1. Fraud, Finance and
Freaking Out!
Risk and Crisis Management
For Nonprofits
Presenter
Miriam Robeson, Attorney
September 18, 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 - 2012
NY church embezzler CA sues veterans MA man admits to
pleads guilty to $1M charity over spending $900K theft from
theft pay and perks nonprofit he led
In Indiana…
DC council member
• Indy Child Care organization
AZ man gets 14 years sentenced to 38 under investigation
for Muslim charity months for stealing • Franklin woman sentenced
scam $350K from youth to 3 years probation for
programs $12K theft

4. Why We are Here – Part 3
The IRS
IRS increases nonprofit oversight
Executive Compliance (Tax
Employment Taxes Activist Agenda
Compensation forms)
Since 2008, the IRS has added more than 100 employees to the Exempt
Organizations Section
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

5. Financial Accountability for
Nonprofits
 Compliance
 Accountability
 Best Practices
 Risk Management
 Crisis Management

6.  Government and other
technical requirements
Compliance

7. 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

8. 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 estate
• Due 5 + 15 after end of • Normal gross receipts <
$200,000
fiscal year • Total Assets < $500,000
• NO extensions of time!
Failure to file – automatic revocation of §501(c)(3) status

9. Updated slide
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

10. 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 federal
State – IN-Tax
many tax payment
organizations system)
“Exempt” versus
Employee “non exempt”
Wages and Hours
Classification employees
laws
Applies if you
Fair Hiring and Does not apply to
receive
Nondiscrimination all employers
government $$

11. Compliance - UBIT
UBIT – • (A) Trade or business
Unrelated • (B) regularly carried on
Business Income • (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!

12.  Requirements to protect the
financial integrity of the
nonprofit
Accountability

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

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

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

18. Handout – Document Destruction Policy
Accountability - 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

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

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

21. Accountability - Personal Benefit
A Nonprofit
CANNOT
distribute funds
to members,
officers or
directors

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

23. 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

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

25. 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”)

26. 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 assistance, spending (financial control
when needed (lawyer – policies) - Indianapolis
accountant) Humane Society

27. 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

29.  Steps to Identify and manage
nonprofit financial risk
Risk
Management

30. 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

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

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

33. 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”

34. 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

35. Fraud in the Nonprofit Sector is on the Rise!
2012 Global Fraud Study, Association of Certified Fraud Examiners

36. How is Fraud Detected?
Percent of Cases
Internal Controls 1.0%
Other 1.1%
Confession 1.7%
Percent of Cases
Surveillance 2.0%
Notified by Police 2.6%
External Audit 3.3%
Document Examination 4.5%
Account Reconciliation 5.3%
By Accident 7.4%
Internal Audit 14.0%
Management Review 15.1%
Tip 42.1%
0.0% 20.0% 40.0% 60.0%
2012 Global Fraud Study, Association of Certified Fraud Examiners

37. How Long Does it Take to Discover Fraud?
Median Months to Detection
Register… 12
Median Months to
Non-Cash 12
Detection
Corruption 18
Cash Larceny 18
Cash on Hand 19
Skimming 24
Billing 24
Expense… 24
Financial Statement… 24
Check Tampering 30
Payroll 38
0 10 20 30 40
2012 Global Fraud Study, Association of Certified Fraud Examiners

38. Financial Difficulties 27.1%
Behavior Red Flags
Living Beyond Means 35.8%
Control Issues 18.2%
Divorce/Family 14.8%
Wheeler-Dealer 14.8%
Close association w/vendor 19.2%
Paranoia 12.6%
Addiction problems 8.4%
Past employment problems 8.1%
Past legal problems 5.3%
Refuses vacations 6.5%

39. Handout -- Asset Misappropriations
What are the most common types of fraud?
3.60% 11.80% 14.60%
9.30% 11.00%
Skimming
11.90%
Larceny
Billing
25%
Expense
14.50%
Check
Payroll
Cash Register
Cash on Hand
2012 Global Fraud Study, Association of Certified Fraud Examiners

40. Who Commits Fraud? How Much?
Median Loss
Median Loss
Other (4.2%) $86,000
Executive (18.5%) $373,000
Manager (34.3%) $150,000
Employee (43.0%) $50,000
$0 $100,000 $200,000 $300,000 $400,000
2012 Global Fraud Study, Association of Certified Fraud Examiners

41. 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

42. What is the likelihood of recovering funds? (1)
 Nothing recovered = 48%
 Complete recovery = 16%
 Partial recovery = 36%
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

43. 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
2012 Global Fraud Study, Association of Certified Fraud Examiners

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

45. 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

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

47. 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!

48. Crisis Management - The Good News
120
100
Less than last year
80
Approximately the
60 same
More than last year
40
Don't Know
20
0
2009-2010 2010-2011
 Nonprofits showed growth in contributions in 2011 compared with 2010
Source: Guidestar 2011 Nonprofit Fundraising Survey

49. 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?

50. 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

51. 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

52. 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

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

54. 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/
2012-workshops/