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Jul 23

When is the Right Time to Leave Your NFP Board Position?

By Frank Monti

There are plenty of articles written and many reasons why you should consider joining a nonprofit board, yet many help you to identify the warning signs of when it might be the best time for you to surrender your board position and volunteer your time elsewhere. This blog will help you to identify some situations which, if they exist, should cause you to consider whether remaining on a board is the right decision for you.

Organizations evolve over time and the organization you joined as a Board member years ago may be very different today.  Occasionally you should take a step back and evaluate whether the organization’s values and activities are still consistent with your personal values. If they are not, you may want to either try to move the organization back to where it once was, or consider parting ways.

It is absolutely appropriate to vote with your conscience on all Board votes.  However, after the vote, all Board members must support the majority decision and proceed along the selected path with a united front.  If you are unable to support the organization when a board action is taken contrary to your vote, you should consider resigning. Supporting the majority decision is one of the basic and most important fundamentals of holding a Board position. If that is not possible for you, you may need to look into alternative organizations.

If you (and other board members) are not informed about the organization’s current activities and its mission-oriented results or the performance of the chief executive, this is an organization which is likely no longer being run by the board.  If, after making an effort to change the situation or make right of an issue, you should consider resigning from the Board.  Continuing to participate in an ineffective board only reinforces the ineffective behavior.

Another example of an ineffective board is one that does not receive and review the organization’s financials on a regular basis.  Financial resources are what allow the organization to address its programmatic mission.  Board oversight of the financial picture is critical.  Likewise if you don’t spend a significant amount of time thinking about whether the organization is effective at advancing its mission and how the organization could be more effective at advancing its mission, you (and the rest of the board) are probably becoming more and more disconnected from the organization.

Among the more obvious reasons for leaving a board position is that you recognize that you’re serving more for personal benefit than for the public benefit.  Remember, your position on a not-for-profit board is as a representative of the public – the public that has granted tax-exempt status to this organization because that public values the organization’s tax-exempt mission and has entrusted the board members with keeping the organization focused on that mission.  Also, if you have a material financial interest in a transaction with the organization that would be damaging or embarrassing if known by the public, it is time to sever your ties with the organization.

In more than one instance above, we mentioned working to change the board’s activities back to what they should be.  In doing this, however, if you find yourself unable to work collaboratively with the other board members in a productive manner, it probably does not make much sense for you to continue your efforts.  It certainly is not easy to resign from an organization which you joined and worked so hard and for so long to improve. However, sometimes, needed change will only come about when you emphasize your position or feelings and take action to correct them.

Jul 15

Lobbying Activity Reporting & Registration Requirements in Massachusetts

By Frank Monti

Are you a not-for-profit organization beginning to engage in permitted lobbying activities?  You should be aware of regulations under Massachusetts General Law c. 3, §§39-50.

Our latest white paper outlines the laws that your organization may be subject to if you engage in lobbying and what you need to look out for. Here’s a summary of what is reviewed:

  • From December 1st-15th each year, the Secretary of State will hold mandatory educational seminars for executive and legislative agents (defined in Massachusetts General Law section 39).
  • Each legislative agent and executive agent is required to file an annual registration statement with the Secretary of State (to be completed no later than December 15th each year).
  • Semi- annual financial reports must be filed with the secretary of state (due on July 15th and January 15th for the six month period ending on the end of the month preceding these dates).

Compliance with these laws is necessary if you engage in lobbying activity, so make sure you pay attention to of all the deadlines and requirements.

For more information on lobbying activity in Massachusetts, read our whitepaper: Federal & Massachusetts Reporting and Registration Requirements Related to Lobbying Activity.

 

Jun 26

Board Member Independence

By Frank Monti

Board members play a critical role in the governance of a not-for-profit organization. Their role in supervising the decision making process in the organization – including the decisions reserved for the Board itself – are critical in keeping the interests of the organization and its mission top priority.  One of the key legal obligations of board members is their loyalty.  This means maintaining objectivity in making decisions; assuring an unbiased approach to issues; being free of any conflicts of interest when choosing between options and being free from external control or ulterior motives.

