FINANCIAL ACCOUNTABILITY
Important Stuff Nonprofit
Boards MUST Know
PresenterMiriam Robeson, Attorney
July 9, 2014
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 FinancesAccountabilityBest PracticesRisk 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 ReportsIncome/ExpenseBalance Sheet
Intermediate ReportsCompilationReview
Advanced ReportsAuditStatement of Financial Position
Basic ReportsNonprofits < $50,000/year annual income
Income/Expense(aka: Profit & Loss, P&L,
Cash Flow)Reports income from all
sources, all expensesInclude Restricted FundsShould be provided at every
board meetingWhat’s missing from this
one?
Handout: Sample Financial Report
Basic ReportsNonprofits < $50,000/year annual income
Account Balance(aka: Balance Sheet)Cash account balanceAsset balanceShould be provided at every
board meeting (in some form)
What are Retained Earnings?○ Accumulated net income
from all previous years
Basic ReportsNonprofits < $50,000/year annual income
Year-End AccountingAccounting method
○ Cash versus AccrualYear-End Review
○ Internal (Audit/Review)○ Compilation○ Review○ Audit
Government Reporting○ IRS 990N○ State NP20
Intermediate ReportsAnnual Income $50,000 - $250,000
Same as Basic -PLUS:Internal Audit TeamCPA Review or AuditSome detailed reportsAdditional Financial
proceduresIRS 990 EZ (not 990N)
Advanced ReportsNonprofits > $250,000 Annual Income
Also - significant government grants
All Reports in Basic and Intermediate
PLUS – Additional Financial
ProceduresIRS 990 requiredFull Audit
○ Financial Information○ Financial Management○ Assets and Inventory
Handout: Sample Financial Statement
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
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
Accountability
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 AccountabilityBasic 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 ControlsSSARS 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
Accountability - Financial OversightWatch the money - Watch the peopleFinancial 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 PolicySigned by Board and Staff annuallyPracticed openlyTransparency critical to credibility!
EthicsNewspaper Headline TestAppearance of Impropriety
Best Practice Watch Conflicts of Interest
Board Member Conflicts
Staff Conflicts
Donor Conflicts
Volunteer Conflicts
Watch Appearance of Impropriety!
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 - EthicsFailure 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
Accountability – No Personal Benefit
A Nonprofit CANNOT
distribute funds to members,
officers or directors
Abuse of Nonprofit Status
Improper Conduct
Executive Compensation
“Private Inurement”• Excessive
compensation• Unreasonable
Rental Agreements• Unreasonable
lending agreements• Unreasonable sales
transaction
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 missionRecruit Board members based on needEmbrace in-kind donations – but have a planMake smart decisions about facilitiesGrowth 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 CrisisIdentify RiskRanks RiskIdentify Policies to manage riskImplement protectionsImplement 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
coversBreach of Duty Wrongful acts of
the boardMismanagemen
t
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 PlanTypes of Risk to Manage
• Board members, volunteers, employees, clients, donors, the public.People
• Buildings, facilities, equipment, materials, copyrights, trademarksProperty
• 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?
2014 Global Fraud Study, Association of Certified Fraud Examiners
Tip
Management Review
Internal Audit
Account Reconciliation
By Accident
Document Examination
External Audit
Surveillance
Notified by Police
Internal Controls
Confession
Other
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
42.2%16.0%
14.1%6.6%6.0%
4.2%3.0%2.6%2.2%
1.1%0.8%0.5%
Percent of Cases
Percent of Cases
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
Cash Register
2014 Global Fraud Study, Association of Certified Fraud Examiners
Handout -- Asset Misappropriations
Who Commits Fraud? How Much is Lost?
Employee (48.6%)
Manager (31.9%)
Executive (17.3%)
Other (4.3%)
$0 $200,000 $400,000 $600,000
$75,000
$130,000
$500,000
$250,000
Median LossMedian Loss
2014 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 2014 Global Fraud Study found that organizations that had common controls in place hadSignificantly 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 ChecklistHandout – Sample Board Anti-Fraud Policy
Primary Control Weaknesses for Victim Orgs.
Handouts – 10 Ways to Catch Fraud and Mistakes from OutsideHandout – 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 Con-trols
Lack of Management Review
Lack of Internal Controls
Nonprofits and FraudWhat 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 FraudAlert!
Handout – Someone Stole the Cashbox!Handout – Preventing and Responding to Fraud
PR for NonprofitsPublic 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 FraudHave 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 101Surviving in an Uncertain Economy
Step 1 – Review the OrganizationHow 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 PlanRisk Management PlanWhat 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 in an Uncertain Economy
Step 3 – Creative OptionsNew Fund Raising
Opportunities○ Social media, networking, micro-
fundraisingCollaborations with similar or
complementary nonprofitsSpin-off/Re-Master current activities
Crisis Management 101Surviving in an Uncertain Economy
Step 4 – Acute Crisis ManagementReduction 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 101Surviving in an Uncertain Economy
Know Emerging Nonprofit Issues
Best Practices to Staying Current
Subscribe to Nonprofit forumsBoard Source, INRN workshops
Listen to your stakeholdersWhat concerns affect them?
Listen to your professionalsAttorney, CPA
Financial Accountability for Nonprofits
Handout – Financial Accountability Further ReadingHandout – Where to Go for Government Compliance
Finance Best Practices Accountability Risk Management Crisis Management
***BONUS: Board Governance Quick Quiz
Thank you for your attention!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:[email protected]