Expert: Consuelo Herrera, International Accountant and Fraud Examiner - 4/13/2009

Question
QUESTION: I am a CPA, although my license is currently on maintenance so I am not able to practice.  I am involved as a volunteer with a 501c3 organization, and I'm helping them straighten out their bookkeeping.  When I started this project, they asked if I recommended having an audit.  I decided to informally review prior bookkeeping in records first. The same bookkeeper had been in charge of the books for 15 years, and they had never been audited.

The books are a mess.  Some income was recorded as liabilities, and fixed assets were recorded that do not exist.  I have also discovered instances where a board member has received no-cost program fees in return for his volunteering - which should have been reported as compensation.  The did have a CPA prepare the form 990 each year, but obvioulsy they just transferred numbers to the forms without any recommendation for adjustments to correct financial statements.

The board is willing to make the adjustments to the books that I recommended, but I'm struggling with a good way to approach these items that should have been expensed or recognized as income in prior periods.  Please let me know if you think prior financials should be restated, or if the form 990 should be amended.

The board is unwilling to approach the board member who should have income reported.  This practice has gone on for years as far as I can tell, and everyone has looked the other way (this particular person is loud, forceful, and intimidating and no one wants the confrontation).  This same board member has also run fundraisers, and the money is not completely deposited to the accounts - I suspect that he withholds some to pay "expenses".

I'm feeling like I should step away from this project and recommend that they get a CPA to perform a formal audit, but I really do want to help them.  Technically, I can't issue an opinion on their financial statements since my license is on maintenance.  Any suggestions?

ANSWER: Dear Sharon,

Thank you for contacting me. I understand your desire to help this organization and I commend you for that. I think the best way you can achieve it in your position as a volunteer is to bring awareness to the board of directors about their responsibilities, risks, and consequences of being "willfully blind"

I you want to go further, simply as a citizen concerned for public funds being misused, bringing this situation to the IRS would be another option.

Below are some implications of amending a non for profit tax return.

G. Amended Return/Final Return

To change the organization’s return for any year, file a new return including any required schedules. Use the version of Form 990 applicable to the year being amended. The amended return must provide all the information called for by the form and instructions, not just the new or corrected information. Check the Amended Return box in the heading of the return. Also, state in Schedule O which parts and schedules of the Form 990 were amended and describe the
amendments.

The organization may file an amended return at any time to change or add to the information reported on a previously filed return for the same period. It must make the amended return available for inspection for 3 years from the date of filing or 3 years from the date the original return was due, whichever is later.

Use Form 4506, Request for Copy of Tax Return, to obtain a copy of a previously filed return.

See www.irs.gov for information on getting blank tax forms.

State law may require that the organization send a copy of an amended Form 990 return (or information provided to the IRS supplementing the return) to the state with which it filed a copy of Form 990 originally to meet that state’s filing requirement.

A state may require an organization to file an amended Form 990
to satisfy state reporting requirements, even if the original return was accepted by the IRS.

I would suggest that you approach the Board showing them their responsibilities with the organization which could lose its Tax Exempt Status because of its disregard for recordkeeping requirement and potential "fraud". Also because a non for profit organization must have its records available for public inspection, anyone can bring these irregularities to the IRS and thus, an audit would be prompted and maybe, a criminal investigation as well.

Indicators for each question:  Met Needs Work N/A

E 1. The roles of the Board and the Executive Director are defined and respected, with the Executive Director delegated as the manager of the organization's operations and the board focused on policy and planning    

R 2. The Executive Director is recruited, selected, and employed by the Board of Directors. The board provide clearly written expectations and qualifications for the position, as well as reasonable compensation.    

R 3. The Board of Directors acts a governing trustees of the organization on behalf of the community at large and contributors while carrying out the organization's mission and goals. To fully meet this goal, the Board of Directors must actively participate in the planning process as outlined in planning sections of this checklist.    

R 4. The board's nominating process ensures that the board remains appropriately diverse with respect to gender, ethnicity, culture, economic status, disabilities, and skills and/or expertise.    

E 5. The board members receive regular training and information about their responsibilities.   (If the board is unwilling to approach the board member who should have income reported, they are not meeting their responsibilities with the organization and the regulators and they, personally, could be liable for not being in compliance with laws and regulations.)

E 6. New board members are oriented to the organization, including the organization's mission, bylaws, policies, and programs, as well as their roles and responsibilities as board members.    

A 7. Board organization is documented with a description of the board and board committee responsibilities.    

A 8. Each board has a board operations manual.    

E 9. If the organization has any related party transactions between board members or their family, they are disclosed to the board of directors, the Internal Revenue Service and the auditor.    

E 10. The organization has at least the minimum number of members on the Board of Directors as required by their bylaws or state statute.    

