Would You Drive Blindfolded?

February 2015; Joan M. Renner, CPA, CGMA; Renner and Company, CPA, P.C.

Download the article e

Introduction

No one would ever drive blindfolded.  However, your organization’s internal financial statements may be leading you to do just that.  It’s a challenge to staff all the finance functions an organization needs on a limited budget.  Organizations may inadvertently squeeze out the important controllership function, leaving management and the Board with misleading internal financial statements.  Below we will explore some examples that illustrate why controllership matters and discuss some solutions for ensuring that you are leading your organization with timely and accurate financial information.

The challenge

In smaller associations and charities, especially those with a limited budget and staff size, a few individuals wear many hats.  One accountant is called upon to serve as both bookkeeper and controller and the CEO usually takes on the budgeting and reporting duties of a CFO.  When this happens, the important middle layer of the accounting function can get squeezed out—with unfortunate results.  Board members can be looking at financial statements with positive net income all year, only to see big adjustments when year-end reconciliations are done.

Accounting is like a layer cake

To understand why this happens, it helps to understand the three layers of accounting; operational, controllership and strategic.  In large organizations, these functions are performed by different individuals with different skills and compensation levels.  The finance office is staffed with full-time accountants at each functional layer, like a layer cake.  Smaller organizations can’t afford to pay for the whole cake, so they often opt for just buying one layer—basic accounting.

Operational accounting–recording transactions

Experienced operational accountants, or bookkeepers, accurately conduct and record basic transactions, paying the bills, depositing collections and handling payroll.  There are basic systems for these types of transactions; accounts payable, accounts receivable and payroll.  The systems record the transactions on the books as they are conducted, resulting in basic financial data.  At this point, the financial statements can be printed out, but they really only consist of raw data.

Controllership—making sure recorded balances are right

The mid level of accounting is controllership.  The controller looks at the raw accounting data that resulted from the system transactions, like paying bills, depositing income and paying payroll.  The controller uses personal initiative, skills and specialized accounting knowledge to review the accounts to see if they are accurate, and to see if they are recorded on the accrual basis in accordance with generally accepted accounting principles.  Most bookkeepers also do basic controllership such as performing bank reconciliations and making adjustments as needed.

Just what are reconciliations and adjustments?

The controller reviews recorded account balances for accuracy at month-end by preparing schedules, or workpapers, that support the accuracy of the material balance sheet accounts, and selected income and expense accounts.  Sometimes, recorded balances are compared to outside data such as a bank statement or line of credit balance.  This process of determining what the recorded ending balances should be is referred to as “reconciliation”.  Sometimes the controller finds that transactions need to be reclassified or that accruals or deferrals need to be recorded into, or reversed out of, the current period.  In that case, the controller makes an “adjustment” to the books.  Without these month-end reconciliations and adjustments, the Board could be looking at financial statements that are misleading.

Strategic accounting—using accounting data

At the top level of the finance function, the CFO, or CEO in smaller organizations, reviews actual amounts compared to budget, presents financial statements to the Board, recommends appropriate courses of action, and prepares next year’s budget.  For the accounting function to provide accurate financial information for management decisions and Board oversight and governance, the financial information must be reasonably accurate.  Without the controllership level making sure the financial statements are right, management and Board members can be steering the organization while blindfolded.

How bad could it be?

Here are some scenarios that can happen when the Board makes decisions based on raw financial data:

Unexpected expenses.  All year, an association’s statement of activities showed positive net income of $20,000.  This seemed to be a result of a profitable special event early in the year.  At year-end, it was discovered that a large hotel deposit made in the prior year for the special event, was still sitting on the balance sheet in prepaid expenses, and was never adjusted into special event expenses of the current year.  Once the $30,000 prepaid expense was adjusted to the current year, the association’s supposed net income turned into a net loss of $10,000.  Because the prepaid account was not reviewed and adjusted during the year, management and the Board were steering the association while blindfolded.

Disappearing income.  All year, a charity’s statement of activities showed positive net income of $20,000.  This seemed to be a result of good collections from corporate sponsors early in the year.  At year-end, it was discovered that three large corporate sponsor contributions had been recorded as receivables at the end of the prior year, and were still sitting on the balance sheet as accounts receivable.  When the sponsor money was collected in the current year, it was counted as income instead of relieving the receivables—effectively double counting the income.  Once the $30,000 of collections was taken out of current year income and applied against accounts receivable, the association’s supposed net income turned into a net loss of $10,000.  Because the accounts receivable account was not reviewed for accuracy during the year, management and the Board were steering the charity while blindfolded.

Floating income.  At year end, an organization’s statement of activities showed positive net income of $200,000.  This seemed to be a result of an increase in grant activity late in the year.  At year end, it was discovered that three large grant receipts were recorded as grant income when they were actually unspent advances of grant money to be used next year to pay allowable costs.  When the $300,000 of grant advances were taken out of current year grant income and recorded as deferred income, the organization’s supposed net income turned into a net loss of $100,000.  Because the deferred income account and the recorded grant income and expenses were not reviewed for accuracy during the year and adjusted properly, management and the Board were steering the organization while blindfolded.

What to do?

Nonprofit Execs and Board members should take steps to educate their fellow organization leaders about the nature and importance of controllership.  It’s difficult to convince Board members that controllership is needed unless you can explain clearly what it is and what it does.  The above scenarios can serve to illustrate that inadvertently skipping timely controllership has the unintended consequence of steering the organization while blindfolded.

Fortunately, organizations do not have to hire a separate full time employee for each layer of the accounting cake.  Part-time and outsourced controllership is available to make sure the organization’s books are reconciled and adjusted on a timely basis.  By engaging part-time help for the controllership function, the nonprofit effectively buys a slice of each layer of the cake in just the amount needed.

Conclusion

No one would drive blindfolded.  However, nonprofit Execs and Board members who make decisions based on raw financial data may be doing just that.  Without the important controllership function, internal financial statements can be misleading.  Fortunately, organizations can outsource controllership and get just the amount of services needed.  This will allow smart nonprofit leaders to take off their blindfolds and steer the organization with timely and accurate financial information.

©2015 Renner and Company, CPA, P.C., all rights reserved.

Anti-Fraud Controls

February 2015, Joan M. Renner, CPA, CGMA, Renner and Company, CPA, P.C.