The IRS Form 990 specifically asks questions relative to board member independence;  however, these questions stem from a strict definition of independence which is related to financial reward.  For example, the IRS questions whether board members receive compensation either as a board member or as an employee.  They also question compensation that may be received as an external contractor and other financial transactions with either a board member or family member.

States Taking Action

In addition to the IRS, various state laws address the independence of not-for-profit board members.  On July 1, 2014 a revised New York nonprofit law goes into effect.  This law addresses board independence as one of the key aspects of an accountable board.  Among other things the law indicates that a board member may not be or have been an employee or have a relative who is a key employee of the organization for the past 3 years.  The board member may also not have received direct compensation from the organization or an affiliate of more than $10,000 in the past 3 years.

The goal of every organization is a board comprised of individual board members, each possessing genuine independence.  This leads to decision making that derives simply from the obligation and need to help the organization.  This independent-mindedness results in candor and a thorough reflection of the issues as evidenced by a willingness to ask questions until an issue has been thoroughly examined and discussed. Everyone on the board should feel free to question current practices and traditions without being influenced by the seniority, position, or reputation of fellow board members, staff members or donors.

Defining Genuine Independence

Organizations can create a structure that will lead to genuine independence. For example, the CEO shouldn’t have double duties by also serving as the chair of the organization. To the same respect, no paid staff member should also be a voting board member. This also applies to spouses and close relatives.  The organization should have a solid conflict-of-interest policy with unequivocal enforcement. Full disclosure of potential conflicts should be the norm with recusal from both discussion and voting when a conflict is present.  This fact should also be noted in the meeting minutes.

The role of the board should be periodically reinforced so that members understand their individual and shared responsibilities.  This understanding is aimed at linking board decisions to the future success of the organization and reinforcing the concept that the board and the organization are a team.  The board should hold regular executive sessions without the staff and develop a culture where the skills of the individual board members are brought to the organization as assets. 

A highly effective board leads to a highly effective organization. We urge everyone who serves on a board to commit the time and energy needed to run an effective, independent board. Learn more about board development by reading our 10 Basic Responsibilities of Not-for-Profit Boards blog series.

Jun 17

More on Nonprofit Lobbying Activities

By Frank Monti

Earlier this year I wrote a blog about political campaigning and lobbying activities since 2014 is another important election year.  This blog will discuss the federal and Rhode Island registration and reporting requirements for organizations that engage in lobbying activities.

In the spirit of greater transparency both the federal and state governments have enacted laws requiring greater disclosure of who is lobbying for what, how much they are spending and how they relate to other organizations, if at all.  These lobbying registration and reporting regulations do not change or affect any of the information contained in my previous blog.

The KLR Not-for-Profit services group has also written a whitepaper on this topic with greater detail for organizations that are engaged in any amount of lobbying activity. Download the whitepaper “Federal & Rhode Island Reporting and Registration Requirements Related to Lobbying Activity” now.

In our previous blog and whitepaper we indicated that any organization that is engaged in lobbying activity should make a safe harbor election under Section 501(h) of the Internal Revenue Code.  This election is for lobbying purposes only and your organization remains tax-exempt under Section 501(c)(3) of the Code.  Making this election is relatively easy and any member of our team can help.

The federal regulations for lobbyist registration and reporting are part of the Federal Lobbying Disclosure Act.  Typically with federal regulations, the definitions of various lobbying related activities under the Act and under the Internal Revenue Code differ a bit.  However, the Act has indicated that organizations that have made a 501(h) election have the option of using either set of definitions to determine the organization’s reporting and registration requirements. Clarity and consistency is unusual coming from the federal government, but makes us accountants happy! Therefore, in addition to all of the other reasons we have provided in other documents as to the advantages of a 501(h) election, this is yet another.

