How Nonprofit Tax Form Helps Management

The nonprofit tax form 990 contains interesting questions and requirements that should be reviewed by the board, not just by the financial people. I highly recommend to download and print the full form, even if the nonprofit doesn’t need to file it.  You can check out the core pages at https://www.irs.gov/pub/irs-pdf/f990.pdf

Take a look at the 990 page 6- “Part VI Governance, Management and Disclosure “section” and what is asked in this page– it may be an eye-opener for many.

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As you can see, this form raises good questions that may be used to improve operations.  According to the instructions on the top, saying “yes’ to lines 2 through 7b requires explanations and management should review these items carefully.

Line 2 is about identifying people who may personally benefit from the organization, a possible private inurement situation, usually a no-no for tax-exempt organizations or a hefty excise tax. The take away here — be careful with business relations involving board members.

Line 5 is about the loss of assets, an intriguing item on the tax return. A “significant diversion of assets” according to the IRS is embezzlement, fraud, theft or other inappropriate use of funds that is the lesser of 5% of current annual gross receipts, 5% of total assets at year-end, or $250,000.  According to a Washington Post report in 2013, more than 1,000 organizations marked “yes” here and most were for embezzlement.  Besides giving details of the problem, it’s a good idea to also disclose any new internal controls used after the problem was disclosed to prevent it from happening again. Note that this is NOT confidential information.

Line 11 specifically asks about top management getting copies of the tax return and how reviews are conducted.  The board must be engaged in this process, even if they are not financial people.  They cannot say that they don’t know or understand the tax returns.

Line 12 asks about conflicts of interest while line 13 is about whistleblowing, and line 14 covers document retention and destruction policy.  These lines underscore the need for written policies, and under the conflict of interest item, the need to monitor those regularly.  The idea is to say “yes” to all of these.  And the take away for management is to make sure these policies are followed up by procedures to make sure they’re not just “lip service.”

Line 18 reminds organizations to make certain forms available for review, as required by law.   Such reminders are all over the tax form, including reminding nonprofits about reporting contractors and gambling winnings.  Management could highlight those items and follow up on them with the finance department.

Also, note that the 990 asks for the nonprofit’s mission statement as the first line, and also on Part III- Statement of Program Services Accomplishments.  The idea here is to match the mission statement to the programs.  If an organization mission is to provide food for the homeless, but programs relate to buying books to schools, the nonprofit may be at risk to lose its tax-exempt status, which can be a major problem.

 

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

 

 

 

Kindle Version Available

Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:

http://amzn.to/2GF2E8W

 

Nonprofit Finance and Management Explained

The second edition of my book, “Nonprofit Finance: A Practical Guide,” is out.  It includes detailed coverage of FASB update regarding reporting, details about liquidity and other details effective in 2018.   For example, the official financial reporting will show only two net assets, but internally, a nonprofit should maintain the three net assets separately and combine the temporarily and permanently restricted for reporting only.

Internal controls are covered in detail for cash, payables and computerized systems, giving ideas about how to minimize certain risks specific to the nonprofit sector.

Like the first edition, nominated for a McAdam Book Award, this second one has many examples and suggestions based on real-life experience, not just theories.  It was written with both the accountant and the non-accountant in mind, so that people of different backgrounds can benefit from the material and put it to good use right away.

You can check the new edition at https://goo.gl/M563u9

Challenges in Financial Planning of Nonprofits

Nonprofits need to plan for their future as any other firm. However, because of the nature of nonprofits, planning can be quite a challenge. While for-profits rely on the sale of goods and services, nonprofits must count on grants and donations for operations. Expenses are mostly related to programs and are very dependent on the income stream. Since the point of a nonprofit is not to generate profits, many don’t have that much left over after they spend all revenues. So detailed planning is a must. Some of the challenges of planning for nonprofits are:

Income uncertainty

Bills are a sure thing, but income may be received after a campaign, a gala event or gifts and grants. Nonprofits may not be able to ascertain the amounts and timing of such income as donors that may have given certain funds in the past may not be able to keep on giving at the same level. Grants may be cut or delayed with no prior notice. Also, grant income may decrease if auditors find noncompliance items and those could be substantial and unexpected. The key here is for the organization to learn of any changes in income stream the earliest possible time to be able to adjust for those.

Because of this instability, it’s always good for a nonprofit to keep a “cushion,” also known as a reserve to be used when the unexpected hits. Add a bit to budgeted expenses, just in case, and contact major donors and grantors to verify any changes in revenue.

Lack of financial knowledge

Many nonprofits are headed by kind people with the best intentions and good contacts. But too often the organization lacks financial education and experience. Basic financial concepts may be missing. Sometimes people are not aware that they need help in this area until something happens that doesn’t make sense to them. This vacuum can pose additional challenges on planning since many concepts may be new to management.