Download the article e

Introduction

An association loses $900k from unauthorized disbursements…a housing agency loses $30k from diverted income…another association loses $5 million in fake vendor scheme…  These news stories about nonprofits victimized by embezzlement are enough to cause a nonprofit Executive or Board member to lose sleep.  No nonprofit leader ever wants to read that their organization has become the next victim.   Sadly, the Association of Certified Fraud Examiners (ACFE) says the typical organization loses 5% of revenues each year to fraud.  If you’re a $1 million nonprofit, that’s an estimated $50,000 each year.  In its 2014 Report to the Nations, the ACFE used survey results to paint a clear picture of a typical fraud.

  • The median loss from a fraud is $145,000,
  • the fraud usually lasts 18 months,
  • it’s usually an embezzlement, and
  • the smallest organizations suffer disproportionately large losses from embezzlement.

The survey went on to state that having anti-fraud controls can reduce fraud losses and shorten fraud duration.  In this article, we will explore some recent frauds ripped from the headlines, and discuss steps you can take to develop the right anti-fraud controls for your organization.

Here are a few frauds where perpetrators exploited their job duties for personal gain:

$900k lost from unauthorized disbursements:  In November 2014, a former association CFO pleaded guilty to embezzling more than $928,000 from a San Francisco trade association from 2007 to 2014.

How did he do it?  The CFO used the access to the association’s bank accounts and books that his employer gave him.  As CFO, he had complete control over all aspects of the association’s finance function including keeping the books, authorizing payroll, and paying bills.  He wrote checks payable to himself and payable to “cash” totaling more than $550,000.  He made unauthorized purchases of more than $250,000 on the association’s credit cards, and he put an overpaid acquaintance on the payroll.

How did he conceal it?  He just omitted the fraudulent transactions from the books and the financial statements he sent to the Board.  He made false entries on the books to cover up his personal charges.

$30k lost from diverted income:  In December 2011, a former director of a nonprofit housing agency pleaded guilty to diverting more than $30,000 of rent money from tenants of the nonprofit into his own bank account during 2008 and 2009.

How did he do it?  The housing director used the access to tenant rent collections that his employer gave him.  As director of property management, he collected rent money from tenants, but instead of handing it in to the agency, he deposited it into his personal bank account.  He even moved an unauthorized tenant into a vacant unit and set up a post office box to collect that rent as well.

$5 million lost in fake vendor scheme:  In November 2013, a former administrative assistant pleaded guilty to embezzling more than $5 million from her association employer from 2005 through 2013.    

How did she do it?  The administrative assistant’s duties included processing vendor invoices, even approving some invoices.  In addition to the valid invoices she processed, she submitted false invoices from real organizations.  Because signed checks were returned to her after signing, the administrative assistant made sure that the checks from the fake invoices went to her own bank accounts that she had set up using names similar to the real vendors.

She also submitted invoices to the organization from her own business, called FCI, which did no work for the organization.  She left these payments off her budget reports.  FCI turned out to be the bridal shop she owned, Fabulous Concepts, Inc.

Eventually, after a call from the perpetrator’s bank, her employer discovered her fraud.  The association said they were “truly stunned” and referred to the perpetrator as a “long-time, trusted employee” who had “exploited every gap in their system” using “deception and coverup”.  The association further said they would “apply the lessons we have learned from this experienced, as well as share them with others in the nonprofit community.”

With headlines like these, nonprofit leaders know they can’t rely on good intentions to protect their organizations.  However, small organizations may not know how to address fraud risks with limited budgets and small staff size.  It is clear that nonprofit managers and Board members need to take action to get ahead of the curve with appropriate anti-fraud controls.

Developing Anti-Fraud Controls

Anti-fraud controls are procedures an organization implements to prevent or find and correct fraudulent transactions.  Anti-fraud procedures are not one-size-fits-all.  In designing the right policy, management and Board members must balance the cost and restrictions related to internal controls with the protection and accountability they offer.

Here are some concepts and steps that will help nonprofit managers and Board members design and evaluate anti-fraud procedures that are right for an organization:

  • Understand that anti-fraud controls are the responsibility of management and the Board.   It is their fiduciary duty to safeguard the assets of their organization.
  • Understand that anti-fraud controls may be more important in the nonprofit environment than they are in a Board member’s own business. Business owners may take risks with their own money, but in the nonprofit environment, the general public expects a high degree of accountability.
  • Make controls a Board priority. Some Boards dismiss anti-fraud procedures as unattainable or inefficient, presuming that organizations should just do the best they can when it comes to internal control. This approach can leave the organization open to fraud. Remember that all Boards are expected to carry out their fiduciary duty, even in situations where resources and/or staffing is limited.
  • Implement an annual assessment of anti-fraud controls. Management will inspect the organization’s transaction processes annually, identifying any new risks and updating anti-fraud controls. Read and update your policies and procedures document for each area such as disbursements, receipts and payroll. Ask “how could someone steal money in this area, and if they did, how would we find out?” Enlist the assistance of outside accountants to help with this review as needed. Management will report the results of this process to the Board.
  • Look for new ways of doing things that offer increased anti-fraud controls. For example, instead of allowing someone to pay bills electronically on a system that requires no further approval to release disbursements, switch to paying bills using an online banking platform that requires a second level of approval.
  • Small organizations may need to enlist Board members to help with anti-fraud controls. If a second employee is not available to review and approve a transaction, a Board member may need to step in to review and approve. Online processes make it easier to log in and oversee transactions.

With frauds like these in the headlines, nonprofit leaders are aware that no organization is immune.  Smaller organizations may not know how to address the risk of fraud given their limited resources.  Using the points above, nonprofit managers and Board members can develop anti-fraud controls that address fraud risks in a way that is best for the organization.

©2015 Renner and Company, CPA, P.C., all rights reserved.

 

Alert To Virginia Corporations Regarding Solicitations

FROM “VIRGINIA COUNCIL FOR CORPORATIONS”
(11/25/2014)

The State Corporation Commission has received inquiries recently about unsolicited mailings directed to Virginia corporations from Virginia Council for Corporations, 7330 Staples Mill Road, #402, Richmond, VA 23228-4122. The Commission posted an alert in  December 2013 about similar solicitations to Virginia corporations from Corporate Records Service, whose Richmond, Virginia address is identical to the address for Virginia Council for Corporations.

The mailings from Virginia Council for Corporations include an official-looking document titled “2014 – Annual Records Solicitation Form” and instructions for completing the form. The Solicitation Form includes an offer from Virginia Council for Corporations to prepare “corporate consent records in lieu of meeting minutes” for a fee of $125. PLEASE BE ADVISED that the Solicitation Form is neither required by Virginia law nor authorized by the Commission, and it will not be accepted for filing with the SCC.

