Financial accountability 2014 07-09 lafayette

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


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


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


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


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


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


Step 3 – Creative OptionsNew Fund Raising

Opportunities○ Social media, networking, micro-

fundraisingCollaborations with similar or

complementary nonprofitsSpin-off/Re-Master current activities


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


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]

Law

Financial accountability 2014 07-09 lafayette