Boards of directors must have people with financial expertise to help in this process and provide guidance in these matters. Also, management should make efforts to learn about accounting and finance so that they can make right decisions. Usually, having a bookkeeper with some experience with nonprofits is not enough to see “the big picture.”

Lack of Time

Typically, nonprofit managers wear many hats, are hands-on, and there is no time to focus on planning and financial matters. It’s hard to think about financial planning and strategy when so many things need to be done today. The result is that usually information is pulled in a hurry and not analyzed, resulting in poor planning and errors.

It’s a good idea to have appointments and set schedules for managers to talk about planning and strategy, A bookkeeper or accountant can only do so much in financial planning. He or she needs input from various areas such as from managers regarding new programs and fundraising folks about new grants or changes in donations.

Planning for nonprofits pose particular challenges but can be done. Management can learn from past mistakes and try to get a better planning model moving forward.  The concept here is that nonprofits must take planning seriously and keep on improving it. Donors and grantors like to see a nonprofit planning ahead and not just putting off fires.

 

You can check out my books at:

Nonprofit Finance: A Practical Guide -Second Edition — First edition was nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

 

Ideas for Cash Controls

Cash is the riskiest asset of an organization. Why? Because it can be easily stolen or lost.

Below are some controls to prevent or identify these losses.

1-Two people should count any money before it’s deposited to be sure the total is correct.

2-Organizations should acquire a safe preferably bolted to the wall or floor with the code known to limited personnel to safeguard cash, checks not yet deposited, and other valuables.

3-Limit physical access to the area where money is received to just a few people.

4- Don’t keep cash, checks, or credit card slips on a desk or in another unsafe place that is easily accessible. Thieves typically look for petty cash in drawers under desk

5-Nonprofits should use their websites to collect money as much as possible.

6- Organizations should implement a policy indicating that no cash over a certain amount would be accepted.

7- When money is received, it must be deposited promptly in the bank after the count by two separate individuals to confirm the total amount.

8- Nonprofits should perform bank reconciliations, also known as cash reconciliations, every month to be sure all cash transactions have been accounted for correctly.

9- People outside accounting may answer phone calls or emails regarding complaints about payments not showing up in invoices or statements. The question would be– where’s the money these people sent in? The problem could be just an error or an unfortunate situation where money is stolen.

Just knowing that an organization has controls in place to prevent cash theft or losses may be a deterrent to some people with bad intent. The key here is for the tasks to be done all the time, not just once in awhile to avoid problems down the road.

Interested in CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide -Second Edition— Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

Another Nonprofit Exec in Jail

Not to be too paranoid here, but I just read an article about the Simi Valley Community Foundation whose former executive director stole over $45,000. According to the news, she forged a second signature on the checks used to pay her own mortgage.  Sadly, this embezzlement cost the organization its reputation as it had to stop operations, at least for now.  A total disaster.

It’s not clear how exactly the theft was discovered, but board members noted something odd, hired a forensic accountant to review the records, and went to the police with evidence of embezzlement. So, I give credit to the board for finding this out, but this theft had been going on for awhile.

So, what can a board do to prevent or identify financial fraud faster?

1- Knowledge –Get people on the board who understand financial matters and can ask the right questions. The board cannot have the obligation to fundraise and provide oversight only. Board members should have different backgrounds with least one person having the education and experience to really understand the information provided and ask good questions. Had this person been on the board of this Simi Valley nonprofit, the fraud may have been identified earlier.

2- Online Access –Have someone from the board check on the bank accounts of the organization online. He or she should review checks and deposits, looking for checks that don’t look right. Just having a policy about this review may deter fraud. Employees may think twice before forging signatures or doing something odd when they know that someone would be looking at the bank transactions regularly.

3- Pay attention –Listen to complaints from staff, donor, and vendors. Oftentimes, information that could be construed as gossip can be useful in pointing you in the right direction. People talk. Even though it’s not clear how the board of the nonprofit became aware of something wrong, my bet is that someone saw something and talked about it. Some nonprofits have started using hotlines for people to report possible fraud anonymously, a very good idea.

4- Variances –Pay attention to the actual vs. budget reports. Looking at this fraud, one may wonder how the $45,000 theft was classified and shown on the financial reports. The amount didn’t show up all at once, but it was likely classified as a budget item. So, if an overage is noted, the board should ask for back up documentations, such as bills.Talk only doesn’t explain financial issues.

5- System reports –Review new vendor/change vendor reports once a month to question any odd new vendor or changes. In this situation, the bank where the mortgage was paid to would have been added at a certain point to the accounting system. Had this report been reviewed, it may have flagged the bank as an odd vendor. Some accounting systems can send an email whenever a new vendor is added or changed, making this task automatic.

