2. Why Are We Here?
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 fix
Information Level –Intermediate
Assumes familiarity with nonprofit finance
3. Why Are We Here – Part 2
“Ripped from the Headlines”
Charity Leader
Accused of Spending
NY State Funds on
Herself
CA sues veterans
charity over spending
pay and perks
MA man admits to
$900K theft from
nonprofit he led
OR Musician Accused
of Faking Charity
Album to Bilk Investors
DC council member
sentenced to 38
months for stealing
$350K from youth
programs
In Indiana…
• Indy Child Care organization
under investigation
• Franklin woman sentenced
to 3 years probation for
$12K theft
4. Why We are Here – Part 3
The IRS
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
Since 2008, the IRS has added more than 100 employees to the Exempt
Organizations Section
IRS increases nonprofit oversight
Employment Taxes
Executive
Compensation
Activist Agenda
Compliance (Tax
forms)
5. Financial Accountability for Nonprofits
Compliance
Accountability
Best Practices
Risk Management
Crisis Management
7. 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
8. 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
9. Compliance – IRS
Is 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
Updated slide
10. Compliance - Employment
Employment taxes
and reports must be
timely filed!
Federal -- 941 –
Employer’s Quarterly
Federal Tax Return
State -- WH-1 –
Employer’s State Tax
Return
2011 – ONLINE
requirement for
many organizations
Federal – EFTPS
(electronic federal
tax payment system)
State – IN-Tax
Employee
Classification
“Exempt” versus
“non exempt”
employees
Wages and Hours
laws
Fair Hiring and
Nondiscrimination
Does not apply to all
employers
Applies if you receive
government $$
11. 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!
13. 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?
14. 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
15. 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
17. 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
Handout – Document Destruction Policy
18. 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
19. 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
20. Accountability - 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
21. Accountability -
Governance
• Personal Benefit
• Abuse of Status
Conflict of Interest
• Board – Staff – Volunteer - Donor
Ethical Standards
Handout – Conflict of Interest Policy
22. Accountability - Conflicts of
Interest
Board
Member
Conflicts
Staff
Conflicts
Donor
Conflicts
Volunteer
Conflicts
23. Accountability – No Personal
Benefit
A Nonprofit
CANNOT
distribute funds
to members,
officers or
directors
25. 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
27. 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
28. 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
Handout – Whistleblower Policy
29. 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
30. 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
33. 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
34. 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
35. 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
36. 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
37. 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”
38. 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
39. Fraud in the Nonprofit Sector is on the Rise!
2012 Global Fraud Study, Association of Certified Fraud Examiners
40. How is Fraud Detected?
2012 Global Fraud Study, Association of Certified Fraud Examiners
42.1%
15.1%
14.0%
7.4%
5.3%
4.5%
3.3%
2.6%
2.0%
1.7%
1.1%
1.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Tip
Management Review
Internal Audit
By Accident
Account Reconciliation
Document Examination
External Audit
Notified by Police
Surveillance
Confession
Other
Internal Controls
Percent of Cases
Percent of Cases
41. How Long Does it Take to Discover
Fraud?
38
30
24
24
24
24
19
18
18
12
12
0 10 20 30 40
Payroll
Check Tampering
Financial Statement…
Expense…
Billing
Skimming
Cash on Hand
Cash Larceny
Corruption
Non-Cash
Register Disbursements
Median Months to Detection
Median Months to
Detection
2012 Global Fraud Study, Association of Certified Fraud Examiners
43. What are the most common types of fraud?
14.60%
11.00%
24.90%14.50%
11.90%
9.30%
3.60% 11.80%
Skimming
Larceny
Billing
Expense
Check
Payroll
Cash Register
Cash on Hand
2012 Global Fraud Study, Association of Certified Fraud Examiners
Handout -- Asset Misappropriations
44. Who Commits Fraud? How Much is Lost?
$50,000
$150,000
$373,000
$86,000
$0 $100,000 $200,000 $300,000 $400,000
Employee (43.0%)
Manager (34.3%)
Executive (18.5%)
Other (4.2%)
Median Loss
Median Loss
2012 Global Fraud Study, Association of Certified Fraud Examiners
45. 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
46. What is the likelihood of recovering funds?
(1)
Nothing recovered = 48%
Complete recovery = 16%
Partial recovery = 36%
Small organizations are much more
likely to be a victim of occupational fraud
Lack of anti-fraud controls in smaller
organizations contributes to vulnerability
Who is more likely to be victimized? (2)
1. “An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents,”
Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center for Nonprofit Organizations
2. 2010 Global Fraud Study, Association of Certified Fraud Examiners
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 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
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
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 – Effect of
Economy
Nonprofits showed growth in contributions in 2011 compared with 2010, but
slight reduction from 2011-2012
Source: Guidestar 2012 Nonprofit Fundraising Survey
0
20
40
60
80
100
120
2009-2010 2010-2011 2011-2012
Less than last year
Approximately the same
More than last year
Don't Know
53. Crisis Management 101
Surviving Financial Downturn
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?
54. Crisis Management 101
Surviving Financial Downturn
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
55. Crisis Management 101
Surviving Financial Downturn
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
56. Crisis Management 101
Surviving Financial Downturn
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