The Solicitation Form looks somewhat like the annual report form prescribed by the State Corporation Commission and mailed to corporations of record in the Clerk’s Office of the SCC. Some corporations have confused the Solicitation Form for the  Commission-prescribed annual report.

A search of the Commission’s business entity records in the Clerk’s Office revealed no information about a company with the name Virginia Council for Corporations.

Any corporation that has questions about the solicitation or form is encouraged to obtain advice from its lawyer or business advisor. Also, the Clerk’s Office can be contacted at (804) 371-9733 or 1-866-722-2551 (toll-free in Virginia) for information about corporate annual report and other business entity filing requirements under Virginia law.

 

RAFFLES – The Right Way

Joan M. Renner, CPA, Shareholder, Renner and Company, CPA, P.C. Download the article e

Raffles are gaining popularity for nonprofit fundraising. Often combined with a gala or other big event, raffles are accessible and fun. In a tight economy, attendees might hesitate to bid on a big auction item, but almost everyone can afford a raffle ticket. While everyone likes a nonprofit raffle, many nonprofits don’t realize the registration and reporting that raffles
require.

Many organizations give the winner a 1099 and hope for the best. If you’ve done that
in the past, you’re not alone. Unfortunately, that’s not the right way to run a raffle. The IRS
has increased its scrutiny of gaming activities, and has partnered with many states to compare
state gaming registrations to proper IRS reporting. If you run a raffle for your nonprofit, learn
about the requirements that may apply to you and make sure you’re running it right. To get
started, ask yourself the following questions:

Is our drawing a raffle?
A raffle is where the organization sells tickets, separately from tickets for admission to
an event, and one of the tickets is drawn from all tickets to win a prize. Raffle tickets are
tickets that are sold separately from event tickets. If everyone attending an event is
eligible to win a prize drawing, then it’s a door prize, not a raffle.
Key question—were raffle tickets sold separately from event tickets. If yes, it’s a raffle.

Is raffle income taxable as UBIT?
Chances are you were not granted exempt status to run raffles. Your raffle income is
not related to your organization’s exempt function. Typically raffle income is exempt
from UBIT only because the activity is conducted with substantially all volunteer labor.
Paid staff can be involved without ruining the exemption provided volunteer effort is
also present. The unofficial guideline is that substantially all means 85% or more.
Nonprofits conducting raffles should keep records of volunteer participation to support
that 85% of the effort was conducted by volunteers and that they did not receive any
substantial benefit while volunteering.

Key question—did volunteers do 85% of the work? If yes, then it’s not UBIT.

Do we have to report the winner’s prize to the IRS?

If the prize is more than $600, and more than 300 times the ticket price, then, yes, the
organization must report the winnings to the IRS using a W‐2 G. For example, if raffle
tickets are $50 and the prize is a $20,000 car, (greater than $50 x 300) then the
organization would have to report the winnings to the IRS on a W‐2 G. Unfortunately, it
is not correct to give the prize winner a 1099.Key question – was prize more than 300 times the ticket price AND more than $600? If yes to both, then a W‐2G is required.

How about withholding?
The organization must withhold and deposit federal income tax on the winnings. There
are penalties for failure to withhold. Tax withholding is required when the prize is more
than $5,000 and more than 300 times the ticket price. The withholding rate is 28% of
the prize (up from 25% in 2010).
Key question – was the prize more than $5,000? If so, the organization must make a tax
deposit.

How do you withhold tax on a $20,000 car?
The nicest raffles pay in the tax for the winner, making the prize even bigger. Others
offer the winner the choice of taking the prize or a cash equivalent, allowing the winner
to pay the tax and keep the rest of the cash. The organization must do one of two
things. Either: 1) ask the winner hand over $5,600 before they get the car; or 2) gross
up the prize to $27,778 and pay in f ederal income tax of $7,778. ($20,000/ (1 ‐ .28) =
$27,778.)

Do we have to register with the State?
Organizations holding raffles in Virginia must register with the Commonwealth of
Virginia. Other states have similar requirements. Virginia registration is required if the
organization expects to receive more than $40,000 in any 12 month period from
gaming. For details, contact the Virginia Department of Agriculture.

Key question—has raffle income exceeded $40,000? If so, then Virginia registration is
required.

Summary
Running a raffle can be a good source of revenue and a good fundraising tool. It gets many
people involved in supporting the organization and generates excitement and fun. To avoid
penalties and hassle, use these questions as a starting point to make sure you know the
registration, reporting and withholding requirements related to your raffle. For more
information, you can read IRS Publication Number 3079, Tax Exempt Organizations and
Gaming, available on irs.gov.

Foreign Offices

Washington Monument May 2011, Andrew Young, Manager, Renner and Company, CPA, P.C.
Download the article e

If your non‐profit organization has foreign offices, control over their accounting functions may at best
seem like an inefficient logistical hassle, and at worst may seem like an ineffective, costly, time
consuming venture. Many organizations struggle to implement effective controls over foreign offices especially in the areas of banking transfers, expense processing, and data storage and still maintain an efficient flow of transactions. While the administration and control over the accounting functions of foreign offices present unique challenges, nonprofit managers can indeed establish efficient and
effective procedures to safeguard the association’s assets while eliminating logistical hassle.
Nonprofit managers should take three actions to establish effective procedures: streamline banking transfers, implement an imprest system for expenditures, and establish a data backup and storage system.

Banking Transfers
Many organizations with foreign offices obtain a local bank account for the foreign office. Often, one individual in the foreign office is the signer on the bank account and is responsible for making payments out of the local account. If a member of headquarters management is not also a signer on the account, management may have difficulty accessing account records or accessing funds. In addition, using a different bank for a foreign office account could cause additional account fees and foreign currency translation fees. Account access can be streamlined and account fees may be reduced by using the same bank for all of the organization’s offices. Many banks now offer online options that can both provide additional monitoring and security functions over account transfers with instantaneous recording and processing of transfers. These features allow a manager at the headquarters office to review all banking activities within a foreign bank account to better assess the financial status and activities of the foreign office. Also, if your bank does not have foreign banking capability, many banks have established partnerships with other banks within various regions of the world that offer streamlined arrangements. As an additional benefit, many banks will offer reduced fees or even waive fees associated with transfer costs and foreign exchange translations if transfers are made within the same bank. For organizations that execute a large amount of transfers, this could constitute a significant savings to the organization.

