1. Avoid
Financial Accountability common
for Nonprofits mistakes
Prevent
loss of
Sponsored by :
§501(c)(3)
Greene County Foundation status
Presenter:
Prevent
Miriam Robeson, Attorney Fraud
www.lawlatte.com

2. Why Are We Here?
Starting with 2010, 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
Increase in media attention on unscrupulous
nonprofits and nonprofit directors/officers
It’s easier to PREVENT problems with nonprofit status –
after problems become public, it may be too late to fix
Information Level –Intermediate

3. Why Are We Here – Part 2
The Horror Stories and Bad Press
Investigation of
Fiesta, Sugar, and Orange
In 2006, an estimated
Bowl games for abuse of
$40B was lost to fraud in
nonprofit status and
the nonprofit sector
“extravagant
compensation”
Nonprofit Status of 30 Closer to home
credit counseling •2011 – New Haven $1M Bingo
organizations revoked for Scam
failure to achieve a •2012 Noble County Shelter ED
pled guilty to 4 counts theft
nonprofit purpose and for •2012 “Little Miracles” employees
excessive executive arrested for providing false
compensation information to gov’t officials

4. Why We are Here – Part 3
The IRS
 IRS increases nonprofit oversight
 Employment Taxes
 Executive Compensation
 Activist Agenda
 Compliance (Tax forms)
 Since 2008, the IRS has added more than
100 employees to the Exempt Organizations
Section
 As of June, 2011, the IRS has
“automatically revoked the nonprofit status
of more than 275,000 nonprofits

5. 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

6. Handout – 10 Tips for Keeping an Eye on Finances
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

7. Financial Accountability for
Nonprofits
 Compliance
 Accountability
 Best Practices
 Risk Management
 Danger Zones

8. Compliance
 Government and other
technical requirements

9. Compliance - State
Annual Business Entity Report
• Indiana Secretary of State
Entity Annual Report (E-1)
• Indiana State Board of Accounts
• Financial Reporting for Government
Funds
NP-20
• Indiana Department of Revenue

10. Compliance - Federal
IRS – 990 Form
<$50,000 – 990 N >$50,000 – 990
• Change in threshold EZ/990
beginning 2010 • Due 5 + 15
• On-line ONLY • 6 month automatic
• Due 5 + 15 after end extension
of fiscal year • For most nonprofits –
• NO extensions of 990 EZ
time! • Minimal property or
real estate
• Normal gross receipts
< $200,000
Failure to file – automatic revocation of §501(c)(3) status
• Total Assets <

11. Compliance - Employment
Employment Federal -- 941 –
State -- WH-1 –
taxes and reports Employer’s
Employer’s State
must be timely Quarterly Federal
Tax Return
filed! Tax Return
January 1 – Federal – EFTPS
ONLINE (electronic
requirement for federal tax State – IN-Tax
many payme nt
organizations system)
“Exempt” versus
Wages and Hours
Employer conduct “non exempt”
laws
employees
APPLIES FOR
Fair Hiring and Does not apply
GOVERNMENT
Nondiscrimination to all employers
FUNDING!

12. Compliance - UBIT
UBIT – Unrelated • (A) Trade or business
• (B) regularly carried on
Business Income • (C) not “substantially related” to exempt
Tax purpose
• Apartment rental income
Examples: • Charity gaming income
If UBIT constitutes “substantial portion” of
income, nonprofit can lose exempt status!

13. Accountability
Board reports to Are you Good
• Donors Stewards of the
The Buck Stops • Government resources the
with the Board • Sponsors public entrusts
• Grantors in your care?

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

15. Handout – Document Destruction Policy
Accountability
Financial Controls
Financial Procedures Manual
Restrictions documented and honored
• Donor restrictions
• Grant requirements
• Commingling Funds
Training program for Staff and Board
Document Retention/Destruction Policy

16. Handout – Conflict of Interest Policy
Accountability - Governance
Conflict of Interest
Ethical Standards

17. Accountability - Conflicts of Interest
Board
Staff
Member
Conflicts
Conflicts
Donor Volunteer
Conflicts Conflicts

18. Accountability - Personal Benefit
A Nonprofit
CANNOT
distribute funds
to
members, officer
s or directors

19. Accountability – Ethics
Executive Compensation
 Exempt Organizations with budgets of $100,000 or more are
expected to have paid staff
 EO’s can pay market rates to staff
 EO’s can look to “for-profit” compensation when determining
“market rates”
 IRS has no standard formula, but looks at compensation as
percent of budget, success of nonprofit mission
 If IRS finds abuse
 IRS can fine the Board and Executive
 IRS can revoke nonprofit status
 For “higher” compensated ED’s, document salary decision with
supporting research and recorded (written) board discussion

