Fraud, Finance and Freaking Out!Risk and Crisis Management For Nonprofits Presenter Miriam Robeson, Attorney September 18, 2012
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
Why Are We Here – Part 2The Horror Stories and Bad Press - 2012NY church embezzler CA sues veterans MA man admits topleads guilty to $1M charity over spending $900K theft from theft pay and perks nonprofit he led In Indiana… DC council member • Indy Child Care organizationAZ man gets 14 years sentenced to 38 under investigation for Muslim charity months for stealing • Franklin woman sentenced scam $350K from youth to 3 years probation for programs $12K theft
Why We are Here – Part 3 The IRS IRS increases nonprofit oversight Executive Compliance (TaxEmployment Taxes Activist Agenda Compensation forms)Since 2008, the IRS has added more than 100 employees to the Exempt Organizations Section 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
Financial Accountability for Nonprofits Compliance Accountability Best Practices Risk Management Crisis Management
Government and other technical requirements Compliance
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
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 estate• Due 5 + 15 after end of • Normal gross receipts < $200,000 fiscal year • Total Assets < $500,000• NO extensions of time! Failure to file – automatic revocation of §501(c)(3) status
Updated slideCompliance – IRSIs your nonprofit “on the list?” IRS Publication 78– no longer published Search-able database: http://www.irs.gov/Charities-&-Non- Profits/Exempt-Organizations-Select-Check Search: IRS select check NOTE - Incorporation as a State (Indiana) nonprofit does not equal IRS §501(c)(3) status
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 federal State – IN-Tax many tax payment organizations system) “Exempt” versus Employee “non exempt” Wages and Hours Classification employees laws Applies if you Fair Hiring and Does not apply to receive Nondiscrimination all employers government $$
Compliance - UBIT UBIT – • (A) Trade or business Unrelated • (B) regularly carried onBusiness Income • (C) not “substantially related” to exempt purpose Tax • Rental income Examples: • Product sales (storefront) • Does not include investment incomeIf UBIT constitutes “substantial portion” of income, nonprofit can lose exempt status!
Requirements to protect the financial integrity of the nonprofit Accountability
Accountability Board reports Are you Good to Stewards of The Buck Stops • Donors the resources with the Board • Government the public • Sponsors • Grantors entrusts in • Constituents your care?
What is Financial Accountability?The Board is Responsible for:Knowing the financial status ofthe NP Understanding the financial status Acting on financial needs of the NP Preventing financial mishaps Mitigating financial crisis
Handout – 10 Tips for Keeping an Eye on FinancesFinancial OversightWatch the money - Watch the peopleFinancial Oversight is the review of both finances andfinancial practicesEnsures safe, ethical financial proceduresProtects Nonprofits and the Directors/StaffProvides integrity and transparency to the publicCatches financial difficulties before they become financialimpossibilities
Handout – 10 Financial Priorities for Nonprofit Boards Accountability - Financial Financial Policies Financial Controls Monitor appropriate use of nonprofit funds Audit - review
Consequences of Abuse of Status IRS Consequences – $$ Fines to Nonprofit Fines to Board of Directors Fines to Staff PERSONAL LIABILITY FOR ALL! IRS Consequences – Revocation of Nonprofit Status
Accountability - Ethics When are your actions… Question- Un-Legal? Illegal? able? ethical?