Processing of Expenditures
Processing the expenditures of a foreign office can often be a difficult function within an organization. Documentation supporting an expenditure can be sparse, incomplete, or in a language that anonprofit manager may not understand. Also, local approval may not be readily apparent or properly indicated when submitted to headquarters for payment. Management at the headquarters office must resolve all of these issues to determine that all expenditures funded by the organization are in line with the organization’s exempt purpose. If foreign operations are funded by grants, undocumented expenditures would result in unallowable costs that would have to be returned to the grantor. A control procedure such as the imprest system, is needed to ensure that all foreign office expenditures are allowable and documented.
Under an imprest system, the organization provides the foreign office with a one‐time advance to fund about 45 to 60 days of expenditures. After the initial advance, the organization only sends money to the foreign office as reimbursement for documented allowable costs. To obtain additional funds, the foreign office must submit a reimbursement request with documentation verifying that all expenditures incurred were allowable and appropriate. After verifying that all documentation is appropriate, management reimburses the foreign office for the allowable costs incurred. With this system in place, an organization’s assets are safeguarded by ensuring that no expenditures can be funded by the organization without appropriate documentation.

Data Storage Systems
Monitoring and establishing data backup and storage systems for accounting and financial data can pose concerns and risks for a foreign office. For many foreign offices, accounting and financial data is not backed up or stored in a secondary location due to logistical or technological constraints. With the potential for natural disasters and the threat of computer hackers and viruses, large amounts of data and information could be easily lost or destroyed, with the potential for a great cost to the organization. By installing adequate backup systems for all financial data, and organization can establish an effective internal control procedure to safeguard the assets of the organization from these types of situations and prevent any substantial losses from unexpected events. Three simple solutions that an organization could utilize to implement a data backup and storage system would include online storage through online databases, “off‐site” storage through the usage of memory drives, or utilizing an outsourced vendor for data storage. Each of these solutions can be implemented at a minimal cost to the organization and would ensure that data can be recovered in the event of loss or destruction. Different organizations may prefer one control procedure over another, but each procedure is equally effective in safeguarding an organization’s assets by preventing massive loss of data. It is in the best interests of an organization to evaluate the technology structure in its foreign office and consider a solution that fits the organization’s desired control structure.
While many of the aspects of maintaining the accounting functions and control procedures of an
organization’s foreign offices may seem challenging to a nonprofit manager, there is hope! By
streamlining banking transfers, implementing an imprest system, and establishing a data backup and storage system, an organization can indeed obtain more effective, efficient controls over its foreign office activities while improving its safeguards over assets in foreign offices.

©2014 Renner and Company, CPA, P.C. All rights reserved.

The Charity Scorecard

Washington Monument
September 2011, Joan M. Renner, CPA, Shareholder and Karen Johnson, MBA, Manager, Renner and Company, CPA, PC
Download the article e

As a charity, your organization is constantly evaluated; by the IRS, and by donors and grantors.  The IRS reviews key areas of your Form 990 to determine whether you are complying with the Internal Revenue Code.  It’s important to meet these standards to keep your organization’s tax exempt and public charity status.

Charity watch groups, such as the American Institute of Philanthropy (AIP), the Better Business Bureau Wise Giving Alliance, (BBB) and Charity Navigator, use your 990 and other information to develop a rating that they publish online to help potential donors evaluate your organization.  Meeting their standards makes you look better to potential donors and grantors.

With so many standards being used by so many different groups, how do you know how your charity measures up?  How do you know which standards to meet to put your best foot forward?

To help nonprofit managers and Board members prioritize, we sifted through many criteria, and developed this “Charity Scorecard” as a tool for you to use to evaluate how your organization may score in the eyes of the IRS, donors and grantors.

The “Charity Scorecard” is a composite of many criteria, including those frequently used as well as those we think are useful.  It provides nonprofit managers and Board members with a starting point for prioritizing actions to put your best foot forward.  If you are going to focus on ten things to evaluate how you appear to others, consider these points your top ten.

To see how your organization will measure up, ask yourself these 10 questions about your organization:

    •  Are your program expenses at least 75% of total expenses?  Donors and grantors often have specific limits on the amount a charity spends on general and administrative and fund raising costs.  The charity watch groups such as AIP, BBB and Charity Navigator all use this ratio to evaluate an organization’s efficiency.  Some organizations make the mistake of reporting all salaries and office costs as general and administrative expenses on Form 990.  Be sure you are allocating your costs properly between program, fundraising and general and administrative functions.  A charity with program expenses that are 75% or more of total expenses will score well. 
    • Does your organization spend $35 or less to raise $100?  This ratio compares total fundraising expenses to total dollars brought in by the fundraising effort.  High fundraising costs should be reviewed by management and the Board to evaluate the underlying cause.  Sometimes higher fundraising costs are associated with the nature of the donor base or the popularity of the cause.  Charity watch groups use this statistic to evaluate an organization’s use of funds.  Charities that spend $35 or less to raise $100 will score the best.
    • Does your organization have enough unrestricted net assets to cover 1-3 years of expenses?  This one may come as a surprise, however, charity watch groups want to see that an organization has enough reserves to continue its mission in a down economy.  This ratio compares total unrestricted net assets to total expenses.  Organizations with a reserve of more than three years expenses appear less needy, so if you are saving for a special purpose, explain your designated funds on Form 990.  Charities with unrestricted net assets to cover 1-3 years expenses will score the best.
    • Is your organization’s executive compensation in line with comparable organizations?  Charity watch groups calculate and report an organization’s executive compensation as a percentage of total expenses so that donors can compare this percentage with other organizations.  The IRS scrutinizes executive compensation for signs of private inurement which can endanger an organization’s exempt status.  Charities should be following the IRS safe harbor procedures when establishing executive salaries including using salary surveys and documenting their decisions.

While the executive compensation percentage is not necessarily comparable between a small charity and a large charity, it is a statistic that is being used.  You can check other organizations’ percentages on www.charitynavigator.org using the “charity search” field to find the charity and then using the “current rating” tab to find the section on “leadership”.  Organization whose executive compensation is in line with that of other organizations of similar size will score best.

