Risk Assessment… Do What?

Undoubtedly your auditor asks you if management regularly performs risk assessments and then takes note of the blank expression on your face. What are they talking about? What do auditors even mean by ‘risk assessment’, anyway?

Ok, first off, there’s a good chance your organization does some form of risk assessment without necessarily calling it that or even realizing that’s what it is, but is it enough? A risk assessment means essentially: where could things go wrong and what are we doing about it?

Another way to think about it – blind optimism that things will always work out and that you can trust everyone, is the opposite of a risk assessment. Management, those with the authority to contract, and anyone who is involved in the chain of financial transactions should at some point look around and think about where the weak spots are. Brainstorm together.

I took a self-defense class and the instructor gave us homework: next time we were out in public, look around and notice who is most vulnerable if a purse snatcher was to come by. We each came back to the next class and reported the same thing. It was us. Each of us was the one sitting at a cafe, not paying attention, with our purses sitting where they would be easily accessible if someone felt inclined to take it. That’s a risk assessment. Awareness is key. Moving your purse is addressing the risk. It doesn’t have to be complicated but it does take thinking about it.

Where is your organization most vulnerable? Think about it from different perspectives. Here are some questions every organization should ask and they tend to follow the What Would Happen If format. Answers tend to be If That/Then This. Also, it isn’t just management that should ask these questions. Continue reading »

The it Award – Apply Now!

C.Fox Communications is still accepting applications for its 2012 it Award–worth up to $30,000 in pro bono PR services!  The application is only available until February 29th.

The it Award is open to any United States-based nonprofit with 10 or more employees and there is no fee to enter. You just need to tell them why your organization should be it.

You can apply here.

If you’ve looked at the application and have questions, join C.Fox Communications for a conference call Thursday, February 23, at 3 p.m. They’ll be answering questions and giving advice about completing the application. Please RSVP to Julia@cfoxcommunications.com.

Do you know an organization worthy of the award?  Pass along these details, and feel free to reach out to C.Fox Communications at itaward@cfoxcommunications.com with any questions during the application process.

D.C. Fraud and the ex-Councilman

Former Councilman Harry Thomas Jr. pleaded guilty in January of taking more than $350,000 in kickbacks and related tax evasion. Those funds were intended to help D.C. youth in Ward 5, northeast D.C. His method was through fundraising and non-existent events for his charity group Team Thomas. Thomas asked D.C. Children and Youth Investment Trust Corp to provide over $450K in grants for which no services were rendered but false documents and reports were submitted.

No allegations have been made against D.C. Children and Youth Investment Trust Corp. but the situation is in the news again, cited as an example of lack of oversight of D.C. agencies. The D.C. Council Committee on Government Operations lacks the authority to enforce any correction of problems found by its inspectors and auditors although they do conduct follow-ups on recommendations made.

A fellow Council member, Tommy Wells, spoke out that disbanding D.C. Children and Youth Investment Trust Corp. would be losing a valuable D.C. institution. His suggestion is that a leadership change is in order with mayoral oversight of future appointees to the board. The political pressure on the board is going to be intense and constant and having stringent reporting and competitive bidding  requirements as well as increased oversight is called for in order for the organization to function responsibly.

Thomas’s sentencing will take place in May.

Read more about the case here, Councilman Well’s statement here and oversight here.

Need cash? Don’t borrow from the IRS!

Many businesses and individuals are experiencing cash flow difficulties in today’s economy. To ease the cash crunch, it may be tempting to delay payment of taxes in the hope that finances will improve soon. Unlike other creditors, the IRS moves relatively slowly, lulling the taxpayer into complacency. During this time, interest and penalties accrue which, in some situations, can even exceed the original tax due. When the IRS decides to act, they often file liens, levies, and other garnishments that can cause significant and sometimes permanent economic damage. In addition to these civil penalties and collection actions, the IRS can pursue criminal charges. The failure to truthfully account for or turn over taxes is a felony, with the potential of up to five years of jail time. This applies to all taxes under the Internal Revenue Code – income tax, payroll tax, gift tax, and excise tax, to name a few. Continue reading »

The Dirty Dozen – according to the IRS

The IRS has released its list of the Dirty Dozen Tax Scams to watch for when preparing and filing returns for 2011. “Illegal scams can lead to significant penalties and interest and possible criminal prosecution,” according to the IRS website. The list is published as a way of increasing public awareness and cautioning people to be on the look-out.

