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Ff&f elkhart june 11, 2013

  1. 1. Financial Management For Nonprofits Presenter Miriam Robeson, Attorney June 11, 2013 Sponsored by United Way of Elkhart County
  2. 2. Why Are We Here? 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 fix Information Level –Intermediate Assumes familiarity with nonprofit finance
  3. 3. Why Are We Here – Part 2 “Ripped from the Headlines” Charity Leader Accused of Spending NY State Funds on Herself CA sues veterans charity over spending pay and perks MA man admits to $900K theft from nonprofit he led OR Musician Accused of Faking Charity Album to Bilk Investors DC council member sentenced to 38 months for stealing $350K from youth programs In Indiana… • Indy Child Care organization under investigation • Franklin woman sentenced to 3 years probation for $12K theft
  4. 4. Why We are Here – Part 3 The IRS 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 Since 2008, the IRS has added more than 100 employees to the Exempt Organizations Section IRS increases nonprofit oversight Employment Taxes Executive Compensation Activist Agenda Compliance (Tax forms)
  5. 5. Financial Accountability for Nonprofits  Compliance  Accountability  Best Practices  Risk Management  Crisis Management
  6. 6. Compliance Government and other technical requirements
  7. 7. 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
  8. 8. 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
  9. 9. Compliance – IRS Is your nonprofit “on the list?”  IRS Publication 78– no longer published  Search-able database: Profits/Exempt-Organizations-Select-Check  Search: IRS select check  NOTE - Incorporation as a State (Indiana) nonprofit does not equal IRS §501(c)(3) status Updated slide
  10. 10. Compliance - Employment Employment taxes and reports must be timely filed! Federal -- 941 – Employer’s Quarterly Federal Tax Return State -- WH-1 – Employer’s State Tax Return 2011 – ONLINE requirement for many organizations Federal – EFTPS (electronic federal tax payment system) State – IN-Tax Employee Classification “Exempt” versus “non exempt” employees Wages and Hours laws Fair Hiring and Nondiscrimination Does not apply to all employers Applies if you receive government $$
  11. 11. 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!
  12. 12. Accountabilit y Requirements to protect the financial integrity of the nonprofit
  13. 13. 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?
  14. 14. 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
  15. 15. 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
  16. 16. Accountability - Financial Policies  Policies for –  Handling Money  Recording Money  Reporting Money Handout – Nonprofit Financial Control Policy
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. Accountability - 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
  21. 21. Accountability - Governance • Personal Benefit • Abuse of Status Conflict of Interest • Board – Staff – Volunteer - Donor Ethical Standards Handout – Conflict of Interest Policy
  22. 22. Accountability - Conflicts of Interest Board Member Conflicts Staff Conflicts Donor Conflicts Volunteer Conflicts
  23. 23. Accountability – No Personal Benefit A Nonprofit CANNOT distribute funds to members, officers or directors
  24. 24. Abuse of Nonprofit Status
  25. 25. 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
  26. 26. Accountability - Ethics When are your actions… Legal? Illegal? Question- able? Un- ethical?
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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
  31. 31. Risk Management Steps to Identify and manage nonprofit financial risk
  32. 32. 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
  33. 33. 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
  34. 34. 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
  35. 35. 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
  36. 36. 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”
  37. 37. 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
  38. 38. Fraud in the Nonprofit Sector is on the Rise! 2012 Global Fraud Study, Association of Certified Fraud Examiners
  39. 39. 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
  40. 40. How Long Does it Take to Discover Fraud? 38 30 24 24 24 24 19 18 18 12 12 0 10 20 30 40 Payroll Check Tampering Financial Statement… Expense… Billing Skimming Cash on Hand Cash Larceny Corruption Non-Cash Register Disbursements Median Months to Detection Median Months to Detection 2012 Global Fraud Study, Association of Certified Fraud Examiners
  41. 41. BehaviorRedFlags 6.5% 5.3% 8.1% 8.4% 12.6% 19.2% 14.8% 14.8% 18.2% 35.8% 27.1% Refuses vacations Past legal problems Past employment problems Addiction problems Paranoia Close association w/vendor Wheeler-Dealer Divorce/Family Control Issues Living Beyond Means Financial Difficulties
  42. 42. 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
  43. 43. 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
  44. 44. 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
  45. 45. What is the likelihood of recovering funds? (1)  Nothing recovered = 48%  Complete recovery = 16%  Partial recovery = 36%  Small organizations are much more likely to be a victim of occupational fraud  Lack of anti-fraud controls in smaller organizations contributes to vulnerability Who is more likely to be victimized? (2) 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
  46. 46. 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
  47. 47. Primary Control Weaknesses for Victim Orgs. Handouts – 10 Ways to Catch Fraud and Mistakes from Outside Handout – 15 Ways to Minimize Employee Fraud
  48. 48. 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
  49. 49. 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
  50. 50. 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!
  51. 51. 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
  52. 52. Crisis Management 101 Surviving Financial Downturn  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. Crisis Management 101 Surviving 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
  54. 54. Crisis Management 101 Surviving 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
  55. 55. Crisis Management 101 Surviving 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
  56. 56. Financial Accountability for Nonprofits Compliance Accountability Best Practices Risk Management Crisis Management Handout – Financial Accountability Further Reading Handout – Where to Go for Government Compliance
  57. 57. Any Questions? Miriam Robeson, Attorney Today’s materials are available on Miriam’s Website: workshops/