  • Do you measure and report your organization’s effectiveness?  Charities know that reporting measurable successes is good for fundraising.  Statements such as “we sent 65 needy children to summer camp” communicate your accomplishments.  There is growing recognition in the nonprofit community that strict ratios do not tell the whole story about a charity’s effectiveness.  “Measureables” are increasingly seen as an alternative to total reliance on ratios.  In fact, in July 2012, Charity Navigator will launch a new rating model that bases 50% of the score on effectiveness and results.  Be prepared to report your successes by developing measurable goals related to your mission, collecting data and reporting your accomplishments.  Organization’s who are able to illustrate their effectiveness with measurements and statistics of success will score the best.
  •  Does your organization have adequate Board oversight?  The Board’s responsibility is to set policy and ensure the fiscal integrity of the organization.  This includes monitoring the organization’s activities, ensuring adequate funding, overseeing the organization’s financial operations compared to budget and exercising stewardship over the organization’s assets.  An organization needs to have enough Board members around the table to assemble the knowledge and experience necessary to carry out the Board’s responsibilities.  For example, a Board should have individuals with knowledge of fundraising, leadership, mission, finances, investments, the community, and the organization’s past.  BBB suggests that organizations have at least 5 independent voting Board members.  These individuals need to meet often enough to stay informed about the organization’s activities and exercise oversight and governance as needed.  BBB suggests a minimum of three Board meetings per year.  Organizations that have at least five independent Board members meeting at least 3 times per year will score best.
  • Do you eliminate conflicts of interest?  Form 990 promotes the use of conflict of interest policies by requiring organizations to disclose their use and provisions.  Policies that track potential conflicts of interest and ensure that Board members are removed from issues where they have an interest avoid the appearance of private inurement which endangers an organization’s exempt status.  However, charity watch groups go beyond the conflict of interest policy to promote completely eliminating ongoing conflicts with voting Board members.  BBB suggests that an organization have no more than one compensated person as a voting Board member, or no more than 10% of the voting Board, and recommends that there be no compensated Chair or Treasurer.  Organizations that eliminate ongoing conflicts of interest and have no more than one compensated Board member and no compensated Chair or Treasurer will score best.
  •  Does your organization address donors’ privacy concerns?  Charity watch groups encourage charities to post their privacy policy on their website and to allow donors to indicate that they do not wish their contact information shared outside the organization.  The privacy policy should tell visitors what information is being collected about them, how it will be used, how to review and correct such information and opt out if desired, and what security measures are in place to protect personal information.  Charities that have a posted privacy policy meeting these criteria will score best.
  • Do you have audited financial statements if your annual gross income is more than $500,000?  Audited financial statements give users confidence in your financial information and they come with a report on any significant control deficiencies the auditors encountered during the audit.  These are important to charities trying to raise funds and safeguard assets.  However, audits are disproportionately expensive for smaller organizations.  BBB and others recommend an audit if gross income is more than $250,000.  We suggest that managers and Board members review all.
  • Do you post key information on your website—audited financial statements, Form 990, Board list, and more?  Charity watch organizations encourage charities to post audited financial statements, Form 990, the Board list, the mission statement and a summary of accomplishments on the organization’s website.  The IRS promotes this as a best practice by requiring nonprofits to disclose on Form 990 whether the organization makes its 990 available on its website.  Because this kind of transparency is increasingly expected by donors and grantors, charities that post key information on their websites will score the best.

How did you do?  While some of these points may be a challenge, the “Charity Scorecard” lets you know what’s out there; what the IRS and donors and grantors are using to size up your organization every day.  While these ten points are a good start toward improving your organization’s appearance to the IRS and to donors and grantors, these are not the only points to consider.  If you are interested in achieving a specific rating from a specific agency, you will need to visit  that organization’s website and individually address each one of their criteria.

The “Charity Scorecard” shows nonprofit managers and Board members the top ten things you can do to improve how you might be viewed by others.  Answering “yes” to all the questions will give you the best chance to receive high marks from most of the entities evaluating you. ∆

©2011 Renner and Company, CPA, P.C.  All rights reserved.

Direct Mail Costs – Program or Fundraising?

Washington Monument November, 2011, John Sprehe, In-Charge Accountant, Renner and Company, CPA, PC
Download the article e

Are you mailing out your year-end giving letters soon? Many nonprofits send out a mailing around the holidays to help promote year-end giving.  Often, these letters include both a program message and a fundraising appeal.  These activities run the gamut from direct mailing campaigns, door-to-door solicitations, public service announcements, or simply adding a link for donations on an organization’s website.  Because the activity includes a program component, organizations would prefer to classify the cost of the activity as program expenses on their financial statements.  However, the fundraising component of the activity may require that the costs be reported as fundraising expenses.  As we know, all charities need to capture and report their program costs accurately to demonstrate that a significant portion of their expenses are devoted to their mission, as opposed to administration and fundraising.  Can you just call the whole mailing a program?  What is the proper accounting treatment for the cost of a fundraising appeal?

To be able to allocate the costs of the program part of your mailing to your program function, your mailing must:

  • be directed to an audience who would benefit from your programs,
  • call the selected audience to undertake an action that is in line with your mission goals,
  • be related to a program that is important enough to stand on its own, and
  • not compensate anyone based on the results of the fundraising component.

Sound complicated?  Fortunately the accounting standards provide specific rules.  If an activity contains a program component as well as a fundraising appeal, it falls under the category of “Joint Activities” for accounting purposes.  Joint Activities are subject to a stringent test to determine whether they can be allocated between program and fundraising, or whether they must be reported as all fundraising.  Your auditors will apply this test to your activities in order to determine if you are allocating your costs properly.  If an organization is not careful, they could find themselves with a much higher percentage of fundraising costs than initially thought—something that donors will find unattractive when viewing the annual financial reports or IRS Form 990. The good news is that this test can also be used by an organization as a tool for internally evaluating their current joint cost activities and in developing new campaigns.

Before going over the test, it is important to understand why it matters.  As laid out by FASB (the Financial Accounting Standards Board), the default presumption when an activity has a fundraising component is that all related costs are fundraising.  If you fail the test, all the costs of your activity are considered fundraising.  In order to overcome this presumption, the organization must essentially demonstrate that the fundraising component is not an integral part of the activity.  In other words, the

organization should be able to show that the program component of the activity is important enough to the organization’s mission that they would still conduct it, even if the fundraising portion was removed.

There is one very important concept to understand before going through the test:  the call to action.  A call to action requests that the audience perform some act that helps the nonprofit fulfill their mission goals:  a dental hygiene nonprofit may hand out flyers urging the audience to floss; a road safety organization could put up billboards suggesting that drivers slow down; or a youth sports association might engage in telemarketing about youth fitness, asking parents to sign their kids up.  An organization is also allowed to use a management and general activity, such as sending out the annual report, as a call to action for this test. In short, with any qualified joint activity the call to action is the crux of the program or management and general component.

There are two important warnings about calls to action which you should understand.  First, the requested action cannot be donating cash, noncash, or volunteer time to the organization as this supports rather than overcomes the default presumption.  And second, educational material on its own is not a call to action. Without implicitly or explicitly urging the audience to do something, there is no call to action.