As mentioned above, in addition to the federal lobbying registration and reporting requirements, a similar registration and reporting obligation has been instituted in Rhode Island (and other states).  In Rhode Island, there are actually two laws governing lobbying activity.  One set of laws deals with lobbying activity and the other addresses ballot question advocacy. 

The Rhode Island laws may appear very similar but the lobbying law is limited to activity relative to matters before the General Assembly or on the Governor’s desk for signature.  The ballot question advocacy laws apply only to ballot questions and advocating in support or opposition of those questions.

Because of the relatively short period of time during which legislation or a ballot question comes before the legislature or the voters, all legislation contains very strict deadlines for registration.  In addition, reporting is mandated generally on a monthly basis and, in some situations, even more frequently. 

Of course, there are financial penalties for noncompliance so it is in your best interest to be aware of the law and be ready to comply as soon as you become active in the lobbying arena.

To read more about lobbying, download our whitepaper “Federal & Rhode Island Reporting and Registration Requirements Related to Lobbying Activity”.

Jun 3

Your Questions About Board Meeting Minutes Answered

By Frank Monti

Recently I received some questions on the subject of keeping records of board meetings.  The minutes of the meeting are the official record of the Board’s actions taken at meetings and should contain specific information. Below are responses to some of your recent questions on this topic.

Q: What is required to be recorded in meeting minutes on motions and votes?

It is not necessary to record who made and seconded a motion, nor is it necessary to record the exact vote (i.e. 6 in favor and 5 against).  All that is necessary is to indicate that a motion was made and seconded and whether it passed or was defeated.

In general, the concept behind the recommendations above is that the decisions of the Board represent the decisions of the entire Board acting in unison in its capacity as the body responsible for overall governance of the organization.  Decisions of the Board are binding upon the organization whether they passed unanimously or by a one-vote margin. 

After a decision is reached, all Board members (and management) must act to implement and support the decision.  A motion that passes is not the responsibility of only those Board members who voted in favor of it.  The Board members who voted against the motion must never act in any way to diminish the impact of the decision or the effectiveness of the course of action decided upon.  This also means that you should not refer to a decision as “one that barely passed” or “passed with the thinnest majority of support”.

Q: Should Board members record negative votes in the meeting minutes?

If a Board member wants their negative vote recorded in the meeting minutes, the board as a whole should first examine what that member’s objective is. While there is no rule or regulation prohibiting that fact from being noted in the minutes, it would be best to remind the member that the majority rules and that the organization must move in concert as it makes decisions. This will hopefully convince the member that there is no value to the organization to make note of their negative vote on the matter. 

Q: What happens if a member of the Board doesn’t agree with a motion or insists a negative vote be recorded?

If a Board member is so set against the direction that the organization is taking as evidenced in the previous question, that Board member must evaluate their ability to support the organization going forward.  While volunteer Board members may be difficult to recruit, retaining a member who truly believes that organization is making an error may become very problematic in the near future.  The time to lobby and fight for the course of action you believe is right is during the discussion prior to the vote.  Once the vote is taken, the majority position becomes the position of every single Board member.  If a Board member can’t live with this, merely noting that they voted against the motion is not a solution. 

Read our whitepaper titled “Board Meeting Minutes” to learn more about the various aspects of the normal meeting processes and how those processes should be documented in the meeting minutes.

May 28

Not-for-Profit Raffle Regulations in Massachusetts

By Frank Monti

Charitable organizations frequently hold raffles to raise money.  Sometimes these are very informal such as the raffles at golf tournaments and sometimes they are very sophisticated with expensive prizes.  The first thing to know about running a raffle is that it is a gambling activity and is highly regulated in every state

Today we will talk about the laws in the Commonwealth of Massachusetts. The laws in Massachusetts are contained in two places:

  • Massachusetts General Law 271 (M.G.L. c.271) and
  • Section 940 of the Massachusetts Code of Regulations (940 CMR)

The general law is very straight forward and indicates that you cannot run a raffle unless you are a charitable organization and you need to obtain a permit to do so.  The 940 CMR regulations are where a raffle running in Massachusetts runs into complexity. 

