Prevent Fraud in Your Nonprofit

Nonprofits are even more susceptible to fraud losses than other organizations because of typically lower levels of staffing and technology. Fraud is also more prevalent in nonprofits due to a common assumption that everyone working there, especially volunteers, is nice, honest, and trust-worthy.

Unfortunately, high levels of trust and low levels of staffing and technology can give free reign to people who are unscrupulous or experiencing extreme financial pressures. A lack of processes and controls can give those individuals the opportunity to steal donations that nonprofits work really hard to raise. Not to mention that being a good nonprofit steward is part of the trust relationship with financial donors.

Recognizing that fraud can happen and implementing a proactive action plan help to prevent nonprofit fraud. Nonprofits can implement practical and cost-effective steps to minimize the chance that a fraudulent act will occur by taking these three fraud prevention tips:

 

  • Separate Tasks – The most powerful weapon against fraud is separating tasks or duties. Separation of duties prevents one person from having too much control over financial activities, like separating expense approval and check signing from the person who reconciles the bank account.

 

  • Report Anomalies – Identify anomalies, or exceptions, from expected conditions or results highlights events or actions for additional review and action. Reporting unusual activity or results to an independent reviewer could end up drawing attention to and ending fraudulent activities.

 

  • Independent Oversight – Periodic independent reviews performed by a knowledgeable party is another way to safeguard nonprofit financial assets. Methods include audits and effective governance, such as the Board’s financial statement review and the Treasurer’s review of all expenses incurred by the Executive Director.

 

Recognizing that fraud can happen and implementing a proactive action plan to minimize the risk are important steps for preventing nonprofit fraud. Powerful weapons like separating tasks, reporting anomalies and independent oversight reduce the risk of losing donations that nonprofits work really hard to raise.

What’s Your Nonprofit’s ROI?

The tough job of nonprofit fundraising just got tougher. The 2017 Tax Cuts and Jobs Act doubles the standard deduction for individual taxpayers. That change is anticipated to slash the number of taxpayers who itemize their deductions because the standard deduction will be higher for them. One itemized deduction those folks won’t be taking is the one for charitable contributions.

 

Not getting a tax incentive in the form of a deduction means that many taxpayers will donate less to charity. That will be quite a blow to nonprofits that depend on smaller individual gifts that add up to a significant portion of total income. Fundraisers will have to change their strategies.

 

With competition for contributions getter fiercer all the time, it’s more important than ever to make a convincing case that funds donated to your nonprofit will achieve results. Donating to a nonprofit is just like making an investment – return on investment (ROI) attracts investors. Nonprofits need to “market” their ROI, or program results, so donors are attracted to “invest”.

 

In a recent episode of With Good Reason on NPR, best-selling business writer Jim Collins discussed the special factors that make for the most successful organizations in the non-profit world. Those organizations are poised to get results. Listen to his reasoning here.

 

Collins posits that a commitment to excellence in nonprofits results in outcomes beyond measure. That starts with hiring qualified people who are working for more than their paycheck. No matter their role in the organization, they are passionate about the mission and the effective use of donations. It makes sense – professionals collaborating to serve the community within a clear mission and established practices are positioned to achieve a higher ROI.

 

If a high ROI on donations isn’t compelling enough, Collins presents his case in another very impactful way. He points out that when for-profit organizations have bad financial results or a product failure, they lose money. Sure, that’s bad; but the overall cost to society when nonprofits fall on hard times is immense – homeless citizens whose children do not have a childhood; formerly incarcerated men and women who cannot get re-entry services for support when they come home; working families who have no money for groceries the last week of each month.

 

We don’t know exactly what taxpayers will do after losing the income tax deduction for charitable contributions. But no matter what, it’s fair to say that nonprofits with a higher ROI on their program results will attract more contributions from taxpayers who keep donating to charity after the tax law change.

 

Tips for Nonprofits during Giving Season

Thanksgiving is the traditional start of Giving Season. To mark the date, I blogged a couple of weeks ago about “Which, Who, What, and How” individuals can deduct charitable donations. Nonprofits receive a large portion of their total donations in the last few weeks of the year. Large donation volumes require protections to prevent some of those funds from “disappearing”.

