – accountant) 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 Insurance Breach of Duty Wrongful acts of the board Mismanagement covers What D&O Provides legal defense Pays claims Does What D&O Normal liability claims Criminal acts Doesn’t
  • 26. Handout – Risk Management PolicyRisk Management PlanTypes of Risk to Manage • Board members, volunteers, People employees, clients, donors, the public. • Buildings, facilities, equipmen Property t, materials, copyrights, trade marks • sales, grants, contributions, s Income ponsors, 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 NonprofitSector 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/Detect Fraud? 2010 Global Fraud Study, Association of Certified FraudExaminers
  • 32. Behavior Red Flags Financial Difficulties 44.70%Living Beyond Means 45% Control Issues 23.40% Divorce/Family 22.90% Wheeler-Dealer 19.70% Close association… 16.10% Paranoia 14.50% Addiction problems 14.20% Past employment… 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% 15.10% Billing Expense Check 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 more than one action is taken)“An Investigation of Fraud in Nonprofit Organizations:Occurrences and Deterrents,” Greenlee, Fischer, Gordonand Keating, 2006, Hauser Center for NonprofitOrganizations
  • 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 vulnerability1. “An Investigation of Fraud in Nonprofit Organizations: Occurrences andDeterrents,” Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center forNonprofit Organizations2. 2010 Global Fraud Study, Association of Certified Fraud Examiners
  • 36. Handout – Fraud Prevention Checklist Handout – Sample Board Anti-Fraud PolicyWho 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 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 forVictim 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. PR for Nonprofits Handout – Public Relations During Nonprofit CrisisPublic Relations During Fraud CrisisIf Fraud or DO NOT Have a planembezzlemen HIDE ort finds your of actionNonprofit, Minimize the for• How the seriousness response public hears of the event • If employee: about and suspension, termi perceives the • If you are nation incident can contacted by • If board member: drastically the resignation, remo affect the press, answer! val nonprofit’s - if you don’t • Note appearance ability to get your story of impropriety is move beyond out, no one enough to take the event. will, and action for a board speculation will member, but replace facts more evidence is needed to take action against an employee
  • 40. 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!
  • 41. Crisis Management The Good News  Nonprofits showed growth in contributions in 2010 compared with 2009Source: 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. Other Danger ZonesLobbying – Abuse of Charity Nonprofit political Gaming Status activity
  • 48. Danger Zone - Lobbying CANNOT DO CAN DO• Endorse political • Hold Candidate candidate forum• Spend more than • Educate the public 5% of annual on the issues budget on lobbying important to the activities nonprofit• Directly lobby • Encourage like- legislators minded supporters to contact their legislators
  • 49. Danger Zone – Charity Gaming Rule 1 - Rule 2 – Charity Gambling is Gaming is illegal in the allowed, but State of Indiana regulated
  • 50. What is “Charity Gaming?”Games of chance -- “Pay to Play”• Raffles• 50-50 Raffles• Program “sticker” prizes• Bingo• Casino NightDoor prizes for Cost-Admission EventNOT Charity Gaming – NOT Regulated:• Games of SKILL – Guess the pennies, shoot the basket• Silent Auction
  • 51. Charity Gaming – Rule 1 Gambling is Illegal Unlicensed gaming is illegal and subject to fines  $1,000 for the first violation  $2,500 for the second violation  $5,000 for additional violations Same fines apply to improper gaming, failing to file reports, failing to pay tax Criminal charges may also apply – Class B Misdemeanor
  • 52. Charity Gaming Rule 2 – Charity Gaming is Regulated Must be charitable organization Must be in existence (§501(c)(3) status) for > 5 years Must apply for and receive license Must conduct gaming activities properly NOTE – if properly licensed, conducted and reported, there are NO income taxes from charity gaming
  • 53. Danger Zone –Abuse of Nonprofit Status Improper Conduct Executive Compensation “Private Inurement”  Excessive compensation  Unreasonable Rental Agreements  Unreasonable lending agreements  Unreasonable sales transaction
  • 54. 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
  • 55. Has Your Status Been Revoked? Google: “recent IRS revocations”http://www.irs.gov/charities/charitable/article/ 0,,id=141466,00.html Comprehensive List of “Automatic Revocations” (organized by state) http://www.irs.gov/charities/article/0,,id=24 0099,00.html
  • 56. What if you LOSE nonprofit status?If your organization loses nonprofit status, you are NOW ataxable corporationFile 1120 Corporate ReturnPay Income Tax (Federal and State)Donations NOT tax-deductible to donorLoss of eligibility for MOST grants, including pending grants
  • 57. How can you get back NP Status? Loss of Status cannot be reversed or appealed Must go through re-application for tax exempt status  May include request for retroactive reinstatement to avoid taxes for “interim period”  Requires payment of user fee ($400 or $850)  Small nonprofits might be allowed to pay $100 user fee  Must write “Automatically Revoked” on application If exemptions do not apply, must provide complete packet of information for re-application
  • 58. For More Information IRS.gov – Exempt Organizations  Publication 557 – Tax Exempt Status Info  Publication 78 – Approved nonprofit list Indiana Charity Gaming Commission Indiana Secretary of State Indiana Department of Revenue Guidestar.org Charity Navigator
  • 59. Financial Accountability for NonprofitsComplianceAccountabilityBest PracticesRisk ManagementCrisisManagement
  • 60. 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 /upcoming-workshops/