Tone at the Top

Presented by:Nonprofit Program Office

Office of Research and DevelopmentDepartment of Veterans Affairs

85 Nonprofit Corporations Across the Country

Tone at the Top PresentersKim Collins, MBA, Masters in Gerontology

Director, Nonprofit Program Office

Allan Krehbiel, MSA, CPA

Auditor, Nonprofit Program Office

Paula Floyd, BSHA, MPA

Staff Assistant, Nonprofit Program Office

http://www.research.va.gov/programs/nppo

IntroductionAn organization’s leadership creates the

tone at the top – an ethical (or unethical) atmosphere in the workplace.

Management’s tone has a trickle-down effect on employees.

If top managers uphold ethics and integrity, so will employees.

• However, if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud and feel that ethical conduct isn’t a priority.

• In short, employees will follow the examples of their bosses.

The tone set by top management is particularly important because it sets an example for all others in and around the organization!

What has changed in the nonprofit world that places more emphasis on the Board of Directors?

Enhanced Expectations 1970’s-1980’s Reasonable Assurance1992 - Treadway Commission2001 - Enron, WorldCom, Tyco2002 - Sarbanes-Oxley Act (for publicly held

companies)

2005 - Report to Congress & Nonprofit Sector on Governance,

Transparency, and Accountability (by Panel of the U.S. Senate Finance Committee )

1992 – Treadway Commission StudyA report of the Committee of Sponsoring Organizations of the Treadway Commission (COSO)

Definition of Internal Control“Internal control is a process effected by an entity’s Board of Directors, management and other personnel designed to provide reasonable assurance regarding the achievement of the entity’s objectives.”

Objectives of Internal Control1. Effectiveness and efficiency of

operations (including risk assessment and the need to monitor risk)

2. Reliability of financial reporting

3. Compliance with applicable laws and regulations

Internal Controls ResponsibilityThe NPC’s internal control process, including the prevention and detection of fraud, waste, and abuse, is the responsibility of :

Board of Directors

Management

Employees

Show me the Money…..EnronWorldComTyco “infectious greed” had

simply “gripped the business community.”

Alan Greenspan

WorldCom Board of DirectorsAccused of being key

players in the corporate malfeasance.

…..Overreaching in a culture that appears, to have encouraged pushing the limits.

Inadequately performed their fiduciary duties

WorldCom not only financial fraud… but also a major failure of corporate governance… although the Board, at least in form, appeared to satisfy many checklists at the time, it did not exhibit the energy, judgment, leadership or courage that WorldCom needed.”

Famous last words from some bad actors who have had an effect on all of us….

“You’ll see people who in the early days … took their life savings and trusted this company with their money. And I have an awesome responsibility to those people to make sure that they’ve done right.”

former WorldCom CEO Bernard Ebbers (convicted in March 2005 on nine counts of fraud,sentenced to 25 years in Federal penitentiary)

“We are offended by the perception that we would waste the resources of a company that is a major part of our life and livelihood, and that we would be happy with directors who would permit that waste. … So as a CEO, I want a strong, competent board.”

former Tyco CEO Dennis Kozlowski (sentenced to 8.33 to 25 years in state penitentiary)

“People have an obligation to dissent in this company.” former Enron CEO Jeffrey Skilling (sentenced to 24 years, four months in Federal

penitentiary)

2005 Report to Congress-NonprofitsMore IRS enforcement/oversightImproved Annual Information Returns (990s)

Board/Committee reviewOfficer signature required

Required audits or reviews – part of 990Disclosure of performance data“Financial literacy” of Board/CommitteeConflict of interest and misconduct by Board members

Specific Comments in Senate Report“The Enron board had a

wealth of sophisticated business and investment experience and considerable expertise in accounting, derivatives and structured finance.”

Enron ranked as one of the nation’s five best boards in 2000.

The Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the US, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation.

Impact on Nonprofits 2006 – Eleven new Statements on Auditing Standards (SAS) in one

year SAS 106 - Board responsible for Internal Control SAS 112 - Nonpublic companies must report deficiencies to Board SAS 114 - Auditor’s Communication with Those Charged with

Governance2008 – IRS redesigned and made Form 990 much more complex,

developed 11 core parts and 16 supporting schedules Nonprofit officer must now sign off on many new questions regarding

governance structure, compensation, program service accomplishments, major polices, and more.

VA NPCsOIG Report No. 07-00564-121 dated May 5, 2008Recommendation No. 4

“We recommended that the Under Secretary for Health develop and implement oversight procedures to perform substantive reviews of NPC financial and management controls to ensure NPCs fully comply with Federal laws, VHA policies, and control standards.”

NPCs Fraud, Abuse, Waste$1 million in federal funds stolen from a NPC$1.5 million in NIH funds diverted from VA ORD to NPC$494,000 in improper NPC billings to VA and others$20,000 stolen by using NPC credit card$10,000 wired from NPC bank account to pay personal credit cardIPA used to pay for Executive Director’s salary

NPCs Fraud (continued)

Nepotism, hired son and daughter-in-law to work in another state without Board knowledge or approval.

Paid for expensive foreign travel over several years for a non-VA researcher, full week in Paris, France to attend a ninety-minute meeting.Increased salary significantly without Board approvalFalsified external audit reports for four yearsPaid $650 for “Happy Times Limousine Service”

What NPPO auditors are looking for when reviewing your NPC

Adherence to VA policy, specifically Handbook 1200.17

Policies and Procedures, financial and other

Internal Controls, identify weaknesses and recommend improvements. We cannot guarantee that all weaknesses will be found our limited review.

What NPPO auditors are not looking for when reviewing your NPCFRAUD (intentional deception for personal gain)

WASTE (excessive or unnecessary spending)

ABUSE (nepotism and other self-dealing).

However, if we come across any of the foregoing in our reviews, then we will report it to the board and others.

Fraud Definition

Fraud is an intentional deception made for personal gain or to damage another individual

Fraud FactsFraud and abuse costs U.S. organizations more than $400

billion annually.The average organization loses more than $9 per day per

employee to fraud and abuse.The average organization loses about 6% of its total annual

revenue to fraud and abuse committed by its own employees.

Losses caused by managers are four times those caused by employees.

The most costly abuses occur in organizations with less than 100 employees.

FraudMost business fraud occurs in:

BankingManufacturingGovernment

Deterrents to Reporting and Prosecuting Fraud in NPCs

Fear of notorietyFear of legal actionCompassion for the offenderConcern about personal safety

When Fraud goes Unpunished….Setting a precedent that could lead to additional fraud;Creating an environment that spurs rather than deters fraud; Loss of credibility and respect for the organization among

employees and others; and Lack of access to a crime policy — some, but not all crime

policies, require that the insured prosecute employees and volunteers who steal.

The right “tone at the top” is of paramount importance.

Directors Code of EthicsHonestyIntegrityLoyaltyResponsibilityFairnessCitizenship

A sound, ethical tone at the top permeates and inspires an organization. It must, however, be supported and enforced by checks and balances that, in times of temptation, would strengthen those inclined to stray!

Questions