The document discusses essential financial knowledge for nonprofit boards, including the importance of financial integrity, accountability, best practices, and risk management. It outlines various financial reports required based on nonprofit income levels and emphasizes compliance with IRS regulations and ethical standards. Additionally, it addresses fraud prevention, crisis management strategies, and the board's role in upholding financial accountability.

1. Important Stuff Nonprofit
Boards MUST Know
Presenter
Miriam Robeson, Attorney
July 9, 2014

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

4. Finance
Basics of
Financial Statements

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!

15. Best Practices
Best Practices
For Financial Oversight
And Management

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

18. Accountabilit
y
Requirements to protect the
financial integrity of the nonprofit

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

22. Accountability - Financial
Policies
 Policies for –
 Handling Money
 Recording Money
 Reporting Money
Handout – Nonprofit Financial Control Policy

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

32. Abuse of Nonprofit Status

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

36. Risk Management
Steps to Identify and manage
nonprofit financial risk

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