To learn, in greater detail, about the rules and regulations regarding raffles in Massachusetts please read our white paper: Regulations Affecting the Running of Raffles in Massachusetts.

Today I am going to talk about avoiding 940 CMR.  These regulations are applicable to raffles only if the sum total of the value of the prizes exceeds $10,000 or the individual ticket price exceeds $10.00.  Obviously, if you want to save yourself a great deal of compliance and record keeping work, you would want to avoid both of these thresholds.

This Spring I was consulting with an organization running their first raffle and they had a number of cash prizes that totaled $9,500.  Good, they failed to cross the first threshold of 940 CMR.  However, because they had a limited number of people in their constituency, they priced the raffle tickets at $50 each figuring that their supporters will want to participate in the fundraising effort and the organization wants to raise a substantial sum of money.  As a result of the $50 ticket price, they were going to be subject to 940 CMR (exceeding the $10 per ticket threshold).

This made me think of a golf tournament I attended a number of years ago.  When you check in at a charity golf tournament, one of the things you can do at the check-in table is purchase raffle tickets for the drawing of door prizes which happened during the meal after the tournament.  Almost everyone buys raffle tickets. 

Since a golf tournament only has a limited number of golfers, this is the classic marketing challenge of trying to get your customer to spend more money by purchasing raffle tickets. As a matter of fact, selling more to an existing customer is one of the 4 basic ways to improve your business (think about McDonalds, “do you want fries with that?”). 

Typically, golf tournament raffle tickets are $5 each; 3 of $10 and 7 for $20.  Ideally, the charity would like everyone to purchase 7 for $20 but it doesn’t happen.  At the tournament I am thinking of, the ticket sellers sold 1 ticket for $5, 3 for $10 and your height in tickets for $25!  If you plunked down $25, two people came around the table and measured you for 6 feet of raffle tickets – what a buy.  Many, many people purchased $25 worth of raffle tickets.

While on the course that day, I thought about this.  How could they afford to give you 40 or 50 tickets for $25 when they were selling 3 for $10?  The reason is that the number of tickets sold doesn’t matter.  The same number of prizes exists no matter how many tickets are sold.  What matters is how much they raise in selling the tickets.  Raffle tickets cost next to nothing – they are not valuable to you.  Cash sales are what you are after.

Getting 100 or more of golfers to pay $25 for raffle tickets when we normally would have only paid $5 or $10 was an excellent up sell and a much better value!  The golfers were excited about their extra chances to win (and the awesome deal they got) and the organization was able to sell a ton of raffle tickets. 

Back to my raffle client from this spring . . . when they saw the amount of 940 CMR work required due to their $50 ticket price, they hoped that most people in their group would purchase; they were overwhelmed and a little disappointed.  I suggested reducing the price of a single ticket to $10 but offering 20 or 30 tickets for $50.  They eventually settled on 25 tickets for $50 because people could more easily see that the price-per-ticket was thereby reduced from $10 to $2.  As expected, and similar to the golf tournament example I gave above, most people purchased 25 tickets and their fund raising raffle was a financial success without any 940 CMR requirements.

Isn’t it fun to apply a lesson learned one day on the course to a situation many years later?! If you have questions about raffles please contact me or any member of the not-for-profit team

Read our white paper: Regulations Affecting the Running of Raffles in Massachusetts to learn more about the rules and regulations regarding raffles in MA.

 

May 15

How to Make Sure Your Endowment will be Worth the Same Amount in 10 years

By Frank Monti

Unless you are an endowment donor, you probably have no idea what generational equity is all about.  When a donor makes an endowment gift to a charity, the donor has two purposes.  One is to provide the organization with funds today and the other is to continue providing funds long into the future.  As a matter of fact, an endowment gift is expected to continue on in perpetuity – i.e., forever; unless there is a provision in the gift for some endowment term other than perpetual.