While identity theft and phishing top the listing, of particular interest are these two items:

• Abuse of Charitable Organizations and Deductions, and
• Misuse of Trusts

Intentional abuse of 501(c)(3) organizations includes: arrangements that improperly shield income or assets; attempts to maintain control over donated assets or the income from donated assets; over-valuing non-cash assets; arrangements to buy back the donated asset at a time and price set by the donor; and inaccurate appraisals.

Misuse of trusts include: questionable deductions of personal expenses, and promises of reduced income, estate, and/or gift tax.

IRS personnel have witnessed an increase in the abuse and misuse of these entities. Organizations should be aware of the possible motives behind some donor objectives and strive to not be complicit in such activities. Penalties and the damage to the organization’s reputation might not be worth whatever temporary benefit received.

See the full listing here.

Mandatory Volunteerism? Realistic Option or Just an Oxymoron?

Last week, Senator Richard Burr (R-N.C.) introduced a bill that proposes to reform the unemployment system. The key points in the bill are as follows:

• Require long-term unemployed to volunteer for 20 hours a week in order to continue receiving unemployment benefits,
• Those drawing six months or longer must search for work at least 20 hours a week,
• Allowing states to conduct their own drug testing of applicants.

The last point is an explosive political issue with intense arguments on both sides so let’s steer clear of that one entirely and just deal with the first point. The concept behind the first point, according to the senator, is that being involved in volunteer service helps workers maintain job skills, marketability, and a sense of self-worth.

Similar proposals have been shuffling around for a few years now about the possibilities of different types of mandatory volunteerism: college students receiving federal education tax credits, or having a high-school volunteer requirement (also here). The arguments for such requirements tend to cite the personal growth of the volunteer and the benefit to the community. Both are true. Arguments against tend to point to that if people are forced, they will resent it, that is time that could be spent looking for work, and that “mandatory volunteer” is an oxymoron.  Also true.

Only a few have mentioned what the impact on the nonprofit community could be. Yes, volunteers are needed but a sudden influx of volunteers that don’t want to be there? Hmmm… There are certainly organizations that need help but many might prefer to cultivate and train their volunteers. Many organizations are concerned with and work hard to increase volunteer longevity, which is at odds with the idea of short-term placement in order to push back into the work force. Ultimately, organizations may not be cut out to care-take a mob of volunteers as well as their clientele. Having peace officers supervise clean-up efforts and similar low-training tasks might be a better fit, and then you have arrived at what this actually is, which is community service. Community service is a great thing and many organizations have structures in place for that, but whether they could manage a sudden influx is still a possible issue. There’s also the possible issue of it feeling punitive. But sticking to the nonprofit’s point of view, organizations have to be able to conduct their mission without getting overwhelmed with supervising. Supervision takes resources and funding that many organizations don’t have room for in the budget right now. There’s such a thing as a kind of help that hurts more than it helps.

Read more about the proposed bill here and here.

Record Level Debarments: What’s the impact on government grantees?

The term debarred refers, in this case, to a person or entity that is no longer allowed to receive governmental funding, either directly or indirectly, federal and/or state. According to Money News, the proposed debarments in 2011 reached the highest levels since 1997.

A contractor can be debarred for poor performance or ethical issues, including fraud or misrepresentation. Delinquent tax payments and violations of the Drug-Free Workplace Act are particularly frowned upon. An indictment of criminal activity will set the process for suspension rolling. Each agency has a debarring official who will determine if debarment is appropriate and the period of suspension.

It isn’t just contractors that can be debarred, however, individuals can also be debarred. A suspended or debarred individual may not bid on or receive any federal funding including: contracts, subcontracts, grants, subgrants, cooperative agreements, scholarships, fellowships, loans, or subsidies.

If an organization knowingly does business with a suspended or debarred person or company, the federal agency may disallow costs or cancel the agreement. If you receive government funding,  protect your organization and check your vendors and subgrantees on the Federal Excluded Parties List System (EPLS). D.C. has its own list here. Virginia’s list is here. Maryland’s is here. Don’t assume you would know if any of your vendors were on the list!

For more on debarment technicalities go here and for ultra-technical go here. See the Money News article here.

Drug Valuation Impact on Ratings

As previously discussed, the valuation of donated medication has been coming under intense scrutiny of late, with Food for the Hungry landing in the news and garnering a hefty federal penalty in the process. It should be noted that at this time, Food for the Hungry maintains it has done nothing wrong. At issue is the method by which nonprofits ascribe worth to donated drugs – some of which may have a “donative intent” in the form of steep discounts on purchase price.