What is the test?  The test to qualify an activity for joint cost allocation has three criteria, which all have to be met:  the purpose criterion, the audience criterion, and the content criterion.  The purpose criterion looks to establish that the activity is conducted for program-related ideas.  The audience criterion is meant to filter out activities that target an audience for fundraising purposes. The content criterion ensures that the activity is in line with the organization’s overall mission.

The purpose criterion looks for three things in the activity to pass the test:  a call to action, no fundraising performance pay arrangements, and the existence of a separate program activity conducted on a similar scale using the same medium.  This last test is difficult for smaller nonprofits to pass as they may lack the resources to conduct multiple activities using the same medium.  If there is no call to action, or if there is pay for performance, the activity does not qualify for joint cost allocation.  All costs must be reported as fundraising.  Fortunately, if the “separate and similar” test is not passed, other tangible evidence of the organization’s intent to undertake a program activity can be used to pass the test.  This could be internal discussion on setting program goals and measuring the effectiveness of the activity using program criteria, or board minutes that show only the program component of the activity being discussed.  Auditors are allowed to use all available evidence to evaluate the activity and if any materials point to a fundraising motivation behind the activity, this could outweigh other positive evidence.

If your activity passes the purpose criterion, you must next look at the audience criterion; how the target audience for the joint activity is selected.  This is primarily concerned with whether or not the audience was selected for fundraising or program reasons.  If the audience was selected solely for their

likelihood to donate, then the audience test is failed and the activity is fundraising.  One common trip-up is if the audience is comprised largely of prior donors, as this is a key signal that the audience was selected for fundraising purposes.  This is not disqualifying on its own however as some nonprofits may have donor and program audiences that overlap.  If an auditor ever questions the selection of prior donors in an audience, the organization should be prepared to defend the audience selection on program grounds through the documentation measures discussed above.

Lastly, there is the content criterion, which is met by establishing that the program portion of the activity helps accomplish the organization’s goals in furtherance of its mission.  To do so, the activity must either implicitly or explicitly explain how the audience will benefit by following through on the call to action, and the benefit must be in line with the organization’s mission goals.  If the call to action covered under the purpose criterion is well established in the activity, then the content criterion should be easy to meet.

So let’s put it all together.  To qualify for joint cost allocation, an activity with both program and fundraising components must call the selected audience to undertake an action, of which the benefits for doing so are clearly explained, that is in line with meeting the nonprofit’s mission goals.  In addition, no party’s pay can be based on the results of the fundraising component, and the organization must demonstrate, either through a similar activity with no fundraising component, or with other evidence, that the program portion of the activity is important enough to stand on its own.

Nonprofits of all types engage in joint activities which may qualify for joint allocation. While the tests contained in the accounting standards to make this determination may seem stringent, understanding how the test works and what it attempts to accomplish can be a useful tool for nonprofits in designing their joint cost activities.

Charities and Political Activity – Steering Clear of Risks in an Election Year

Washington Monument March, 2012, Joan M. Renner, CPA, Shareholder, Renner and Company, CPA, P.C.
Download the article e

Most Board Members and Charity CEOs know that the IRS prohibits their organizations from supporting or opposing candidates for public office.  Public Charities exempt under Section 501(c)(3) such as charitable, educational or scientific organizations, schools and churches, can lose their exempt status and/or incur excise taxes if they engage in any partisan political activity.  While charities are aware of the need to avoid endorsing any candidates for federal, state or local office, in an election year, emotions run higher and events move faster.  Subtle changes can cause activities that seem non-political to turn partisan without warning.  Once the election winds whip up, it can be hard to see the rocks until it’s too late.

One organization who will be on the lookout for prohibited political activity is the IRS.  In its 2012 work plan, the IRS Office of Exempt Organizations says they will be focusing examination resources on allegations of impermissible political intervention.  They intend to review information from outside sources to look for signs of political campaign intervention by charitable organizations.  The work plan does not specifically identify these outside sources, but they could include the mention of your organization’s name in political ads, editorials, or news stories related to the election, and could even include tips or complaints involving allegations of impermissible political intervention.  They will also be looking at information obtained from the revised Form 990 for signs of prohibited political activity.   From your Form 990, the IRS can access your website address, and identify your leadership and your major supporters.  They can evaluate what you reported on Form 990 about your mission, program activities, contribution expenditures and your lobbying efforts, and will analyze all of this information to select organizations for examination.  In an examination, the IRS may also look at your newsletters, your events and your board minutes to evaluate whether the organization violated the ban on campaign intervention.

With all this attention, this year is a good time to brush up on the basics, so all leaders of the organization know what you can and can’t do.  As a public charity, you can encourage people to vote, as long as you do so in an unbiased way.  You can produce a voter’s guide, and you can sponsor a candidates’ forum or debate, but you can’t show preference in its content or in the way it is conducted.  Your organization can not endorse candidates for federal, state or local office.  You can’t make or solicit campaign contributions.  You can’t make written or oral statements that encourage people to vote for or against a candidate and you can’t place political ads.  Make sure these rules are incorporated into your policies and procedures, and review them with Board Members and employees annually.

While charities intend to follow these rules, situations can arise in which the political activity is more subtle and more difficult to identify and control.  For example, Board Members or your CEO might inadvertently make political statements.  Political activity could arise at your events.  Political activity could creep in to your support of legislative issues, and could even lurk on your website.  Because the presence of political activity depends on the facts and circumstances of each individual situation, the IRS issued Revenue Ruling 2007-41 which includes examples to help charities evaluate more complex situations to avoid partisan political activity.  Now is a good time to look at the ways that partisan political activity might arise unexpectedly in these more complex areas.

Board Members and CEOs Must Speak as Individuals

While your Board Members and CEO are not prohibited from supporting candidates, they must be careful to do so as individuals and not as representatives of the charitable organization.  You should develop a policy on this, and remind Board members to avoid using their organizational titles in connection with any personal political endorsements and at any political events they may attend.  If organization leaders are speaking on their own, they should clearly state that their comments represent their personal views and not the views of the organization.  Board Members and Executives should not make partisan comments in a charity’s publications or at the charity’s own meetings or events.  Board meetings should not include any discussions related to supporting or opposing candidates for public office, and should not include any discussions on how a candidate’s views agree or disagree with the charity’s views on a campaign issue.  Charities should not give candidates access to the charity’s mailing list or facilities unless they are made available equally to all candidates on a regular basis.