R 11. If the organization has adopted bylaws, they conform to state statute and have been reviewed by legal counsel.    

R 12. The bylaws should include: a) how and when notices for board meetings are made; b) how members are elected/appointed by the board; c) what the terms of office are for officers/members; d) how board members are rotated; e) how ineffective board members are removed from the board; f) a stated number of board members to make up a quorum which is required for all policy decisions.    

R 13. The board of directors reviews the bylaws.    

A 14. The board has a process for handling urgent matters between meetings.    

E 15. Board members serve without payment unless the agency has a policy identifying reimbursable out-of-pocket expenses.    

R 16. The organization maintains a conflict-of-interest policy and all board members and executive staff review and/or sign to acknowledge and comply with the policy.    

R 17. The board has an annual calendar of meetings. The board also has an attendance policy such that a quorum of the organization's board meets at least quarterly.    

A 18. Meetings have written agendas and materials relating to significant decisions are given to the board in advance of the meeting.    

A 19. The board has a written policy prohibiting employees and members of employees' immediate families from serving as board chair or treasurer.    

Indicators ratings: E=essential; R=recommended; A=additional to strengthen organizational activities  

Source: http://managementhelp.org/org_eval/uw_brd.htm

Finally, since you are barred for performing an external audit you should encourage the board of director to hire another CPA with expertise in non for profit audits and I know, he or she will find these weaknesses and will issue a qualified report that will undermine this organization's ability for continuing its funding activities.

Hope it helps. Congratulations again for donating your time to a non for profit organization! Make your services worthwhile by helping the board bring accountability to the member who is reluctant to be in compliance.


Sincerely,


Consuelo Herrera, CAMS, CFE


---------- FOLLOW-UP ----------

QUESTION: Thank you for the helpful information.  Do you have any sources of criteria for when to hire an executive director?  This organization is divided into three operation groups, each with a separate commitee.  It's a sports oriented charity, and each group/committee hires  a coach/program director.  The program director is hired by and reports to their individual committee.  There is no executive director to oversee the entire organization.  The board allows each group to set policies, which sometimes contradict each other.  Financial control rests with the board (investing, bookkeeping, etc) but there is no day to day management of those activities.

This organization has over $500,000 of assets, close to $1 Million of annual revenue, almost 50 paid employees, hundreds of volunteers, and hundreds of kids participate in the programs each year.  There is no executive director.  I would like to present the board with a list of criteria for knowing when it is time to hire an ED.

Answer
Dear Sharon,

Sorry for the delay.

The American Institute of Certified Public Accountants (AICPA)has a wealth of information for not for profit organizations. Below is the link to it.

http://www.aicpa.org/audcommctr/toolkitsnpo/Fraud.htm

You will find the article below useful too.

Before Your Not-for-Profit Hires a Fund Development Director


Robert Clifford Uerz, M.Ed.

Whether your not-for-profit organization is hiring its first fund development director or hiring a replacement let the following list of guiding statements help your organization be successful in securing the financial resources it needs. Keep in mind however that there are issues that need to be addressed before beginning recruitment efforts.

Many not-for-profit organizations make the mistake of believing that by merely adding a new fundraising event or more often just adding fundraising staff, fundraising problems will disappear.

Such actions do not replace the need to bring about organizational culture change relating to fundraising. Furthermore, they do nothing to build internal support for changes at either the board of directors or the staff level.

Consider the following guiding statements and incorporate them into your thinking about fundraising at your not-for-profit organization.:

Guiding Statement Number One – The Chief Executive Officer or Executive Director of the not-for-profit organization must always be the chief fund development officer.

Fundraising is all about relationships and in order to build strong, long-lasting donor relationships, the CEO or Executive Director must publicly lead the fund development effort for the not-for-profit organization. The CEO or Executive Director must always be watchful for opportunities and always working to involve the entire board of directors and staff in fundraising.

It is the role of the future Fund Development Director to effectively and technically manage a Comprehensive Fund Development Plan to achieve the pre-established short-term and long-term objectives of the not-for-profit organization related to revenue generation.

Guiding Statement Number Two – All Board Members must be directly involved in fund development.

Fundraising is not just the job of the staff. Fundraising is not just the job of a subset of the Board of Directors (many times known as the Development Committee).

It is the role of each and every member of the Board of Directors to be directly involved in fund development. Board members have wonderful opportunities each day to both open doors and identify resources available to financially support the not-for-profit organization they oversee.

On an individual level, and to establish organizational value, it is important to make sure that volunteer job descriptions, including those for the Board of Directors, include responsibility for both and direct responsibility in fund development and program development (that includes a true marketing-orientation).

Suffice it to say, no matter how hardworking or how talented the future Development Director is, long-term success in fundraising is best assured by the Board and Staff working together.

Guiding Statement Number Three – All Staff Members must be directly involved in fund development.

More specifically… never isolate fundraising from program development.

It has been said, “no money, no mission.” It has also been said, that “no mission, no money.”

Both statements are true. This is why the most successful not-for-profit organizations involve both aspects into their operations and choose to manage the conflict as challenging as it is.

In the not-for-profit sector there is tension in some cases and conflict in others between those drawn to work in the program development and delivery realm of operations  (individuals generally more comfortable working in the process-oriented side of the continuum) and those in the fund development realm (individuals generally more comfortable working in the outcome-oriented side of the continuum).

Since both perspectives have value, by establishing and supporting mixed teams that bring together both perspectives, the end-products can be extraordinary --- outcome-based programming and passionate funding proposals!

On an individual level, and to establish organizational value to both, job descriptions for all staff with primary focus on program development and delivery must include fundraising responsibilities and for those staff with primary focus on fund development must include program development and delivery responsibilities (that include a true marketing-orientation).

Guiding Statement Number Four – All programs and services of the organization must serve its mission.

Before any organization can begin to think about fundraising, they need to be assured that all of the not-for-profit organization’s programs and services are focused on mission.

In affect, the not-for-profit organization needs to take a step back and examine all its offerings to be assured that they directly serve the mission. Not-for-profit organizations can find themselves in a place where because of financial pressures, their programs and services do not directly match and do not directly support their mission. This phenomenon is known as “mission drift.” It generally happens over time and occurs when not-for-profit organizations chase money; usually in the form of grants.

A way to resist the likelihood of “mission drift” is for a not-for-profit organization to stay on a three-year strategic planning cycle and to produce an annual program of work document that spells out for all stakeholders how the resources of the organization will be deployed to achieve the mission.

Guiding Statement Number Five – Once assured that all programs and services serve the mission, not-for-profit organizations must develop and implement a planned, systematic public relations and marketing effort.

Once that a not-for-profit organization are assured that all its programs and services are directly mission-focused, it needs to establish a plan to inform all stakeholders about the work of the not-for-profit organization and at the same time gather feedback from clients, funders, collaborators, and others about their needs and opinions.

Such a plan needs to be developed in concert with the Board of Directors and staff to be fully supported as it is implemented. Board action on the draft plan is advised.

While most not-for-profit organizations have a route or mechanism (either formal or informal) for the Staff and Board to provide feedback about existing programs and services but many do not have a process to bring new ideas into the process from other stakeholders or customers to lead organizational change.

Guiding Statement Number Six – With a Public Relations and Marketing Plan developed, a Comprehensive Fund Development Plan must be developed.

Universal support by each member of the Board of Directors and for that matter the staff is critical to the success of the Fund Development Plan. So, do not make the first task for the new Fund Development Director to develop the Comprehensive Fundraising Plan.

This critical task belongs to the CEO or Executive Director with feedback and counsel by the Board President or Chair especially about the level of direct involvement by the individual board members. Board action is more than advised, it should be required in order to make sure that both Board and Staff will complete their respective tasks on schedule.

A comprehensive fund development plan must layout the steps necessary to establish and maintain a diversified revenue generating effort. Short-term objectives should be spelled out as well as longer term objectives consistent with the financial needs of the organization and with the culture of that organization.

Guiding Statement Number Seven – Prepare a job description for the Fund Development Director that must include both short-term performance objectives (specific and measurable to be accomplished within six months) and long-term performance objectives (specific and measurable to be accomplished within a year) --- tied directly to the Comprehensive Fund Development Plan.

As was noted earlier, fund development staff are by their nature are generally an outcome-oriented breed. So, it is a realistic expectation for candidates to want to know beyond the operational structure (of working in teams with staff colleagues and volunteers) “how much will I be expected to raise both in the short-term and long-term.”

The phrase “how much will I be expected to raise both in the short-term and long-term” is really an overstatement since its results are based upon a combination of factors that include: the competency of the new Fund Development Director, the work of the team, and the organization’s support for the Comprehensive Fund Development Plan.

Guiding Statement Number Eight – Begin your hiring process only after developing a clear job description (including short-term and long-term performance objectives) framed by a Board-adopted Comprehensive Fund Development Plan and built on a Public Relations and Marketing Plan

Avoiding any of the previous steps can risk not only the success of the individual that you will hire but that person’s replacement as well.

Take the responsibility to work backwards first and build: a strong written case for financial support (based on its mission-focus), a public relations and marketing plan, a comprehensive fund development plan, integration of program development & delivery and fund development, then…

Hire the best candidate.

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Permission to reprint this article is granted with the understanding that the author and R. C. UERZ & ASSOCIATES, LLC will be acknowledged.

© R. C. Uerz & ASSOCIATES, LLC 2004.



Hope it helps. Do not forget to grade my response, please.

I wish you continued success in your endeavors.