Protecting Your Nonprofit From Fraud

Embed Size (px)

Text of Protecting Your Nonprofit From Fraud

  • Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful.

    Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA and should not be construed or interpreted as such.

    The materials contained in this presentation should not be considered to be in the public domain. Speeches and presentation materials contained here are proprietary works protected by copyright to AICPA and/or to the individual or entity who presented the materials at the conference. All rights are reserved. The authorized use of materials on this page is limited to download for personal reference by authorized users of the conference materials download area. Reproduction, redistribution, reuse, reposting or resale by any party in any form, format or media without express permission is strictly prohibited. Permissions requests may be directed to copyright@aicpa.org or to Thomas Robinson, Manager, Rights and Permissions at 919-402-4031.

    Fraud In Non Profit Entities Dana Basney

    Not-for-Profit Financial Executive Forum

    Session 20

  • Protecting Your Nonprofit Organization

    From FraudDana Basney

    MSBA, CPA, ABV, CVA, CIRA, CFF, CFE

    Managing Director ofCBIZ MHM, LLC and

    Shareholder of Mayer Hoffman McCann P.C.

    1

    Dana Basney is a Managing Director of CBIZ MHM, LLC and a Shareholder of Mayer Hoffman McCann P.C. He has practiced public accounting for more than 37 years. He is in charge of CBIZ MHM San Diegos litigation support, due diligence, and valuation departments.

    Dana holds a Bachelor's Degree in Liberal Arts from Bates College in Lewiston, Maine and received a Master's Degree in Business Administration and Accounting from San Diego State University.

    Dana is a licensed CPA and a Certified Reorganization and Insolvency Accountant, as well as a Certified Valuation Analyst. He is a member of The American Institute of Certified Public Accountants, The California Society of Certified Public Accountants, The Institute of Managerial Accountants, The Association of Insolvency Accountants, The Institute of Business Appraisers, Inc., and the Bankruptcy Forum. He has served on the Family Law Bar's Business Valuation Subcommittee and has previously chaired the San Diego Chapter of the CPA Societys Ethic2s Committee and the San Diego Litigation Support Interest Group of the CPA Society.

    Dana has extensive litigation experience and has served as an expert witness in financial and valuation matters on numerous occasions as well as a court appointed mediator and special master. Dana is also an instructor with the UCSD Extension Program teaching Advanced Accounting Topics and CPA Society approved course on Professional Conduct & Ethics for Accountants.

    Dana may be reached at: dbasney@cbiz.com or 858.795.2018

    Dana Basney, MSBA, CPA, ABV, CIRA, CVA, CFF, CFE

    2

    20 - 1

  • Nonprofits Are A Major Economic Sector

    At 10.7 million workers as of 2010, nonprofit organizations employ the third largest workforce among U.S. industries, behind only retail trade and manufacturing.

    3

    The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies.

    The Center is part of the Johns Hopkins Institute for Policy Studies.

    Nonprofits Are a Significant Part of Our Economy

    The U.S. nonprofit sector employs 15 times more workers than the nations mining industry, nearly 10 times more workers than the agriculture industry, and about twice as many workers as the construction industry.

    4

    The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies.

    The Center is part of the Johns Hopkins Institute for Policy Studies.

    20 - 2

  • Nonprofits Are a Significant Part of Our Economy

    The vast majority of nonprofit jobs are in three service fields - health care (57 percent), education (15 percent), and social assistance (13 percent).

    5

    The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies.

    The Center is part of the Johns Hopkins Institute for Policy Studies.

    Nonprofits Are a Growing Part of Our Economy

    During the 2007-2009 recession, nonprofit employment grew in 45 of the 46 states on which state-specific data were available, while for-profit employment declined in 45. Nonprofit employment also grew in all regions of the country from 2000 to 2010, with an average annual growth rate that ranged from 1.5 percent in the East South Central region to 3.4 percent in the Mountain region. During this same time span, for-profit employment registered annual average declines in all but two of the regions, and the growth rate in these two was no more than one-seventh as robust as the nonprofit one.