The endowment donor’s intention is to provide the charity with some income today and an investment that will produce income each year in the future.  Generational equity is the concept that aims at providing that future stream of income in an amount that is as valuable in the future as the current income is today.  One of the best ways of demonstrating generational equity is to discuss the restricted endowment gift.

Donors may make endowment gifts where the income each year is available for any current operating purpose.  This is generally referred to as an unrestricted endowment contribution.  Donors may also make an endowment gift where the income each year is restricted to a specific purpose – known as the restricted endowment gift. 

Here’s an example. I might make a restricted endowment gift to my university in the amount of $100,000 with the income restricted to the purchase of business books for the library.  Using the university’s endowment spending policy of 4% in the first year, my gift will provide the university with $4,000 that they should spend on business books for the library. If we assume that library editions of these books average $200 each, the university would be able to purchase 20 books.

Next year, under the concept of generational equity, I would like the university to again be able to purchase 20 books.  However since the price of library editions increased to $206 each, the university would need $4,120 to purchase 20 books. Since the university’s endowment spending policy is 4%, they would need an investment of $103,000 to generate the $4,120 needed to purchase the 20 books required by my restricted gift.

How is the university going to accomplish this?  What they need to do is to invest my $100,000 initial gift in such a way that they not only generate the 4% needed to pay for books each year, but receive a greater return than the current cost in order to generate additional investment income in the future. 

In our simplified example above, a 7% return in the first year would have not only produced the $4,000 needed to purchase 20 books at $200 each, but it would also have increased the investment balance to $103,000.  The 7% return produced $7,000 of total return, of which only $4,000 was withdrawn to purchase books, leaving $3,000 that was added to the $100,000 and invested for the future. 

In a perfect world where the investment returns are consistent and the rate of inflation in the cost of books is equally consistent, my one-time restricted endowment gift continues to provide the university with the ability to purchase 20 new business books for the library every year.  Even 100 years (4 generations) from now, when books cost $700 each, the concept of generational equity will provide the investment income sufficient for the university ($14,000) to purchase those 20 business library books. 

Of course, this is not a perfect world; inflation rates and investment returns may not behave according to plan, but conceptually generational equity is the goal.  Minor corrections may have to be made from time-to-time to continue to focus on the donor’s intention when the gift was first received.

Generational equity has not been achieved if 100 years from now, my endowment gift is still producing only $4,000 per year and the university which would only provide enough money for the library to purchase less than 7 books for the library.

May 7

Best Practices for Your Nonprofit Organization

By Frank Monti

One of the advantages of being in a CPA firm with so many not-for-profit clients is that we get to see many different operations.  We get to see the things and operations that are working well and, unfortunately, some that are not.  My next two blogs will share some of each.  In an effort to start on a high note, this blog will be about some ideas worth considering for your organization.


1. Implement a practice that is intended to improve performance.  All too frequently programs continue to run year after year without change.  However, some organizations identify key pieces of data from each program and track these on a regular basis while implementing small changes that are designed to improve the program and be reflected in the tracked data.  Some call these data points Key Factors for Success (KFS) and focus on these points at staff meetings.

2. Donor management. Everyone knows that when you ask for a sandwich at McDonald’s they ask “do you want fries with that?”  This is a standard operating procedure at McDonald’s and other eating establishments because it is easier to sell an existing customer more than it is to find a new customer. The same principal exists with your donors. Asking donors who are already contributing to give more is easier than finding new donors.

When you receive the first gift from a new donor, this is when you begin working on the second gift from that same donor.  Thinking ahead to the next gift immediately upon receipt of the present gift will impact your response and relationship with that donor forever.  The goal is to make the donor feel like a part of the organization – like a partner in your mission.  Realizing the difference between an existing donor and a prospective one is critical to building long-lasting relationships that benefit your program and mission for years.  You should always be trying to increase your donor’s knowledge and commitment to the organization.