 

Nonprofits work hard to raise funds. Plus, they have fiduciary responsibility for donor funds, starting when they are received. So, in the spirit of equal time, this week’s blog gives some tips to nonprofits, similar to tips that I gave in November to taxpayers planning to make year-end donations.

 

Four best practices for nonprofits to protect their donations:

 

  1. Segregate Duties

Separate tasks to ensure that funds are protected at all times, and nothing “falls through the cracks”. For example, separate the tasks for receiving and depositing funds. Bank account reconciliations and other verification procedures should be performed by someone who is not involved in receiving or depositing funds.

 

  1. Standardize and Automate

Establish and follow a routine process for each donation method. Define non-routine activity, how to detect it, and how to address it. Investing in automation generally reduces overall cost through efficiency and cost-effective controls. Automation facilitates reporting to track activity and detect/address issues and anomalies.

 

  1. Verify and Reconcile

Independent and regular donation verification is one of the most important protections for your donations. Automated tools are available for bank account and credit card reconciliations. Up-front technology investments generally pay for themselves quickly. Donations that are restricted by the donor for a specific purpose should be verified separately.

 

  1. Manage Donation Channels

All donations should be protected. Priority should be given to donation channels that bring in the largest dollar amounts. Identify your donation channels, such as direct mail, online, events, or walk-ins. Determine the dollar amount and donation volume from each channel. Prioritize protection activities on donation channels that bring in the larger percentages of total dollars. Encourage donors to use less expensive, well-protected donation channels.

 

Following these best practices is not everything nonprofits should do to protect donations, but it’s a start.  What is your nonprofit doing to make sure that your donations are protected?

Financial Duties of Non-Profit Boards

Last week’s blog post described some professions to keep in mind when recruiting finance-savvy Board members. This week, we talk about the financial duties of nonprofit Boards to fulfill the stewardship and oversight role known as “Fiduciary Responsibility.” Fiduciary responsibilities are legally defined. Failure to act as a responsible fiduciary has serious consequences.

 

At minimum, nonprofit Boards should focus on these four fiduciary duties to oversee the organization’s finances, and to avoid complications down the road.

 

  1. Establish Financial Policies

Documented policies are essential for establishing a common understanding and framework for overseeing the organization’s financial resources. Board-level financial policies define approval authority levels, investment objectives, risk tolerances, and risk mitigation activities to protect and preserve assets.

 

  1. Monitor Financial Performance

Board members must receive periodic, complete financial statements to oversee financial performance in relation to the budget, financial ratios, and other objectives. Financial oversight responsibilities can be performed by a Finance Committee but results must be reported to the full Board.

 

  1. Ensure Audit or Independent Review is Conducted

The Board must be familiar with financial statement audit and IRS information reporting requirements. If applicable, based on income and asset levels, the Board is responsible for hiring the auditor and receiving the audit results. Nonprofits with income and assets below the audit thresholds should consider an independent financial review.

 

  1. Take Corrective Action on Audit/Review Results

The results of any audit or independent financial review should be received by the Board or Finance Committee. Reported issues or risks should be acted upon. The action plan and progress on taking corrective action should be documented and reported on to the full Board.

 

Nonprofit Boards that address these four fiduciary duties are more likely to make appropriate financial decisions. Fulfilling these duties meets donor expectations to protect and preserve the organization’s assets and to ensure that regulatory and legal requirements are addressed.

Are your People a Cybersecurity Risk?

Even after investing tons of money in technology and security for data protection, organizations still fall victim to data breaches. Why? Because security doesn’t work if people don’t use systems securely. Recent news events and surveys of IT security professionals reveal that the biggest cybersecurity risk comes from people.

 

A prime example is when a system administrator fails to change the manufacturer’s default password. The door to that system is wide open to unauthorized access. Phishing e-mails are a popular mechanism for exposing systems to attack.

 

Traditional methods, like training and documentation, make people aware of cyber threats and vulnerabilities. Another way to drive home the risks and costs of a data breach is to hear about real life techniques used by hackers to manipulate people inside your organization.

 

If you think your business isn’t at risk, a few scary, true stories about accessing and stealing sensitive data will change your mind. One of my IT referral partners, Envision Consulting, is hosting a workshop where participants will hear from the World’s Most Famous Hacker – LIVE!

 

A top cybersecurity expert, once on the FBI’s most wanted list and now a trusted, worldwide security consultant, is the main speaker at Envision Consulting’s “Top Business Executive Cybersecurity Workshop of 2016” on October 19th. His experiences demonstrate why people are the weakest security link and how easily they can be manipulated into handing over the keys to the kingdom. Registration and details: http://bit.ly/29yV0yx

 

Walk away with concrete ideas and techniques to adopt immediately in your business to lower the chances of becoming the victim of the next high-profile cybersecurity attack. Your people may be your greatest cybersecurity risk. Attending this workshop could be the greatest investment you make to mitigate that risk.

 

 

Tired of Bootstrapping your Nonprofit Accounting?

Nonprofits promise donors to use funds to deliver programs in support the mission. Those same nonprofits also strive to keep expenses low, especially in non-program areas. But the cost of bootstrapping non-program areas, like accounting, can be huge – and invisible.

 

Nonprofits have a legal responsibility to protect and account for their funds. Using reliable and effective systems and processes are part of fulfilling that legal responsibility. Investing in accounting infrastructure is essential. Knowing WHY accounting is essential helps nonprofits talk to stakeholders about funding infrastructure investments.

 

Three benefits that nonprofits get from reliable, effective accounting systems and processes are:

 

  1. Clear, Accurate View of Finances

Manual or disjointed processes make it difficult to get accurate, up-to-date financial information. The Board, executive director, and program managers don’t get the information they need to make good decisions for the organization. Investing in qualified staff, efficient systems, and standard processes helps nonprofits control and safeguard finances.

 

  1. Fewer Errors and “Do-overs”

A lack of clear, coordinated, and complete processes results in mistakes. Correcting errors and re-doing tasks eat up time that could be spent doing something else. Automating processes reduces the chances of a human error. Coordinating processes between people, roles, and responsibilities increases the chances of getting things done right the first time.

 

  1. Time Savings for All

Not all accounting processes are performed by the accountant or bookkeeper. Program managers and others provide receipts, timesheets, and other information that impact the accounting records. Manual or inadequate processes to collect and record information from the organization pose a challenge to maintaining accurate and complete financial information. Everyone gets time back in her or his day when processes and systems are coordinated with the rest of the organization.

 

Knowing the benefits of reliable, effective accounting systems and processes can help nonprofits explain the importance of infrastructure investments to their stakeholders. Explaining WHY will result in donors understanding that nonprofits cannot afford to keep bootstrapping their accounting.

 

Finding a Tax Preparer Who is Prepared

Last week, I took an IRS exam to earn the Enrolled Agent (EA) credential. Being an EA will allow me to represent clients or interact on their behalf with the IRS. That’s on top of preparing income tax returns for businesses, individuals, estates, and nonprofit information returns.

 

The EA or other tax credential is one thing to look for to find a qualified tax preparer. Clients need to know that a knowledgeable tax professional is helping them follow the tax laws and take allowable deductions.

 

So what other experience or background should tax payers look for when “shopping” for a tax preparer? Other than getting referrals from colleagues, family and friends, taxpayers should ask prospective tax preparers these three questions:

 

  1. How Do You Keep Up with Changing Tax Laws?

Tax laws are constantly changing so it’s important to work with a tax professional who keeps up, so you don’t have to. Your tax preparer should describe attending conferences, webinars, or other methods she or he uses to stay current.

 

  1. What are Your Experience and Credentials?

Tax preparation is an unregulated industry where anyone can participate. Get examples of tax situations, client types, and complex issues where the tax preparer has experience. Her or his answers will indicate if she or he will be able to address your needs.

 

  1. How Do You Communicate with your Clients?

Does the tax preparer you are interviewing meet regularly with clients? Are meetings in person? Is the person available for you if a tax-related question or issue comes up? Make sure you feel comfortable with the tax professional’s style, manner and process.

 

It’s important to have a qualified tax preparer that is prepared to meet your needs. Feeling confident and comfortable with the answers to these three questions is a good sign that your taxes will be prepared accurately and consider allowable deductions.

Two Years in Business!

This week, my business is two years old! Anniversaries are cause for celebration and reflection — a good time to check your progress and feel great about your accomplishments.

 

Looking back on my business from its start to its Second Anniversary, growth and success depend on these four important activities:

Continue reading “Two Years in Business!”