    6

    The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies.

    The Center is part of the Johns Hopkins Institute for Policy Studies.

    20 - 3

  • Nonprofits Are a Significant Part of Our Economy

    The nonprofit sector has been growing steadily, both in size and financial impact, for more than a decade. Between 1999 and 2011, the number of nonprofits has increased almost 31 percent; from 1,202,573 million to 1,574,674 million today. The growth rate of the nonprofit sector has surpassed the rate of both the business and government sectors.In 2010, nonprofits contributed products and services that added $779 billion to the nations gross domestic product; 5.4 percent of GDP. Nonprofits are also a major employer, accounting for 9 percent of the economys wages, and over 10 percent of jobs in 2009.

    7

    Source: The Urban Institutes Center on Nonprofits and Philanthropy

    Wherever there is

    money, there is fraud.

    8

    20 - 4

  • 5% to 7% of the Economy is Being Stolen!

    9

    Estimates for fraud losses range from

    5% to 7% of the U.S. economy.

    5% to 7% of the Economy is Being Stolen!

    Fraud appears to be a growth industry!

    Fraud losses were estimated to have been approximately $994 billion in 2008.

    Fraud losses were estimated to have been approximately $652 billion in 2006.

    Estimates range from 600 billion to almost a trillion dollars.

    10

    20 - 5

  • The Extent of Fraud in Nonprofits

    The extent of frauds in nonprofits is subject to debate and not well documented.There is some evidence that fraud is more prevalent in nonprofits then in for profits

    11

    A New York Times Report by Stephanie Strom, stated that fraud and embezzlement in the nonprofit sector account for a loss of $40 billion a year, or roughly 13 percent of philanthropic giving. The article is based on a report recently published in the Nonprofit and Voluntary Sector Quarterly in 2008.

    12

    The Extent of Fraud in Nonprofits

    20 - 6

  • Financial Fraud is Higher in Nonprofit Organizations Than it is in Business or

    GovernmentA National Nonprofit Ethics Survey taken in 2007 found that:

    Conduct that violates the law or an organizations standards is on the rise, and in 2007 nonprofit violations have reached levels comparable to business and government organizations.Financial fraud is higher in nonprofit organizations than it is in business or government.

    13

    Taken From the Ethics Resource Centers National Non-Profit Ethics Survey of 2007Ethics Resource Center

    2345 Crystal Drive, Suite 201Arlington, VA 22202

    Fraud by Nonprofits

    Nonprofit organizations can and do commit frauds. Fundraising is a particularly sensitive area that can be ripe for fraud. Fraudulent fundraising practices include:

    Charging fundraising costs to programs to improve expense ratios scrutinized by donors, potential donors and charity watchdogs.Misrepresenting the portion of donations that will be used in charitable programs.Misrepresenting the extent of a charitable contribution deduction to which a contributor is entitled, such as in some car donation programs.Failing to comply with donor-imposed restrictions pertaining to the use of a gift.

    14

    20 - 7

  • Other fraudulent practices by nonprofit organizations include:

    Knowingly failing to comply with Internal Revenue Service requirements related to housing.Allowances compensation reporting, knowingly misclassifying employees or using them as volunteers to avoid paying overtime.Using or selling donor data collected under false pretenses.

    15

    Fraud by Nonprofits

    Fraudulent Financial Reporting

    Fraudulent financial reporting is intentionally making false assertions relating to financial statements. Examples include:

    False statements regarding compliance with specific requirements of funding sources.Charging of unallowable costs to grants and other false statements to government agencies.

    Fraudulent financial reporting is most often committed by management and includes such misrepresentations as:

    Failing to disclose significant related party transactions.Failing to disclose noncompliance with debt requirements or lack of waiver of noncompliance from lender.Misclassifying restricted donations to mislead donors or charity watchdogs.Holding records open beyond the period end in order to inflate revenues.Misclassifying expenses to mislead donors and others regarding the funds used for programs.

    16

    20 - 8

  • Unique Concerns for Nonprofits

    If an organ