Also, you should consciously work to have your repeat donor keep pace with inflation.  Don’t wait years and then ask your donor to double their annual gift amount.  We have a client who sends very personalized annual giving letters out and it is not unusual for the letter to a $50 donor to ask if they could donate $53 to this year’s annual campaign.  This organization’s giving growth rate from repeat donors is much higher than other organizations soliciting an annual support donation.

3. Demonstrate the impact of your efforts. This is also part of donor management.  However, today more and more we hear of donors, especially younger ones, wanting to know more about how their funds were used and what change did funding this program bring about.  Measurable output is the new phrase of the day.

We have a client who raises funds to bring kids to a water park in the summer.  After the event, the organization posts pictures and videos on their website of the kids having fun and thanking the donors for their support.  Every donor receives a thank-you e-mail with a link to the website.  Additional pictures and videos are saved for the following year’s fundraising campaign.  This has been an extremely effective way for them to communicate and show people the impact of their donation. Even if you do not raise funds for such a specifically targeted purpose, that doesn’t mean you cannot communicate targeted results back to general donors.

Individual donors are a gateway into a multi-generational family of givers.  A growing number of donors want to involve their children and grandchildren into philanthropy and will welcome the opportunity to do so.  These donors are looking for opportunities for people of different ages to volunteer and learn about the work of your organization.  Think of ways of helping your donors instruct their families in the pleasures of philanthropy.

As I have mentioned, photos and videos are great tools to demonstrate exactly how donations are used. Posting this type of media to your website, social media sites and in an e-newsletter is an excellent way to share this content with even more potential donors. Make sure the quality of your visuals and videos are top notch, these are what will make that connection to your donors and a quality video can make all the difference.

If hiring a professional isn’t an option, bringing them in to teach your staff might be a nice alternative. Recently a shelter had a photographer go to the shelter to teach staff how to photograph animals available for adoption.  The shelter also invited volunteers and donors (all of whom own pets) to the education session.  Now they have a greater supply of trained photographers, donors who know more about the shelter program and volunteers who have been exposed to another facet of the operation.  All of this is a positive for everyone involved.

Read my next blog 5 Things to Consider Changing at your NPO.

May 5

5 Things To Consider Changing at Your NPO

By Frank Monti

In my previous blog, I spoke about some of the successful things we have seen implemented at the over 220 not-for-profit organizations.  This week, I will share with you some of the actions and activities that organizations have stopped doing.  This does not necessarily mean that if you are doing some of these things you must stop immediately, but perhaps it should precipitate a discussion.

  1. Don’t ignore the smaller and medium size gift.  Everyone likes to bring in the big gift and no one forgets to recognize the big giver.  However, there are a number of people who give $500 to $10,000 annually to the charity of their choice who seem to fall through the cracks.  These donors should be on the radar of your major-gift fundraisers.  Perhaps you should have only one development person with the responsibility of these donors and a specific program for deepening those donors involvement with the organization.
  2. Don’t use social media indiscriminately.  You don’t want to jump on every bandwagon that comes along and do none of them well.  The key is to find out where your donors, volunteers and supports are, where they want to hear from you and then devote sufficient resources to that area to do it correctly and completely.  If you do not have the time or the resources to commit to publishing to - social media so that it remains current, it is better to not participate at all and concentrate your efforts on keeping your website updated, fresh and relevant with new information.
  3. Don’t hoard information.  You may produce an annual report but if you have good news and information about the successes experienced in a program, let the public know.  Publish this on your website, send an e-mail to donors and volunteers and let local organizations or public figures know. A good rule of thumb is to be in touch with your constituency on a monthly basis.  Many organizations are making effective use of an e-newsletter and once you get started you will be surprised how easy it is to come up with new information each month.
  4. Stop using generic language.  Not-for-profit organizations are great at saying very little: we empower; we help educate; we help the community.  Stop using those broad generalizations of your work and be specific.  “We help adults raise their math skills two or more grade levels.” As I mentioned in my previous blog, donors are specific and want to know exactly what their donation is contributing to. Using language that is also specific will help your donor get a better sense of what you do and how that it is actually happening.
  5. Don’t be afraid of failure.  Failure is the price of progress and organizations that avoid failure are probably not taking big risks. Innovation is the path to progress.  Don’t be afraid to experiment with new ideas.  Failure is not a problem when it is a learning experience.

