This document provides an overview of a presentation on fraud, finance, and crisis management for nonprofits. It discusses increasing IRS scrutiny of nonprofits and rising instances of nonprofit fraud. It covers financial accountability, compliance, oversight, and transparency. It also addresses risk management, embezzlement, responding to fraud, and crisis management strategies for nonprofits facing financial difficulties.

1. FRAUD, FINANCE AND
FREAKING OUT!
Risk and Crisis Management
For Nonprofits
Presenter
Miriam Robeson, Attorney
February 8, 2012

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
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
THE HORROR STORIES AND BAD PRESS
Investigation of
Fiesta, Sugar, and Orange In 2006, an estimated $40B
Bowl games for abuse of was lost to fraud in the
nonprofit status and nonprofit sector
“extravagant compensation”
Nonprofit Status of 30 credit Closer to home
counseling organizations • 2011 – New Haven $1M Bingo Scam
revoked for failure to achieve • 2012 Noble County Shelter ED pled
a nonprofit purpose and for guilty to 4 counts theft
• 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 Executive Compliance (Tax
Activist Agenda
Taxes Compensation 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. ACCOUNTABILITY
Board reports to
• Donors Are you Good
The Buck Stops with • Government Stewards of the
the Board • Sponsors resources the public
• Grantors entrusts in your care?
• Constituents

7. FINANCIAL ACCOUNTABILITY FOR NONPROFITS
 Compliance
 Accountability
 Best Practices
 Risk Management
 Crisis Management

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 EZ/990
• Due 5 + 15
• Change in threshold • 6 month automatic extension
beginning 2010 • For most nonprofits – 990 EZ
• On-line ONLY • Minimal property or real
• Due 5 + 15 after end of estate
fiscal year • Normal gross receipts <
$200,000
• NO extensions of time! • Total Assets < $500,000
Failure to file – automatic revocation of §501(c)(3) status

11. COMPLIANCE – IRS
IS YOUR NONPROFIT “ON THE LIST?”
 IRS Publication 78 – Cumulative List of Nonprofit
Organizations approved by the IRS
 http://www.irs.gov/charities/article/0,,id=96136,00.html
 Go to IRS website and search “Publication 78”
 Incorporation as a State (Indiana) nonprofit does not
equal IRS nonprofit - 501(c)(3) - Status

12. COMPLIANCE - EMPLOYMENT
Employment taxes Federal -- 941 –
State -- WH-1 –
Employer’s
and reports must Quarterly Federal
Employer’s State
be timely filed! Tax Return
Tax Return
2011 – ONLINE Federal – EFTPS
requirement for (electronic
State – IN-Tax
many federal tax
organizations payment system)
“Exempt” versus
Employee Wages and Hours
“non exempt”
Classification laws
employees
Applies if you
Fair Hiring and Does not apply to
receive
Nondiscrimination all employers
government $$

13. COMPLIANCE - UBIT
UBIT – Unrelated • (A) Trade or business
Business Income • (B) regularly carried on
• (C) not “substantially related” to exempt purpose
Tax
• Rental income
Examples: • Product sales (storefront)
• Does not include investment income
If UBIT constitutes “substantial portion” of
income, nonprofit can lose exempt status!

14. FINANCIAL OVERSIGHT Handout – 10 Tips for Keeping an Eye on Finances
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

15. Handout – 10 Financial Priorities for Nonprofit Boards
ACCOUNTABILITY - FINANCIAL
 Financial Policies
 Financial Controls
 Monitor appropriate use of nonprofit funds
 Audit - review

16. Handout – Nonprofit Financial Control Policy
ACCOUNTABILITY -
FINANCIAL GOVERNANCE POLICIES
 Policies for –
 Handling Money
 Recording Money
 Reporting Money

17. ACCOUNTABILITY Handout – Document Destruction Policy
FINANCIAL CONTROLS
GAAP Standards
Financial Procedures Manual
Restrictions documented and honored
• Donor restrictions
• Grant requirements
• Commingling Funds
Training program for Staff and Board
Document Retention/Destruction Policy

18. Handout – Conflict of Interest Policy
ACCOUNTABILITY - GOVERNANCE
Conflict of Interest
Ethical Standards

19. ACCOUNTABILITY - CONFLICTS OF INTEREST
Board
Staff
Member
Conflicts
Conflicts
Donor Volunteer
Conflicts Conflicts

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
 Failing to take responsibility (“Not My Fault”)

22. Handout – Whistleblower Policy
MORE EXAMPLES - ETHICS
Failure to properly account and
restrict use of donor-specified
Purchases from Board-member
donations (illegal and
business without proper
unethical!)
disclosure (the copy shop
• Capital contributions used for example)
operational expenses
• “Borrowing” from restricted funds
Failure to consult professionals Improper oversight of spending
for assistance, when needed (financial control policies) -
(lawyer – accountant) Indianapolis 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
Wrongful acts of
Insurance Breach of Duty
the board
Mismanagement
covers
What D&O Provides legal
Pays claims
defense
Does
What D&O Normal liability
Criminal acts
claims
Doesn’t

27. Handout – Risk Management Policy
RISK MANAGEMENT PLAN
TYPES OF RISK TO MANAGE
• Board
People members, volunteers, employees, cli
ents, donors, the public.
• Buildings, facilities, equipment, mate
Property rials, copyrights, trademarks
• sales, grants, contributions, sponsors
Income , 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. Financial Difficulties 44.70%
BEHAVIOR RED FLAGS
Living Beyond Means 45%
Control Issues 23.40%
Divorce/Family 22.90%
Wheeler-Dealer 19.70%
Close association w/vendor 16.10%
Paranoia 14.50%
Addiction problems 14.20%
Past employment problems 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%
Billing
15.10% Expense
Check
Payroll
Cash Register
Cash on Hand
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
WHO COMMITS FRAUD? Handout – Sample Board Anti-Fraud Policy
 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. Handout – Public Relations During Nonprofit Crisis
PR FOR NONPROFITS
PUBLIC RELATIONS DURING FRAUD CRISIS
If Fraud or DO NOT HIDE Have a plan of
embezzlement or Minimize
finds your
action for
Nonprofit, the response
• How the public seriousness of • If employee:
hears about the event suspension, termi
and perceives nation
the incident can • If you are
• If board member:
drastically contacted by the
resignation, remo
affect the press, answer! - if
val
nonprofit’s you don’t get
your story out, no • Note appearance
ability to move of impropriety is
beyond the one will, and
speculation will enough to take
event. action for a board
replace facts
member, but
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!

43. CRISIS MANAGEMENT
THE GOOD NEWS
 Nonprofits showed growth in contributions in 2010
compared with 2009
Source: Guidestar 2010 Nonprofit Fundraising Survey

44. CRISIS MANAGEMENT
THE BAD NEWS
 Nearly ½ of Nonprofits are struggling to “Make Budget”
Source: Guidestar 2010 Nonprofit Fundraising Survey

45. 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?

46. 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

47. 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

48. 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

49. FINANCIAL ACCOUNTABILITY
FOR NONPROFITS
Compliance
Accountability
Best Practices
Risk Management
Crisis Management

50. 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/