20. Accountability - Ethics
When are your
actions…
Question- Un-
Legal? Illegal? able? ethical?

21. 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
 Staff/ED/Board/Volunteer accepting gifts from donors
 Lunch versus bequest in a Will?
 “Professional Fund Raiser?”
 Failing to take responsibility (“Not My Fault”)

22. Handout – Whistleblower Policy
More Examples - Ethics
Failure to properly account
and restrict use of donor-
specified donations (illegal Purchases from Board-
and unethical!) member business without
•Capital contributions used for proper disclosure (the copy
operational expenses shop example)
•“Borrowing” from restricted funds
Failure to consult Improper oversight of
professionals for spending (financial control
assistance, when needed policies) - Indianapolis
(lawyer – accountant) Humane Society

23. Transparency – Credibility to Public
Regularly provide information to the Public
Required disclosures Recommended
• Tax returns disclosures
• Organizational Documents • Annual report
• Articles of Incorporation • Basic Financial Statement
• Bylaws • Report of Activities
• Funds used for lobbying • Mission/Vision
• Application for Exempt
Status

25. 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

26. Risk Management – D&O Insurance
Directors & Officers Insurance Protects
the Board and Key Staff
D&O
Insurance Breach of Duty
Wrongful acts of
the board
Mismanagement
covers
What
D&O Provides legal
defense
Pays claims
Does
What
D&O Normal liability
claims
Criminal acts
Doesn’t

27. Handout – Risk Management Policy
Risk Management Plan
Types of Risk to Manage
• Board members, volunteers,
People employees, clients, donors,
the public.
• Buildings, facilities, equipmen
Property t, materials, copyrights, trade
marks
• sales, grants, contributions, s
Income ponsors, fund raising
• reputation, stature in
Goodwill community, ability to raise funds and
appeal to prospective volunteers

28. 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”

29. 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

30. Fraud in the Nonprofit Sector is on the Rise!
2010 Global Fraud Study, Association of Certified Fraud
Examiners

31. How is Fraud Detected?
2010 Global Fraud Study, Association of Certified Fraud
Examiners

32. How Long Does it Take to
Discover/Detect Fraud?
2010 Global Fraud Study, Association of Certified Fraud
Examiners

33. Behavior Red Flags
Financial Difficulties 44.70%
Living Beyond Means 45%
Control Issues 23.40%
Divorce/Family 22.90%
Wheeler-Dealer 19.70%
Close association… 16.10%
Paranoia 14.50%
Addiction problems 14.20%
Past employment… 9.70%
Past legal problems 8.60%
Refuses vacations 8.00%

34. Handout -- Asset Misappropriations
What are the most common types of fraud?
2.40% 11.50% 16.20%
10.60% 9.60%
16.90%
Skimming
Larceny 28%
15.10% Billing
Expense
Check
2010 Global Fraud Study, Association of Certified Fraud
Examiners

35. How is Fraud Punished?
 Termination of employment = 72%
 No punishment = 7%
 Quit/disappeared = 8%
 Referral to law enforcement = 72%
 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

36. What is the likelihood of recovering funds? (1)
 Nothing recovered = 50%
 Complete recovery = 34%
 Partial recovery = 16%
WHO IS MORE LIKELY TO BE VICTIMIZED? (2)
 Small organizations are much more likely to be a victim of
occupational fraud
 Lack of anti-fraud controls in smaller organizations
contributes to vulnerability
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

37. Handout – Fraud Prevention Checklist
Handout – Sample Board Anti-Fraud Policy
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
DO ANTI-FRAUD MEASURES HELP PREVENT
FRAUD?
 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
2010 Global Fraud Study, Association of Certified Fraud
Examiners

38. Handouts – 10 Ways to Catch Fraud and Mistakes from Outside
Handout – 15 Ways to Minimize Employee Fraud
Primary Control Weaknesses for
Victim Orgs.

39. Handout – Someone Stole the Cashbox!
Handout – Preventing and Responding to Fraud
Nonprofits and Fraud
What to do when it happens to you!
If you suspect fraud – act immediately!
• Lock-down data
• Start a formal audit process with outside auditor
• Change procedures and rotate staff responsibilities
If you verify fraud
• 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

40. PR for Nonprofits Handout – Public Relations During Nonprofit Crisis
Public Relations During Fraud Crisis
If Fraud or DO NOT Have a plan
embezzlemen HIDE or
t finds your
of action
Nonprofit, Minimize the for
• How the seriousness response
public hears of the event • If employee:
about and suspension, termi
perceives the • If you are nation
incident can contacted by • If board member:
drastically the resignation, remo
affect the press, answer! val
nonprofit’s - if you don’t • Note appearance
ability to get your story of impropriety is
move beyond out, no one enough to take
the event. will, and action for a board
speculation will member, but
replace facts more evidence is
needed to take
action against an
employee

41. 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!