 

Apr 29

Do You Know Anyone Committing Fraud in Your Organization?

By Frank Monti

Has anyone asked you this question?  As a board member or a member of senior management or even front line staff, our auditors are trained to ask you this direct question.  Asking about fraud is part of generally accepted audit standards and auditors don’t like asking the question(s) any more than people like such direct inquiries.

Why do we auditors ask such a question?  Believe it or not, research has demonstrated that one of the best ways to find fraud is to simply ask about it.  Apparently, some people need to be prompted to share. They won’t naturally bring this up and seek to resolve it for a variety of reasons.

As a board member or organization leader, you should be prepared to be asked about fraud.  You may also be asked if you have any knowledge of suspected fraud affecting the organization.  Another typical question is to ask what the organization is doing to prevent fraud.  For example, are your employees made aware of their responsibilities regarding ethical behavior? 

One of my favorite questions is:  if someone would commit fraud here, how would they do it? I have always found thinking about what could go wrong in an organization to be a particularly challenging and interesting activity.  Of course, some people wonder if there is a side of me they do not know!

If fraud does occur in an organization, it can seriously weaken the organization’s financial health and put everyone’s job at risk.  Even if the organization is financially able to withstand the fraud loss, damage to its reputation may be so great that its future ability to operate with the public trust is damaged beyond repair, again resulting in a loss of jobs.  Fraud and its prevention is everyone’s responsibility and should be on everyone’s mind.  Rather than dreading the annual audit fraud inquiry, this realization should make the auditor’s work a welcome test of the organization’s ability to continue.

How do you develop a fraud-prevention mindset?  The easiest way is to take every daily activity, think about what could go wrong (intentionally or unintentionally) and ask what systems or processes are in place that attempt to minimize the potential.  Most business activities (including not-for-profit businesses) fall into a small number of systems.  These might be the following:

Sales – billing – receivables – cash collection
Purchasing – paying bills – cash disbursements
Payroll

Let’s think of payroll first, since we are all involved in payroll as an employee.  In a large organization one of the first questions is, how do we know we are only paying real employees? What is it that prevents a fictitious person from receiving a paycheck? Of course in a small organization, where everyone knows everyone this is not generally a concern.

What prevents an employee from being paid for more hours than they actually worked?  How do we know that all employees are paid at the appropriate pay rate? How do we know that all voluntary deductions (such as 401K) are remitted in a timely manner and in the appropriate amounts?  If someone were to commit fraud in the payroll area, how would they do it?  The questions actually come fairly easily once you stop to think about the process.

In the sales – billing – receivables – cash collection cycle, some of the questions that come to mind are:  Are we being funded for every service we are providing?  Are we billing for every service provided?  Are we collecting the appropriate co-payment for each service rendered?  Is the billing entering our receivables system so that we can track that we have been paid?  Are all payments being deposited into the organization’s bank account?  If someone were to commit fraud in the billing, cash collection area, how would they do it?

Finally, let’s think about the purchasing – bill paying – cash disbursements cycle.  Some of the easy questions to ask might be:  Are we only purchasing items that we really need?  Are we receiving everything that we have purchased?  Are we paying bills only for items (and services) actually received.  Are we paying the correct amount?  What steps are we taking to make sure we do not pay a bill more than once?  If someone were to commit fraud in the purchasing and cash disbursement area, how would they do it?

Of course, these are not the only areas where fraud can occur but some of the most likely of places. These questions should help you to start thinking about fraud and ways to prevent it happening in your organization.  Simply asking about fraud has been found to be one of the most effective ways of discovering it. Asking simple questions such as the ones suggested above will also guard you against fraud.  Call us for additional help protecting your organization from fraud.

See all Mission Matters blog articles in the archives.