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Financial accountability sept 10 INRN

Financial accountability sept 10 INRN






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    Financial accountability sept 10 INRN Financial accountability sept 10 INRN Presentation Transcript

    • Important Stuff Nonprofit Boards MUST Know Presenter Miriam Robeson, Attorney September 10, 2013
    • 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
    • Financial Accountability for Nonprofits  Finance  Best Practices  Accountability  Risk Management  Crisis Management
    • Finance Basics of Financial Statements
    • 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
    • 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?
    • 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
    • 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
    • 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)
    • 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
    • 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
    • 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
    • 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
    • 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!
    • Best Practices Best Practices For Financial Oversight And Management
    • 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
    • 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
    • Accountabilit y Requirements to protect the financial integrity of the nonprofit
    • 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?
    • 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
    • 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
    • Accountability - Financial Policies  Policies for –  Handling Money  Recording Money  Reporting Money Handout – Nonprofit Financial Control Policy
    • 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 Handout – Document Destruction Policy
    • 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
    • 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
    • Accountability - Governance • Personal Benefit • Abuse of Status Conflict of Interest • Board – Staff – Volunteer - Donor Ethical Standards Handout – Conflict of Interest Policy
    • 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
    • Best Practice Watch Conflicts of Interest Board Member Conflicts Staff Conflicts Donor Conflicts Volunteer Conflicts
    • 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
    • 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 Handout – Whistleblower Policy
    • Accountability – No Personal Benefit A Nonprofit CANNOT distribute funds to members, officers or directors
    • Abuse of Nonprofit Status
    • 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
    • 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
    • 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
    • Risk Management Steps to Identify and manage nonprofit financial risk
    • 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
    • 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
    • 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
    • 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
    • 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”
    • 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
    • How is Fraud Detected? 2012 Global Fraud Study, Association of Certified Fraud Examiners 42.1% 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% Tip Management Review Internal Audit By Accident Account Reconciliation Document Examination External Audit Notified by Police Surveillance Confession Other Internal Controls Percent of Cases Percent of Cases
    • What are the most common types of fraud? 14.60% 11.00% 24.90%14.50% 11.90% 9.30% 3.60% 11.80% Skimming Larceny Billing Expense Check Payroll Cash Register Cash on Hand 2012 Global Fraud Study, Association of Certified Fraud Examiners Handout -- Asset Misappropriations
    • Who Commits Fraud? How Much is Lost? $50,000 $150,000 $373,000 $86,000 $0 $100,000 $200,000 $300,000 $400,000 Employee (43.0%) Manager (34.3%) Executive (18.5%) Other (4.2%) Median Loss Median Loss 2012 Global Fraud Study, Association of Certified Fraud Examiners
    • 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
    • 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 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 Do anti-fraud measures help prevent fraud? Handout – Fraud Prevention Checklist Handout – Sample Board Anti-Fraud Policy
    • Primary Control Weaknesses for Victim Orgs. Handouts – 10 Ways to Catch Fraud and Mistakes from Outside Handout – 15 Ways to Minimize Employee Fraud
    • 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
    • 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
    • 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!
    • Crisis Management – Effect of Economy  Nonprofits showed growth in contributions in 2011 compared with 2010, but slight reduction from 2011-2012 Source: Guidestar 2012 Nonprofit Fundraising Survey 0 20 40 60 80 100 120 2009-2010 2010-2011 2011-2012 Less than last year Approximately the same More than last year Don't Know
    • 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?
    •  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
    •  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
    •  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
    • 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
    • Financial Accountability for Nonprofits Handout – Financial Accountability Further Reading Handout – Where to Go for Government Compliance  Finance  Best Practices  Accountability  Risk Management  Crisis Management
    • Any Questions? Miriam Robeson, Attorney Today’s materials are available on Miriam’s Website: http://blog.lawlatte.com/index.php/2013-workshops/ Contact Miriam at: MiriamRobeson@lawlatte.com