Many nonprofits are re-assessing their valuations with the results being a drastic change, in some cases what was previously valued at $10.64 per pill adjusted down to $1.54 per pill. The impact of decreasing the value of the donation is a significant drop in income. The watchdog group, Charity Navigator is taking a closer look at the potential fall-out for organizations in this position.

Charity Navigator gives rankings to charitable organizations based on their financial health, accountability, and transparency. Typically, an organization with sizeable decreases in revenue get points taken off but in this case, the group is trying to determine if that’s a fair assessment or if these organizations deserve special consideration. The group is soliciting feedback from humanitarian membership groups, gauging the interest in giving the organizations a chance to file restated financials for the past four years, using the reassessed pill values, thereby not having to show a sudden drop in income for the current year.

Arguments are being made for and against allowing the amended reporting. One argument against it being that it would be difficult for an auditor to reassess the fair value four years back. Others note that it wouldn’t be fair to organizations that hadn’t hyper-inflated their medical donation values in the first place. Those arguing in favor are likely the same parties that have needed to make the valuation adjustments.

Read more about the case here. See Charity Navigator here.

Clarifications on 2011 Form 990

The 2011 Form 990 is not significantly changed from the prior year, but the instructions do have some possibly significant clarifications contained in them, if the particular area is applicable to your situation.  Here is a bullet list of the significant clarifications:

• Any organization must file Form 990, 990EZ or 990-N, even if an exemption application has not been filed or approved yet.  (The exemption for churches and certain religious organizations still exists.)
• If you had foreign investments valued at $100,000 or more, you must complete Schedule F, Part I and IV.
• Clarification on when to complete the parts of Schedule F providing grants or assistance made to organizations or individuals outside the United States.
• Clarification with examples for when a board member is considered independent.
• If the governing body allowed an executive committee to act on its behalf, it must provide an explanation in Schedule O.
• The governance section now asks if any governance decisions of the organization reserved to (or subject to approval by) members, stockholder, or persons other than the governing body.
• Instructions added that an organization cannot say “yes” to the governance area question (line 11a) about providing the 990 to the voting governing body before filing with the IRS if it merely notifies them that the 990 is available upon request for review.  It is satisfactory, though, to provide a link to a password-protected web site on which the entire Form 990 can be viewed.

The 2011 form can be found at: http://www.irs.gov/pub/irs-pdf/f990.pdf.

The 2011 990 instructions can be found at: http://www.irs.gov/pub/irs-pdf/i990.pdf.

Check 21 and You (or why timely reconciliation of your bank statement is more important than ever)

Check 21 refers to the Check Clearing for the 21st Century Act, which allows banks to transact based on electronic images of checks, no longer requiring the paper check to be presented. This is not a new act, it was passed in 2003, but as more and more banks eliminate processing paper checks, it is important that organizations be aware of the new risks that come with the process.

Undoubtedly, you’ve noticed you no longer get paper checks back with your bank statement every month. It’s a good step forward in terms of lessening all the paper transported around and speeding the transaction process, but the system has a weak spot. If a vendor processes a check electronically, they still retain a paper check – and while certainly no one we know would ever do this (er…right) – I’m required to remain professionally skeptical – one could present the paper check at a bank branch. The check itself bears no indication of having been previously processed electronically.

According to Fraud magazine, duplicate check processing has bloomed into a $500 million problem, making up about half of all the check fraud in the U.S.

The banks are liable for accepting fraudulent checks and are working to reduce the risks but most only catch it after the duplicate has already p0sted to your account. If the paper check is additionally manipulated it slows the detection process down further.  Organizations need to do their part to reduce impact. Things you can do:

• Reconcile your bank statement as soon as feasible. I know you are busy but don’t keep doing it 6 months late – there’s a real risk involved.
• Ask your bank to at least provide images of the checks in your bank statement. Actually review these to check for any alteration or deviation from the original check as processed.
• Ask your bank what system they have in place to prevent duplicates and what the time lag is in catching duplicates posted in error or fraudulently.
• Stay skeptical. This doesn’t just involve your inside people that you know and trust but anyone that might have access to the paper check, authorized or not. Ask your vendors if they are submitting electronic scans, what is their system for taking care of the paper check afterwards? They need to deal with it securely in a way that protects your information.

Read more about it here and here. Click here for FAQs on Check 21.