Don’t Say “Candidate” or “Election” at Your Events

Charities often encourage VIPs to attend their events to add visibility to the event and to their cause.  To steer clear of unintentional campaign intervention, charities should have policies related to VIP guests who are also candidates. No political fundraising should take place at the event.  If a candidate is introduced or asked to speak at an event, the charity should avoid appearing to endorse or support the candidate.  If one candidate is singled out for a speaking opportunity or an introduction, it should be obvious that the charity invited them to speak or be introduced for some reason other than their status as a candidate.  The candidate should not refer to election issues in his or her remarks unless all candidates are offered the same opportunity.  If the charity recognizes a VIP at the event for his or her support of the organization, the charity should not mention the VIP’s candidacy for re-election.   If a charity asks a candidate to serve in a special role at an event, such as emcee or auctioneer, it should be obvious that the individual is in the spotlight in their role as emcee or auctioneer, and not as a candidate for public office.  Unless your event is a candidates’ debate or candidates’ forum, it’s difficult to provide the same recognition opportunities to all candidates equally.  For most charity events, the best policy is to not to identify VIPs as “candidates” and not mention “the upcoming election” at your charity event at all.

Don’t Mention “The Upcoming Election” when Advocating for Your Issue

Charities often advocate their position on important issues that affect their mission.  Charities may also advocate their position on a piece of legislation as long as it’s not a substantial part of their activities.  However, if that issue becomes a prominent issue that distinguishes one candidate from another in a campaign, making a statement in support of historic preservation and tying that issue to an election becomes prohibited political activity.  When a charity’s issue becomes a hot campaign issue, a charity can find itself in dangerous waters.

For example, if your mission is to promote historic preservation, you can make statements in favor of restoring historic buildings in general.  If there is a piece of proposed legislation related to historic preservation, you can tell legislators how you would like them to vote on that piece of legislation as long as your lobbying effort is an insubstantial part of your activities.  However, if historic preservation becomes a hot issue in an upcoming election campaign, and one candidate is identified with the issue of historic preservation in some way, you can’t make statements that link the importance of historic preservation to the upcoming election.  Even if their statements do not include the candidate’s name or provide specific voting instructions, charities should avoid mentioning the election when commenting on prominent campaign issues that are strongly identified with one candidate or another.

Don’t Make Campaign Statements on Your Website

Charities often include information about current issues on their websites.  Remember that the IRS has your website address from your Form 990.  In an election year, review your website to ensure it does not contain statements on issues that could be construed to represent campaign statements.   Watch links to other websites that appear to endorse partisan content or show preference for one candidate’s views over another’s.  The context of the link matters as well as how many clicks it takes to connect you to the campaign material.  If you’re using a link to indirectly communicate something you can’t say directly, the IRS will look for campaign intervention.

Summary

Charities who intervene in election campaigns risk losing their exempt status, and the IRS has stated that it will be looking for impermissible campaign intervention in 2012.  It’s not always easy to see when subtle changes in the environment or changes in how activities are conducted threaten to turn non-political activities into election activities without warning, but small changes can have big consequences.  For more information on how to avoid prohibited political activity, see the IRS Compliance Guide for 501(c)(3) Public Charities.    Now is a good time to revisit your policies and procedures to protect your organization from inadvertently conducting political activity, and to review those policies with your Board and CEO.  With awareness of the issue, you can navigate this election year without running aground.

©2014 Renner and Company, CPA, P.C., all rights reserved.

Charitable Deduction Documentation Requirements – How to Help your Donors Get Their Deductions

Washington Monument August 2012, Hope Covington, CPA, Renner and Company, CPA, P.C.
Download the article e

Introduction

If your individual donors itemize their deductions on their tax returns, they are very interested in taking a deduction for contributing to your organization.  The law is very clear, however, that if individuals do not have documentation, they are not allowed to take the deduction for their donation. That makes it very important for qualified organizations to provide proper documentation to their donors.

What is the threshold for providing documentation?

Cash Contributions

Your individual donors must maintain records for all of their contributions. If cash contributions are less than $250 per contribution, then a bank record is sufficient for documentation.  The bank record, such as a canceled check or credit card statement, must include the date, amount, and name of the organization receiving the donation.  If an individual provides a single cash contribution of $250 or more, then they must receive written documentation from the receiving organization.  Multiple donations to the same organization at different dates do not have to be combined to determine the $250.  So if an individual contributes $30 each month to your organization, those amounts are considered separate contributions.  You do not have to combine the amounts, which would put your donor over $250 and require your donor to have documentation for the year.

Combination of Cash and Goods or Services

If an organization receives a donation that is a combination of cash and goods or services, then the organization must provide documentation if the combined value is more than $75.

Noncash Contributions

Individuals must maintain their own records if noncash contributions are less than $250.  If the amount contributed is more than $250, organizations must provide written documentation of receipt.  Organizations may also want to let donors know that if they plan to contribute more than $5,000 of noncash contributions, they must have a qualified written appraisal to take their deduction.

What type of documentation is required? If individuals contribute more than $250, they must have written documentation from the organization. Along with being written, the documentation for cash and noncash contributions must provide specific items including:

  • the amount of cash contributed by the donor (only applicable for cash only donations),
  • whether or not the organization provided goods and services to the donor, and
  • a description and estimated value of any goods or services provided by the organization to the donor.   For cash contributions to religious organizations, the document may state that intangible religious benefits were the only ones received.

The reason for documenting the amount of goods or services donors receive in exchange for contributions is that individuals may only deduct amounts for which they received no benefit. For example, if an individual gives your organization $200 in exchange for a ticket to a sporting event, and if the ticket price is $50, then the individual is only allowed to deduct $150 as a contribution on their return.  They may not deduct the $50 value of the ticket, because they received a benefit. The organization must list the amounts on the written documentation it provides so the individual knows how much they may deduct on their return.

When do you need to provide the documentation? Donors must receive their written documentation by the earlier of the date they filed their return for the year they made the contribution, or the date the return is actually due. Therefore it is important to make sure that donors receive timely documentation on their contributions so that they may take the deduction on their tax return.

What is some other helpful information I could tell my donors? There are limits on the amounts individuals may deduct on their return.  Individuals may not deduct more than 50% of their adjusted gross income.  If an individual’s adjusted gross income is $30,000, they are not allowed to deduct more than $15,000 in total contributions for the year on their return.  The amounts that cannot be deducted for the year can be carried forward for 15 years though.  Most organizations qualify for the 50% limit but there are some that have a 30% limit.

Summary If you don’t provide your donors with documentation for their cash contributions over $250, then they can’t take a charitable deduction on their tax return. The documentation must be written, include the donation amount, state whether or not the organization provided any goods or services (if they did provide goods or services they must state that they did and include a description with an estimated value), and may say that intangible religious benefits were the only ones received if the organization is religious.  This information will help you plan ahead to meet your donors’ documentation needs.