6- Bank reconciliations — Check on bank reconciliations, making sure they are done monthly. Keep an eye on deposits that are recognized in the accounting records, but don’t seem to be in the bank.  Also, look at the detailed outstanding checklist. This can be done online using the accounting system and can be emailed to someone at the board. If a check shows up at the bank, but not on the accounting records of the organization, it could be a red flag.

7- Self-reliance –Don’t count on auditors to notice embezzlement. Audits are designed to assure reasonableness of financial statements and they may identify fraud, but not always, especially when done by management. When something seems wrong, not it, and don’t wait for the auditors to figure it out. Insiders are the first people to note things that don’t seem right.

8- Education — Educate all employees on fraud and embezzlement. Nonprofits should have this topic on its policies and procedures documentation and not be embarrassed about it. Fraud happens not just with stealing funds, but in other areas as well, such as equipment theft and overtime pay without authorization. Just showing this awareness and clarity over fraud may prevent it in the first place.

It’s a shame that nonprofit boards must be always on alert for fraud and embezzlement, but that’s the reality of the situation.  Once a scandal happens, it’s hard for the organization to regain the trust and respect of donors, making it hard to move forward.

So, it’s time to talk about this issue openly and set up written policies and procedures with tasks specifically designed to prevent and identify fraud and theft.  The ideas presented here won’t assure boards that they are safe from this issue, but are steps in the right direction.  Each organization is different and I’m sure many will need more control features than the ones presented here.  The crucial point here is that fraud signs cannot be ignored by the board.

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Second Edition 

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

Is Your Board Asleep?

Does your board need a little pep to get going?  Directors may be out of focus and not that energetic about the organization as they were a couple of years ago. People are finding more and more ways to avoid coming to meetings or to focus on programs. The problem is that if the board is down in energy, it’s likely to trickle down to others within the organization.  So, what can one do to keep the board of directors engaged and enthusiastic?

Spread the work evenly

Pay attention to the changing mood in meetings and start talking to people individually. Issues that may be hard to bring to a group can be taken care of privately.  Try to see what is happening to the people.  Are they overwhelmed?  Are only a couple of people working hard, while others are basically coasting? The few who do most of the work are likely to feel the work is not evenly spread and may feel resentful and underappreciated.  This starts slowly with a few directors taking on many tasks over time and the board assuming that all is well and “normal.” until these people start to “flake out” or to refuse to do any other work and distance themselves slowly. Some people may just be too eager to take on more and not notice themselves that the work at the board has become full time and that wasn’t really the plan. Don’t take the “worker bees” for granted and offer to take away some of the work and give to someone else, even if not asked.

Another way to correct this problem is to be sure that everyone on the board has a role and if it’s too much for one person, have the role shared by two or three people. Some organizations have two co-presidents, for instance. The point is to share the workload and responsibilities fairly.

Listen to all board members

Another problem facing a disengaged board is that only certain people are heard and others are shut down most of the time. So, make sure that everyone is heard because those shut down will go away and that may not be for the best interests of the organization. If bullying is part of this scenario, don’t let it go unchecked.  Those who are bullied will be out fast, to the detriment of the organization. Assign someone to be the moderator during the meetings to make sure everybody is heard.

Give directors what they want

Directors may just lose interest in the board and the organization. To prevent this problem, make sure your directors are getting something out of the organization’s activities. Some people may be in for social interactions and networking, while others are passionate about the mission statement and yet others are there to add to their resumes. If a board member doesn’t get much back in terms of an exchange for the voluntary work, he/she will lose interest after a while. So, it’s important to figure out the people real motivations here. Maybe a member is looking for a job and putting him/her in charge of an area that directly relates to what he/she is looking for would be really good. Take your time to know what people really want out of their board duties.

Rotate board members

To keep up the interest, you could rotate board responsibilities around. Someone working for three years at a certain program may be tired of it and may need a change, even though the person may be comfortable in that role.  But too much comfort can lead to boredom, and a change may be in order before the person’s interest wanes.  Maybe that person can work on a different program or area within the organization. Maybe he or she wants to learn a new skill or meet different people. Offer suggestions to the person and see how he or she reacts.

Overall, the idea here is to recognize individual board members needs, and to take an individualized approach to board disengagement Oftentimes, people are just feeling underappreciated and not getting much out of the board as they expected. Since the board’s lack of energy and commitment trickle down throughout the organization, this is a serious issue that must be addressed as soon as possible.

You can check out my books:

Nonprofit Finance: A Practical Guide Second Edition— First edition nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited