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Armanino Nonprofit Blog

Armanino Nonprofit Blog

Welcome to the Nonprofit Blog hosted by the professionals at Armanino, CPAs & Consultants. This blog is set up to inform nonprofit organizations of trends, rule changes, best practices and free educational offerings that we have built to support nonprofit organizations. Our professionals bring you their insights from an accounting and organization perspective to help nonprofits reach their goals. We support our clients with advice, direction and best practices.

Monday, December 15, 2014

5% of Total Revenue: The Cost of Fraud

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Whether it’s misappropriation of funds, corruption, kickbacks or filing misleading financial statements, fraud is costing businesses 5% of total revenue, new figures suggest. That’s $3.7 trillion, with a median loss of $142,000 per incident. And businesses recover some of the losses in only half the cases. In virtually none of the cases is restitution complete.

The picture is even worse for nonprofits, where disclosure of fraud can raise questions about management controls and sap the enthusiasm of donors.

Yet just 19% of private companies are taking the single most effective step to deter fraud, Armanino Partner Jeff Stegner and Natalie McFarlin, Manager in Armanino’s forensic and valuation services practice, said in a recent webinar. That tool?  A simple employee hotline for reporting tips.

“Red Flag” systems allow employees to call a toll-free hotline or log into a website 24/7. Tipsters can remain anonymous. Tips are routed through independent third parties who then turn over the details to the appropriate company officials for investigation and action.

The Sarbanes-Oxley Act requires such hotlines for public companies, but private companies and nonprofits have been slower to adapt the simple measures. Statistics offered by the Association of Certified Fraud Examiners show 43% of fraud cases come to light because of an employee tip. That’s by far the most effective counter-measure available. Fraud cut off by hotline tips are also 41% less costly and are detected 50% more quickly than those uncovered by other techniques from surprise internal audits to management controls. 
 
Fellow employees are best positioned to spot some of the behaviors that should cause concern:
  • Employees who like to work early or late, when they are alone in the office
  • Employees who never take time off and resist training anyone else in their duties
  • Employees who live above their means
  • Employees who are unusually close to vendors or customers
There are certain patterns, Stegner explained, that characterize most fraud:
  • Pressure on the employee, from family emergencies to simply a need to keep up with the Joneses
  • Opportunity, usually a combination of misplaced trust and substandard controls
  • Rationalization, a belief that the actions are justified for some reason—from a feeling their efforts are undervalued to a belief they funds can be repaid before anyone notices
There are a lot of steps nonprofit management can take to reduce the risk. But none is as inexpensive or as effective as the employee hotline. It sends a clear message management cares and is setting an expectation of ethical behavior. And it works.

To learn more about fraud prevention and Armanino’s new fraud hotline, visit Armanino's events page, click on "archived" tab, and select the webinar recording titled Fraud - What Every Nonprofit Needs to Guard Against.

Saturday, November 22, 2014

New Reports Show Foundations Lead the Way as Nonprofit Sector Continues to Grow

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Back in 2012, America was slowly climbing out of the Great Recession, and foundations were leading the way by distributing a then record $52 billion. A year later, foundations again broke the record by distributing $54.7 billion. The numbers come from a new report—Key Facts on U.S. Foundations—released by the Foundation Center in New York City, and they paint an encouraging portrait of a nonprofit industry that continues to move forward.

The Foundation Center’s report showed there were 86,192 foundations with an aggregate $715 billion in assets. Here is how that breaks down:
  • Independent foundations control 82% of the assets ($584 billion) and gave 68% of the 2012 $52 billion total, or $35.4 billion.
  • Community foundations made up only 1% of the total number of foundations but had 9% of the assets and gave 10% of the total dollars. 
  • Health and education led the way as the top focuses for grants, at $5 billion and 22% of total giving each. Grants for human services accounted for the highest number of grants, at 42,037. The median grant amount was $30,000. Some 58,000 organizations worldwide received these grants, but nearly half of the $22.4 billion went to 1%of the recipients.
  • Internationally, health was the greatest focus for grants, with $2.2 billion going overseas for health causes. International development and disaster relief organizations received $1.2 billion. The Gates Foundation, which gave $2.6 billion internationally in 2012, has been the top international funder since 2004. The Switzerland-based World Health Organization was the top recipient of international grant dollars in 2012.
The Foundation Center’s report comes on the heels of the Nonprofit Times’ recent 25th annual snapshot of the nation’s largest charitable organizations. The 2014 NPT Top 100 reported total revenue of $70.067 billion, up 3.19% compared to last year while public support was up 5.6%, to $34.931 billion.

Those gains were posted against strong headwinds. Government support declined 5.6% and investment income was down 6.26%. Nonprofits compensated by leveraging “other revenue”—that which comes from sources outside the nonprofits core mission—to post a 20.5% gain. The larger category of ‘program revenue’ was up 2.19% for the same period.

Download the Reports

You can download a PDF version of Foundation Center’s Key Facts on U.S. Foundations report here. A copy of the Nonprofit Times’ 2014 NPT Top 100  report can be found here.

Monday, November 10, 2014

Not All States Are Equal: Fundraising Campaigns and Professional Solicitors

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Many of America’s largest and best-known nonprofits trace their success, at least in part, to fundraising campaigns handled by professional solicitors. But in an era when states, and even some localities, are busily trying to register and regulate fundraising activities, what happens when something goes wrong?

A new case in South Carolina puts a sharp point on the question with a $1.054 million fine levied against Strategic Fundraising, a well-established firm based in St. Paul, Minn. According to various media reports, Secretary of State Mark Hammond cited the fundraising firm on Oct. 22 for a series of violations involving misrepresentation and failure to register individual solicitors as required by state law.

The charges are based on state officials monitoring 350 calls after receiving citizen complaints. What they found, according to a report in The Nonprofit Times, involved failure to disclose that the fundraisers were paid professionals, failure to disclose the name and location of the soliciting firm, and misrepresentation of the percentage of donations going to the nonprofit’s programs.

“What makes this case so egregious is that these were ‘robo-calls’ in which the individual solicitors were using pre-recorded scripts,” Hammond said in a statement. “This wasn’t a situation in which an individual caller made a mistake and went off script, these disclosure violations were a result of deliberate choices made by a professional fundraiser.”

And this isn’t Strategic Fundraising’s first brush with South Carolina law. In 2009, it signed a voluntary agreement of compliance promising to toe the line. Instead, it is now facing the largest fine of its type in a decade. Often in such cases, fines are reduced after negotiation. But that can’t undo the black eye suffered by the charities involved.

The takeaway here is the responsibility doesn’t end when the contract is signed. Your name, your reputation rests on every interaction with a potential donor. Due diligence extends to reviewing the script and asking about compliance procedures. Anything less has the potential to backfire with disastrous repercussions that may take years to undo.

Friday, October 31, 2014

Benchmark your way to donors

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Nonprofit CFOs have a responsibility to be their organization’s fiscal educator. In fact, an estimated 75%  of the staff at any nonprofit doesn’t understand the financial side of the operation, and that’s a missed opportunity.

For example, think of a child trying to raise money as part of a school project. The child can turn to relatives and achieve one level of results. But if the child can take the message to everyone in the social media contact list of all of those family members, the results rise exponentially.

The same can be true for nonprofits, if they can successfully arm their staff and even their volunteers to tell the nonprofit’s story. The only way that can happen is if the CFO can use the numbers to validate the nonprofit’s position and give this army of new fundraisers a compelling story to tell.

Building that story starts by benchmarking your nonprofit’s performance in the key areas of financial stability, operational efficiency and areas of focus.  Identifying your peers isn’t as simple as it sounds. Perfect matches are rare and smart nonprofit CFOs look for similarities first before considering differences. Look at mission and size. Turn to your sector’s associations for ideas, help and in some cases data. Dig into the numbers from 990 forms, annual reports and Charity Navigator.

When identifying metrics, don’t identify more than 10 that tell your story best. Then, list the most important key performance indicators (KPIs) for nonprofits as:
  • Liquiity
  • Cash flow
  • Operating reliance
  • Program efficiencies
  • Fundraising efficiency


Armed with a story that uses benchmarked numbers that validate the nonprofit’s performance, an organization’s staff can be energized to share that story with their network, opening a whole new realm of potential donors. 

Of course, there are many other good reasons to benchmark your nonprofit’s performance. Executives and the board need the information to set policy and steer the ship. And talking with others who may have mastered a particular area can provide important insights that can improve your performance.


Wednesday, September 24, 2014

Treasury report shows nonprofits face back tax scrutiny

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A new report from the Treasury Department’s inspector general paints a clear target on nonprofit organizations that haven’t been paying their taxes.

The feds found more than 64,000 tax-exempt organizations owed nearly $875 million in back taxes as of June 2012. Most of the unpaid bill  (69%) represented unpaid payroll taxes but unrelated business income and excise taxes were also a factor.

All in all, Treasury found about 1,200 tax-exempt organizations owed more than $100,000 each. Drilling down on what the inspectors considered the 25 worst offenders, the feds found $25 million in tax delinquencies, some dating back a decade.

As a result, the IRS imposed the Trust Fund Recovery Penalty on several officers of those organizations, all of which are 501(c)(3) entities. That levy is imposed on the “responsible person” in an organization that hasn’t paid its taxes. And the penalty is huge—100% of the unpaid amount levied against the individual.

Think you’re immune because you’re ‘just’ a volunteer? There is an exception in the law for unpaid volunteers serving in an honorary position. But that exception doesn’t hold if the feds can’t identify another “responsible person” within the delinquent organization.

The silver lining here is that the feds found more than 96% of nonprofits have been doing the right thing. While that’s encouraging, the report fires the kind of warning shot that should prompt nonprofit executives to take a close look at their practices.

Start by reviewing your records to make sure your organization is current on all its tax bills. Pay particular attention to those payroll taxes. Then take a close look at your internal controls to identify that “responsible person.” Ask yourself if the finding is what you intend and whether the person knows they could be on the hook if anything goes wrong. This is also a good time to check your directors and business officers insurance coverage.

While the Treasury and IRS disagree on next steps, this is the kind of issue that likely won’t go away. Uncle Sam has a long arm and an $875 million unpaid bill is enough to get his attention. Read the full report to learn more: http://www.treasury.gov/tigta/auditreports/2014reports/201410012fr.pdf.

Wednesday, September 17, 2014

Fraud takes a bite out of nonprofit revenue

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A new report puts some important detail on an unfortunate truth: Fraud is a major drag on business.

Overall, fraud is costing business 5% of gross revenue, according to the biennial Report to the Nations on Occupational Fraud and Abuse authored by the Association of Certified Fraud Examiners. The media loss is $145,000, and in 58% of cases, there is no recovery. Small or large. Private, public or nonprofit. It doesn’t matter. Dishonest employees don’t discriminate.

Think of fraud as a triangle, Jeff Stegner, Partner with Armanino’s Forensic and Valuation Services Group, and I explained during a recent webinar focusing on fraud prevention in the nonprofit sector. The legs of that triangle are:
  • Pressure – An employee is in need and feeling pressure
  • Rationalization – An employee rationalizes the fraud as justified or an entitlement
  • Opportunity – An employee finds an opportunity to commit fraud
And opportunity is the only one employers can control. Our best advice involves tightening internal controls and putting your firm in a position to detect a crime. The report showed that 42% of fraud is discovered through a tip from an insider. Another 30% is uncovered by internal controls and internal audits. An additional 11% is discovered purely by accident.

At the bottom of the list at 3% is external audits, highlighting a crucial lesson. Don’t count on external auditors as a frontline detection strategy. That’s not what external audits are designed to do. But that doesn’t mean your auditors can’t help. Ask them for suggestions on how to tighten your internal controls to make fraud easier to detect.

Fraud comes in three main forms, the report said:
  1. Fraudulent financial reporting – This category of white-collar crime makes up just 9% of total fraud but carries a median loss of $1 million. As bad as that it, the figure is down from the $4.1 million median chronicled in the 2010 report. Sarbanes-Oxley reporting requirements deserve much of the credit.  
  2. Asset misallocation – This is the largest category, making up 85% of U.S. cases with a median cost of $130,000. The category includes everything from no-show employees to skimming, theft of supplies to fictionalized expense reports. 
  3. Corruption -- This is a larger problem overseas than in the U.S. but represents 37% of reported cases. (Some cases involve more than one category, sending the total over 100%). The median corruption case costs $200,000.
The old school anonymous tip hotline is one of the most effective steps employers can take. Employers with hotlines find 51% of detection comes from tips while that number dips to 30% for employers without hotlines.

Nonprofits aren’t immune from fraud. Almost 11% of cases involve nonprofits and carry a media loss of $108,000. A common factor is lax internal controls. Also, for small nonprofits, a few key employees are often forced to take on incompatible roles that can open the door to fraud. Rotating duties and roles can lessen the opportunity for fraud.

To learn more about fraud and prevention techniques, download the PowerPoint presentation or replay the entire webinar on our website.

Monday, September 8, 2014

Unrelated Business Income: Tax-Exempt Revenue Can Hang By a Thread

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The term ‘unrelated business income’ sounds innocuous on the surface, a kind of catchall for items accountants can’t categorize. For the nonprofit community, however, nothing could be further from the truth.

A miscalculation that moves tax-exempt revenue into the taxable realm of unrelated business income (UBI) can be devastating. The nuances are so granular, only a CPA can explain the ins, outs and ramifications. This is why my recent webinar presented more than a dozen case studies to explain the subtleties nonprofits need to master to stay on the right side of IRS rules.

The whole area of UBI stems from concerns raised more than 50 years ago by for-profit entities over what they characterized as unfair competition from tax-exempt entities. To level the playing field, Congress moved from considering the use of the revenue to considering the source.

The test for falling out of tax-exempt status involves three elements, all of which must be present:
  1. The activity must not be substantially related to the tax-exempt purpose
  2. It must be a trade or business
  3. And it must be regularly carried on
Is a hospital cafeteria substantially related to the mission of the hospital? How about a college that leases unused land for a cell phone tower? How about a fundraising gala or that Christmas tree lot on the corner?

These are tricky issues, with lots of variables. In addition, these nuances often have to be sorted out by the courts, resulting in a complex set of exceptions and modifications.

Nonprofits can slip into UBI territory without even knowing it. Watch those hyperlinks. The IRS is on the lookout for links that lead to pages that can be classified as advertising or political content. That’s enough to poison a whole partnership and make any revenues taxable. And that can really hurt at a time when nonprofits are watching every penny.

To hear some additional scenarios and learn more about UBI, click here to access my recent webinar presentation and recording.
  

Wednesday, September 3, 2014

Nonprofits: Go Beyond Storytelling

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In the ongoing effort to engage donors, nonprofits have been developing a renewed appreciation for storytelling. But is storytelling alone enough to build the ongoing engagement with doors that modern nonprofits crave?

The ability to touch the heart and then the wallet isn’t a new concept. For decades, donors responded to actors telling stories of impoverished children rising above their circumstances; these stories touched hearts and drove donations. A number of charities connected donations with individual children and promised periodic updates from the children themselves.

Social Media

In the 21st Century, the addition of social media has supercharged storytelling. One good story can be re-purposed into many channels and touch prospective donors where they congregate rather than trying to drive them to the nonprofit’s site. That’s all progress. And there’s some evidence the Millennial generation responds to human narratives. Focusing on best practices helps:
  • First-person tales are most compelling
  • Use video to convey motion and emotion
  • Ensure the story isn't about the organization, but the impact on real human beings
  • Keep it simple and keep it under two minutes
The question is how to follow the initial success of a storytelling appeal.

Results

In this results-oriented world, donors are looking for programs that solve problems, not bandage them. The focus on quantifiable outcomes is one step and can be a powerful tool when packaged in combination with quality storytelling.

Nonprofit website Socialbrite has a great post featuring 8 Great Examples of Nonprofit Storytelling, which showcases how visual storytelling can help advance the missions of nonprofits. It’s a powerful series of examples that are worth a look. However, remember that storytelling doesn’t work in a vacuum.

Modern donors increasing want to feel appreciate. Donor incentives are one way to accomplish this, but so are some spiffs of the social media age. A shout out via Facebook or Twitter, for example, can be a valuable perk for Millennial donors. They also demand transparency, which can reveal that a nonprofit doesn’t have the reach to solve a problem alone.

That’s where collaborations can become an attractive tool. Not only do they show donors a nonprofit is expanding its approach to the problem, it also lets a nonprofit mine another set of potential donors, albeit at the cost of sharing its own list. Finding the best fundraising techniques for your organization is an art, but it can be augmented by the science of best practices.

Monday, August 11, 2014

Should Your Nonprofit Cash in on Cryptocurrency?

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A fascinating fad…or the next evolution of fundraising? Seems it’s what everyone is asking these days about the Bitcoins, Dogecoins and Peercoins of the cyber world. So, let’s take a look at how few early-adopting nonprofits have experienced some initial success in accepting these “cryptocurrencies” as donations.

Songs of Love, a national nonprofit that creates personalized, original songs for children and teens facing tough physical or emotional challenges, was one of the first nationally recognized 501(c)(3) charities to accept Peercoin donations. Donors simply send to the Peercoin wallet address provided on the organization’s website.

Another cryptocurrency, Dogecoin, has been used to raise money to fund everything from the Jamaican bobsled team’s trip to the Sochi Olympics to service dogs for children with disabilities.

Geekers Paradise?

Sure, it’s a brave new world when it comes to virtual currencies. But you don’t have to understand geek-speak to understand the basics.

The IRS refers to Bitcoin and similar cryptocurrencies as “convertible virtual currencies”, which means that they can be digitally traded between users and exchanged for legal tender or other virtual currencies. Cryptocurrencies don't exist in paper or coin form. They are downloaded from a virtual wallet, which is often housed on the owner's smartphone, to the charity's website, which is equipped to convert it to cash. Prompt exchange is often key due to the potential for volatility with virtual currency.

However, you can count on this: Somewhere, sometime, someone will contact your organization and want to make a donation using a cryptocurrency. If you have the ability to do so, you may just create a new platform and a new way to engage donors in the process. Of course, you’ll appeal to younger, tech-savvy donors. But the built-in PR buzz of this new technology may very well ripple across your entire base.

What the Tax Man Says

However, just because you can accept cryptocurrency donations doesn’t necessarily mean that you should. To be sure, a myriad of logistical and legal challenges can arise.

But figuring out the legalities of cryptocurrency donations got a bit easier after the IRS issued a March 2014 notice stating that cryptocurrencies should be treated as property (similar to the way stocks are treated for income tax purposes). Specifically:

  • Cryptocurrency received as payment (or donation) is includable as income for the recipient
  • The value of the cryptocurrency is determined to be the fair market value as of the date it was received

Consider Jumping In

Spare Key, a Minneapolis nonprofit that provides assistance to families with critically ill or injured children, began accepting Bitcoin donations at the beginning of 2014. In a blog post, Executive Director Erich Mische summed up his feelings on cryptocurrency’s future. “I am not smart enough to know where the cryptocurrency economy will end up in the weeks, months and years ahead. But I am old enough to know that I have been told too many times that things like cell phones, the Internet and reality shows would never catch on in my lifetime.”

If you’re considering crytocurrency, or have the same mindset as Mische, you’ll be glad to hear it’s actually pretty easy to jump into the world of cyber donations. Just go to Coinbase or BitPay to set up Bitcoin processing. Then, design a special Bitcoin donation page on your website. Sprinkle in a few “Bitcoin Accepted” logos and add some links on your donation pages to let people know they can donate.