© 2014 Renner and Company, CPA, P.C. all rights reserved.

ELECTRONIC TRANSACTIONS – Are You Leaving a Window Open for Fraud?

Washington Monument Joan M. Renner, CPA, Shareholder, Renner and Company, CPA, P.C.
Download the article e

Few execs would leave the office unlocked at the end of the day. Even fewer would leave some signed blank checks on top of their desk on the way out. Everyone is familiar with the security precautions that keep our organization’s property safe, and the procedures that control traditional financial transactions.

Today, however, financial transactions are changing. Nonprofits are saving time and money paying bills online, collecting fees by electronic transfer or on the website, paying employees by direct deposit, and more. The challenge is, as we say goodbye to paper, we’re also saying goodbye to our traditional internal control procedures. Though electronic transactions are efficient, they can completely bypass traditional controls designed for the paper world. You may put two signatures on every check, but if your controller can go back to his office and pay bills online without further approval, even three signatures on a check won’t prevent or detect fraud. As you adopt new electronic financial processes in your organization, ask yourself: are you leaving a window open for fraud?

Your bank accounts are also vulnerable to “dive bombing” attacks from outsiders. The same banking information you provide to someone sending you an electronic funds transfer can be used by criminals to prepare fraudulent checks and ACH requests. Sophisticated hackers use phishing schemes to try to attach malware to your laptop, enabling them to eavesdrop on your passwords and logins. They then use that information to take over your accounts, writing checks and even approving them through your check verification service. These types of attacks are on the rise and nonprofits are increasingly at risk.

Our biggest risk may not be from the outside. According to the Association of Certified Fraud Examiners, most frauds are occupational frauds. Many victims are smaller organizations without good separation of duties. So while news stories of outsiders attacking bank accounts are alarming, the fraud we may be most likely to experience is embezzlement. Frequently, we read about frauds in the news where a trusted employee used the authority of his position to divert funds for personal purposes. Electronic transactions can make it that much easier to divert funds if the window is left open for fraud.

Smaller nonprofits feel the most pressure. Without the resources to spend on internal control procedures, many are tempted to give up on controlling transactions in today’s environment. Is that advisable? How important is internal control? The answer is: it depends. The importance of internal control depends on the degree of risk, and the need for accountability.

A single business owner who controls his own money has little risk of embezzlement. His business model demands little accountability other than to himself. For him, internal control is not very important. With low risk and little need for accountability, the sole proprietor can decide whether or not he wishes to implement internal control procedures.

However, in a nonprofit, the risk of embezzlement is much higher. All transactions are conducted by non-owners. In addition, we all know that the nonprofit environment demands a great deal of accountability. Nonprofits are accountable to their Boards, their members, donors, grantors, to the IRS and to the general public. These factors make internal control very important in the nonprofit environment. With high risk and great need for accountability, nonprofit execs and Board members can’t ignore the need to safeguard the organization’s assets with adequate internal control procedures.

Nonprofits can close the window on fraud by following a simple maintenance routine. Inspect your transaction processes annually, and look for new areas that require new controls. Take a walk through your business cycle and ask: if an unauthorized transaction occurred here, how would we know? Ensure that procedures are adequate to cover both the risk of inside fraud as well as the risk of outside fraud. The controls you develop to prevent or detect embezzlement, will also detect fraud by outsiders. Let’s see how the maintenance routine works in these common transaction areas:

Online Payments–If your controller initiated an unauthorized payment through online bill paying, how would you know? Some free online bill paying platforms allow users to prepare payment transactions and then release them without further approval. This is like leaving a stack of signed blank checks out on your desk. Fortunately, many banks offer more than one online bill paying platform.

  • Close the window on fraud by choosing the banking platform that offers multiple levels of permission. Using a password generator token, one individual has permission to prepare payments but not release them. Another individual reviews and releases the payments.

If someone initiated a fraudulent check or ACH payment out of your account, how would you know? Anyone with your banking information can present a fraudulent check or ACH on your account.

  • Close the window on fraud by utilizing the protection services offered by your bank. Sign up for your bank’s check verification service. You tell the bank what checks you approved and the bank will only honor those checks.
  • Sign up for ACH blocks or filters. Your bank will block all ACH requests, or will only honor ACH payments from vendors you have approved in advance.
  • U need a UPIC. Ask your bank to assign you a Universal Payment Identification Code that allows you to receive electronic funds transfers without revealing your bank routing number or account number. The UPIC can’t be used to make withdrawals.
  • Use online access to watch the daily activity in your account. It sounds simple, but it’s the best way to keep an eye out for unauthorized transactions.

Website Collections–If an insider diverted some of your website collections into another account, how would you know? Individuals with authorization control the destination of website sales deposits. Some vehicles for website collections allow cash to accumulate in a separate account until transferred, and payments can be made out of this account without detection. Individuals in your organization who are authorized to make refunds can initiate fraudulent refunds to their own credit cards.

  • Close the window on fraud by comparing a report of website activity to bank deposits internally.
  • Watch for activity in the cash reservoir if you have one. Be sure the account is emptied regularly and that any payments made out of it are identified and recorded on the books.
  • Control credit card refunds with a refund authorization program.

Online payroll–If an insider gave themselves a bonus or a raise, or used a terminated or fake employee to deposit extra pay into their bank account, how would you know? When your employees are paid by direct deposit, the individual who transmits payroll to the payroll service is effectively a check signer. Some payroll service platforms permit users to initiate payroll and then release payroll without further approval. Fortunately, many payroll services offer more than one platform.

  • Close the window on fraud by choosing the payroll platform that offers multiple levels of permission. One individual is authorized to set up payroll transactions and another individual is authorized to review and release the transactions.

Today’s electronic transactions offer significant opportunities for nonprofits to save time and money. However, these new transaction processes bring a new set of risks. Nonprofit execs and Board members have a duty to be sure new controls are in place to keep assets safe. To review your risks, ask yourself the questions above, and use the answers to close the window on fraud.

Joan M. Renner, CPA, CGMA, has been providing audit and accounting services to nonprofits for more than thirty years. She is a Shareholder in Renner and Company, CPA, P.C. in Alexandria Virginia where she is in charge of the firm’s services to not-for-profit organizations. A graduate of the McIntyre School of Commerce at the University of Virginia, she has been a leader in bringing quality financial information to the nonprofit community through firm seminars, professional conferences and as Chair of a number of nonprofit Boards. Joan and her husband, John were named Living Legends of Alexandria in 2010.

©2014 Renner and Company, CPA, P.C. all rights reserved.