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
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. Financial Accountability for Nonprofits
Finance
Best Practices
Accountability
Risk Management
Crisis Management
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. 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. 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. 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. 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. 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. 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. 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. 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. 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!
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. 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
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. 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. 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
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. 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. 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. Accountability -
Governance
• Personal Benefit
• Abuse of Status
Conflict of Interest
• Board – Staff – Volunteer - Donor
Ethical Standards
Handout – Conflict of Interest Policy
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. Best Practice
Watch Conflicts of Interest
Board
Member
Conflicts
Staff
Conflicts
Donor
Conflicts
Volunteer
Conflicts
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. 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. Accountability – No Personal
Benefit
A Nonprofit
CANNOT
distribute funds
to members,
officers or
directors
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. 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. 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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