44. Crisis Management
The Good News
 Nonprofits showed growth in contributions in 2010
compared with 2009
Source: Guidestar 2010 Nonprofit Fundraising Survey

45. Crisis Management
The Bad News
 Nearly ½ of Nonprofits are struggling to “Make Budget”
Source: Guidestar 2010 Nonprofit Fundraising Survey

46. Crisis Management 101
Surviving Financial Downturn
Step 1 – Review the
Organization
How well do you meet your budget
(typical)?
What shortfall do you anticipate?
How long can you survive at
reduced budget levels?
How are you affected by each
funding source?

47. 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

48. 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

49. 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

50. Other Danger Zones
Lobbying – Abuse of
Charity Nonprofit
political
Gaming Status
activity

51. Danger Zone - Lobbying
CANNOT DO CAN DO
• Endorse political • Hold Candidate
candidate forum
• Spend more than • Educate the public
5% of annual on the issues
budget on lobbying important to the
activities nonprofit
• Directly lobby • Encourage like-
legislators minded supporters
to contact their
legislators

52. Danger Zone – Charity Gaming
Rule 1 - Rule 2 – Charity
Gambling is Gaming is
illegal in the allowed, but
State of Indiana regulated

53. What is “Charity Gaming?”
Games of chance -- “Pay to Play”
• Raffles
• 50-50 Raffles
• Program “sticker” prizes
• Bingo
• Casino Night
Door prizes for Cost-Admission Event
NOT Charity Gaming – NOT Regulated:
• Games of SKILL – Guess the pennies, shoot the basket
• Silent Auction

54. Charity Gaming – Rule 1
Gambling is Illegal
 Unlicensed gaming is illegal and subject to fines
 $1,000 for the first violation
 $2,500 for the second violation
 $5,000 for additional violations
 Same fines apply to improper gaming, failing to
file reports, failing to pay tax
 Criminal charges may also apply – Class B
Misdemeanor

55. Charity Gaming Rule 2 –
Charity Gaming is Regulated
 Must be charitable organization
 Must be in existence (§501(c)(3) status) for > 5 years
 Must apply for and receive license
 Must conduct gaming activities properly
 NOTE – if properly licensed, conducted and
reported, there are NO income taxes from charity
gaming

56. Danger Zone –
Abuse of Nonprofit Status
 Improper Conduct
 Executive Compensation
 “Private Inurement”
 Excessive compensation
 Unreasonable Rental Agreements
 Unreasonable lending agreements
 Unreasonable sales transaction

57. 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

58. Has Your Status Been Revoked?
Google: “recent IRS revocations”
http://www.irs.gov/charities/charitable/article/
0,,id=141466,00.html
Comprehensive List of
“Automatic Revocations”
(organized by state)
http://www.irs.gov/charities/article/0,,id=24
0099,00.html

59. What if you LOSE nonprofit status?
If your organization loses nonprofit status, you are NOW a
taxable corporation
File 1120 Corporate Return
Pay Income Tax (Federal and State)
Donations NOT tax-deductible to donor
Loss of eligibility for MOST grants, including pending grants

60. How can you get back NP Status?
 Loss of Status cannot be reversed or appealed
 Must go through re-application for tax exempt
status
 May include request for retroactive reinstatement to
avoid taxes for “interim period”
 Requires payment of user fee ($400 or $850)
 Small nonprofits might be allowed to pay $100 user fee
 Must write “Automatically Revoked” on application
 If exemptions do not apply, must provide
complete packet of information for re-application

61. For More Information
 IRS.gov – Exempt Organizations
 Publication 557 – Tax Exempt Status
Info
 Publication 78 – Approved nonprofit list
 Indiana Charity Gaming Commission
 Indiana Secretary of State
 Indiana Department of Revenue
 Guidestar.org
 Charity Navigator

62. Financial Accountability
for Nonprofits
Compliance
Accountability
Best Practices
Risk Management
Crisis
Management

63. Any Questions?
Thank you for your attention!
Miriam Robeson, Attorney
Today’s materials are available on
Miriam’s Website:
http://blog.lawlatte.com/index.php
/upcoming-workshops/