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”)
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 ofprofessionals for assistance, spending (financial control when needed (lawyer – policies) - Indianapolis accountant) Humane Society
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
Steps to Identify and manage nonprofit financial risk Risk Management
Risk Management for NonprofitsBest Practices to Prevent Financial Crisis Identify Risk Ranks Risk Identify Policies to manage risk Implement protections Implement procedures in event of crisis
Risk Management – D&O InsuranceDirectors & Officers Insurance Protects - Board and Key Staff D&O Insurance Breach of Duty Wrongful acts of the board Mismanagement covers What Provides legal Pays claims D&O Does defense What D&O Normal liability claims Criminal acts Doesn’t
Handout – Risk Management PolicyRisk Management PlanTypes of Risk to Manage • Board members, volunteers, People employees, clients, donors, the public. • Buildings, facilities, equipment, Property materials, copyrights, trademarks • sales, grants, contributions, Income sponsors, fund raising • reputation, stature in community, Goodwill ability to raise funds and appeal to prospective volunteers
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”
Issues of Fraud and the Nonprofit SectorNo comprehensive research on depth/breadthof fraud in the nonprofit sector (mostly from“headline news”) – most research includesnonprofit 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
Fraud in the Nonprofit Sector is on the Rise! 2012 Global Fraud Study, Association of Certified Fraud Examiners
How is Fraud Detected? Percent of Cases Internal Controls 1.0% Other 1.1% Confession 1.7% Percent of Cases Surveillance 2.0% Notified by Police 2.6% External Audit 3.3% Document Examination 4.5% Account Reconciliation 5.3% By Accident 7.4% Internal Audit 14.0% Management Review 15.1% Tip 42.1% 0.0% 20.0% 40.0% 60.0%2012 Global Fraud Study, Association of Certified Fraud Examiners
How Long Does it Take to Discover Fraud? Median Months to Detection Register… 12 Median Months to Non-Cash 12 Detection Corruption 18 Cash Larceny 18 Cash on Hand 19 Skimming 24 Billing 24 Expense… 24 Financial Statement… 24 Check Tampering 30 Payroll 38 0 10 20 30 402012 Global Fraud Study, Association of Certified Fraud Examiners
Financial Difficulties 27.1% Behavior Red Flags Living Beyond Means 35.8% Control Issues 18.2% Divorce/Family 14.8% Wheeler-Dealer 14.8%Close association w/vendor 19.2% Paranoia 12.6% Addiction problems 8.4%Past employment problems 8.1% Past legal problems 5.3% Refuses vacations 6.5%
Handout -- Asset MisappropriationsWhat are the most common types of fraud? 3.60% 11.80% 14.60% 9.30% 11.00% Skimming 11.90% Larceny Billing 25% Expense 14.50% Check Payroll Cash Register Cash on Hand 2012 Global Fraud Study, Association of Certified Fraud Examiners
Who Commits Fraud? How Much? Median Loss Median Loss Other (4.2%) $86,000 Executive (18.5%) $373,000 Manager (34.3%) $150,000 Employee (43.0%) $50,000 $0 $100,000 $200,000 $300,000 $400,0002012 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 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
What is the likelihood of recovering funds? (1) Nothing recovered = 48% Complete recovery = 16% Partial recovery = 36% 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 and Deterrents,”Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center for Nonprofit Organizations2. 2010 Global Fraud Study, Association of Certified Fraud Examiners
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 difficultyDO ANTI-FRAUD MEASURES HELP PREVENTFRAUD? 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
Handouts – 10 Ways to Catch Fraud and Mistakes from Outside Handout – 15 Ways to Minimize Employee FraudPrimary Control Weaknesses for Victim Orgs.
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
PR for Nonprofits Handout – Public Relations During Nonprofit Crisis Public Relations During Fraud CrisisIf Fraud or DO NOT HIDE Have a plan ofembezzlement or Minimizefinds your action forNonprofit, the response seriousness of• How the public •If employee: hears about the event suspension, termination and perceives • If you are •If board member: the incident resignation, removal contacted by the can drastically •Note appearance of press, answer! - impropriety is enough to affect the if you don’t get take action for a board nonprofit’s your story member, but more ability to move out, no one evidence is needed to beyond the will, and take action against an event. speculation will employee replace facts
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!
Crisis Management - The Good News120100 Less than last year 80 Approximately the 60 same More than last year 40 Dont Know 20 0 2009-2010 2010-2011 Nonprofits showed growth in contributions in 2011 compared with 2010 Source: Guidestar 2011 Nonprofit Fundraising Survey
Crisis Management 101Surviving Financial DownturnStep 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?
Crisis Management 101Surviving Financial DownturnStep 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 101Surviving Financial DownturnStep 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 101Surviving Financial DownturnStep 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
Financial Accountability for NonprofitsComplianceAccountabilityBest PracticesRisk ManagementCrisis Management
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/ 2012-workshops/