Easy Office Blog

The Chronicle of Philanthropy is reporting another sad story of non-profit fraud.  The struggling Mark Twain House and Museum in Hartford, CT has been fighting insolvency for some time.  Now, to add to their woes, their controller for the past 20 years has admitted to systematically stealing over $1 million from the organization over the past decade.

She used a common trick - ghost employees.  For those of us in the sector who have seasonal workers, or a large part-time staff, ghost employees can be a real problem.  They are very common on farms and in agricultural situations.  The bookkeeper simply "invents" an employee and pays them.  Management often doesn't notice as payroll gets entered into the accounting system in a lump sum.

There are several things you can do to avoid this.  However the most imporant is that a pre-payroll register should be approved and signed - and not necessarily by the Executive Director who may be too far removed from the details to sign appropriately.  Payroll should be broken into chunks by department by person; so that the people and amounts can be meaningfully looked at and approved.

There is more good than bad in our sector, but it always pays to keep your eyes open and your systems water-tight.

Recently we have been having more and more conversations with franchised or affiliated nonprofits.  These are the groups that have a national brand, but have unique 501c3's serving local geographies.  Groups like the YMCA, Boy Scouts of America, Make*A*Wish, Special Olympics, and many many more have this model. (Sharon Oster, Yale School of Management Professor, has written some great articles on this topic.)

Many of these organizations were founded decades ago, or in the case of some, 100+ years ago.  At the time, decentralization was about the only way to operate a national model.  The airplane was just being invented when the Boy Scouts were founded and organized.  Now there are many great studies, like Professor Oster's, that outline the pros and cons of centralization.

One thing in research is pretty consistent, centralized shared services make sense for most organizations.  The program impact and cultural impact is often minimal and the financial savings are significant.  That is money that can be saved and diverted into programs and mission critical activities.  Shared services, or outsourcing as a group to a vendor, is a quick way to achieve financial savings across an affiliated network (without all of the pain and emotion involved in mergers or other cost saving activities.) 

There are great consultants out there who exist to help people think through these issues.  There is no single silver bullet answer.  But the time has come for affiliated nonprofits to investigate this as a solution.

Fraud is all too common.  Typically as non-profits we take an overly trusting stance.  We like to believe the best about people and are generally a hopeful group.  In the arena of fraud, we need to become a bit more cynical.

The best way to avoid fraud is to ensure you have proper controls to prevent fraud.  Sometimes the best of people - when presented with an opportunity - will make bad decisions.  Proper controls give everyone peace of mind that they won't be tempted, and if they are, they are guaranteed to get caught.

The Chronicle of Philanthropy ran an article on September 15th about a case of persistent and consistent fraud.  The Dean of the St. John's Institute for Asian Studies in Queens is accused of systematically stealing over $1M.  Her actions were caught during a routine internal audit.  Internal audits and external audits are essential.  Typically if people know they will get caught, this creates enough of a deterrent to prevent fraud.  However in this case, the Dean thought she had found a loophole.  In fact, she may have got away with it for a long time.  Her actual downfall was an expense report that included personal charges.  As they began to investigate this small issue, the larger picture emerged.  Her greed ultimately was her downfall.  St. John's is now reviewing their internal control structure in hopes to avoid this in the future.

Trust is an important quality, but when it comes to money and financial matters, checks and balances rule the day.

Capacity building is front and center in my mind, after just attending the Alliance for Nonprofit Management conference (solid organization by the way.)  There are 100 definitions of capacity building and a fair bit of discussion around what it exactly is.  Strategic planning, executive coaching, financial training, and program evaluation all typically fall under the capacity building umbrella.

During the conference, we hosted a discussion on "Financial Capacity Building - the Pieces of the Puzzle."  Historically funders and organizations that seek to help non-profits have focused training efforts on how to do accounting.  We believe that capacity building efforts should be focused on how to use accounting, not do accounting.  Financial capacity building has 3 stool legs- a provider to do the work, an ED who can use the info, and a Board / CFO / Treasurer / Consultant who can monitor the process.

Can you imagine the Maryland Association of Bricklayers hosting 1/2 day Finance 101 workshops teaching folks how to use Quickbooks, teaching them the nuances of cost accounting, explaining debits and credits and then releasing them to go do all the work?  Instead, realistically, they would teach them how to use financial information to determine their pricing, monitor cash flow, and budget for the future.  They would teach them how to use the information and suggest to them they they hire a bookkeeper or accountant to do the work.

Blue Avocado recently published a great letter from a lawyer regarding the difference between a Financial Review and a full-blown Audit.  Check it out here: http://www.blueavocado.org/content/attorney-recommends-review-instead-audit

Clients frequently ask us if they need an audit or a review.  This can be dictated by state requirements, the need for a Federal A-133, or by specific funders requirements.  The state of New York has especially onerous requirements that have a very low threshold for when non-profits have to conduct an audit.  Each organization should be aware of the state requirements and requirements of funders - both current and future prospects - when making this decision.  There are two basic differences between the two:  One, the cost of a review is typically 1/2 that of an audit.  And secondly, a review is just that... a review.  The CPA doesn't perform in-depth 'testing' as they do in an audit.  They review for material issues and obvious deviations from GAAP.  But they won't go in and test unique individual transactions in the same way an audit is done.  A review provides some assurance, but does not independently validate transactions.

The moral of the story is to make sure you comply with government regulations based on your size and geography.  And be proactive to understand funders requirements.  (i.e. the United Way requires a review for organizations of a certain size, an audit for larger ones.)

Keeping track of all these regulations can be tricky, so make sure you have an active informed Finance Committee or a partner like Easy Office who can help you through the issues.