1.Fraud, Finance and Freaking Out!Risk and Crisis ManagementFor Nonprofits Presenter Miriam Robeson, Attorney September 18, 2012

2. Why Are We Here?Starting with 2010, the IRS has increased scrutiny ofnonprofits with an aggressive program to revoke nonprofitstatus 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 economyIts easier to PREVENT problems with nonprofit status afterproblems become public, it may be too late to fixInformation Level IntermediateAssumes familiarity with nonprofit finance 3. Why Are We Here Part 2The Horror Stories and Bad Press - 2012NY church embezzlerCA sues veterans MA man admits topleads guilty to $1M charity over spending$900K theft fromtheft pay and perksnonprofit he led In IndianaDC council member Indy Child Care organizationAZ man gets 14 years sentenced to 38 under investigationfor Muslim charitymonths for stealing Franklin woman sentencedscam$350K from youth to 3 years probation forprograms $12K theft 4. Why We are Here Part 3The IRS IRS increases nonprofit oversightExecutive Compliance (TaxEmployment TaxesActivist AgendaCompensation forms)Since 2008, the IRS has added more than 100 employees to the ExemptOrganizations Section In June, 2011, the IRS automatically revoked the nonprofit status ofmore 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 othertechnical requirementsCompliance 7. Compliance - StateAnnual Business Entity Report Indiana Secretary of StateEntity Annual Report (E-1) Indiana State Board of Accounts Financial Reporting for Government FundsNP-20 Indiana Department of Revenue 8. Compliance - Federal IRS 990 Form$50,000 990 EZ/990 Due 5 + 15 Change in threshold 6 month automatic extensionbeginning 2010 For most nonprofits 990 EZ On-line ONLY Minimal property or real estate Due 5 + 15 after end of Normal gross receipts public scrutiny of nonprofitsEvery fraud headline < public donations to nonprofits 34. Fraud in the Nonprofit Sector is on the Rise!2012 Global Fraud Study, Association of Certified Fraud Examiners 35. How is Fraud Detected?Percent of Cases Internal Controls1.0% Other1.1% Confession 1.7% Percent of CasesSurveillance 2.0% Notified by Police2.6%External Audit3.3%Document Examination 4.5%Account Reconciliation 5.3%By Accident7.4%Internal Audit 14.0%Management Review 15.1% Tip42.1% 0.0%20.0% 40.0%60.0%2012 Global Fraud Study, Association of Certified Fraud Examiners 36. How Long Does it Take to Discover Fraud?Median Months to Detection Register12Median Months to Non-Cash 12Detection Corruption18Cash Larceny 18 Cash on Hand 19 Skimming 24 Billing24 Expense 24 Financial Statement 24Check Tampering30Payroll 38 0 102030 402012 Global Fraud Study, Association of Certified Fraud Examiners 37. Financial Difficulties 27.1%Behavior Red Flags Living Beyond Means35.8% Control Issues 18.2%Divorce/Family14.8% Wheeler-Dealer 14.8%Close association w/vendor19.2% Paranoia12.6% Addiction problems8.4%Past employment problems 8.1% Past legal problems5.3% Refuses vacations6.5% 38. Handout -- Asset MisappropriationsWhat are the most common types of fraud?3.60% 11.80%14.60% 9.30%11.00% Skimming 11.90% Larceny Billing25% Expense 14.50% Check Payroll Cash Register Cash on Hand2012 Global Fraud Study, Association of Certified Fraud Examiners 39. Who Commits Fraud? How Much?Median Loss Median LossOther (4.2%) $86,000Executive (18.5%) $373,000 Manager (34.3%)$150,000Employee (43.0%) $50,000 $0$100,000 $200,000 $300,000 $400,0002012 Global Fraud Study, Association of Certified Fraud Examiners 40. 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 morethan 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 41. 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 vulnerability1. An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents,Greenlee, Fischer, Gordon and Keating, 2006, Hauser Center for Nonprofit Organizations2. 2010 Global Fraud Study, Association of Certified Fraud Examiners 42. Handout Fraud Prevention ChecklistWho Commits Fraud? Handout Sample Board Anti-Fraud Policy High-level fraudsters (Officers/Directors) cause greatestdamage more than 3x more costly, and take longer todetect. More than 85% have never been previously charged orconvicted. Behavior warning signs: Living beyond means andexperiencing financial difficultyDO ANTI-FRAUD MEASURES HELP PREVENTFRAUD? YES The 2010 Global Fraud Study found thatorganizations 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 43. Handouts 10 Ways to Catch Fraud and Mistakes from OutsideHandout 15 Ways to Minimize Employee FraudPrimary Control Weaknesses for Victim Orgs. 44. Handout Someone Stole the Cashbox!Handout Preventing and Responding to FraudNonprofits and FraudWhat 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 45. PR for Nonprofits Handout Public Relations During Nonprofit Crisis Public Relations During Fraud CrisisIf Fraud or DO NOT HIDE Have a plan ofembezzlementor Minimizefinds youraction forNonprofit,the responseseriousness of How the publicIf employee:hears about the eventsuspension, terminationand perceives If you areIf board member:the incident resignation, removalcontacted by thecan drastically Note appearance ofpress, answer! - impropriety is enough toaffect theif you dont get take action for a boardnonprofits your story member, but moreability to move out, no oneevidence is needed tobeyond thewill, andtake action against anevent.speculation will employeereplace facts 46. Preventing FraudHave and use financial controlpolicies Know who handles the moneyRemove temptation Review financial information ALSO - have independent review offinances Be aware that it can happen to your nonprofit! 47. Crisis Management - The Good News120100Less than last year 80Approximately the 60 sameMore than last year 40Dont Know 2002009-2010 2010-2011 Nonprofits showed growth in contributions in 2011 compared with 2010Source: Guidestar 2011 Nonprofit Fundraising Survey 48. Crisis Management 101Surviving Financial DownturnStep 1 Review the OrganizationHow 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? 49. Crisis Management 101Surviving Financial DownturnStep 2 Make a PlanRisk Management PlanWhat can you reduce and maintain current levels of service?What can you reduce and maintain minimum service?Where can you increase fundingLapsed donors, new donors, alternate funding sources 50. Crisis Management 101Surviving Financial DownturnStep 3 Creative OptionsNew Fund Raising Opportunities Social media, networking, micro-fundraising Collaborations with similar or complementarynonprofits Spin-off/Re-Master current activities 51. Crisis Management 101Surviving Financial DownturnStep 4 Acute Crisis ManagementReduction 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 52. Financial Accountability for NonprofitsComplianceAccountabilityBest PracticesRisk ManagementCrisis Management 53. Any Questions? Thank you for your attention!Miriam Robeson, Attorney Todays materials are available onMiriams Website:http://blog.lawlatte.com/index.php/2012-workshops/