Fraud Awareness Workshop Not-for-Profit Fraud Awareness Workshop April 5, 2016

We are Brown, Edwards & Company, L. L. P We are Brown, Edwards & Company, L.L.P., a regional accounting and consulting firm, serving our clients’ needs since 1967. Our mission is to provide business management and tax saving solutions as a necessary extension to traditional accounting and tax compliance services.

What is this? BP – April 20, 2010 - $90B in S/H wealth lost in a couple of days. Stock had almost fully recovered by 2014. If you look at 2015, you will notice that the stock has tanked again, but that has a lot more to do with oil prices than the oil spill

How about this? Untied Way National Capital Area $95M in 2002 to average of $33M over the next 12 years. If you’re counting, that’s a total of $744M that didn’t go to feed the hungry, house the homeless, etc.

Agenda Fraud impacts NFPs far differently than for profit businesses Why the impact is so much greater Why NFPs are more susceptible Behaviors to watch out for Prevention: What can you do? Free takeaways Note that this presentation will primarily focus on auditing standards.

Why Is the Impact so Much Greater? Public Trust Publicity of frauds can lead to significant declines in revenue Financial Position Many NFPs are in a fragile financial position to begin with. A small loss of cash can have a big impact. Public Trust – In a for profit, as long as I’m still getting value in exchange for my $, I have a reason to stay. With gift to charity, the only thing I receive are intangible “feel goods.” These go away pretty quickly when fraud comes to light

Why are NFPs more susceptible? Trust Factor Fraud Triangle Opportunity Incentive Rationalization Financial Position Many NFPs are already short staffed, making sound internal controls hard to implement

Behaviors to Watch For 1 – Unable to get financial data Always look for: Cash balance Accounts payable report Amounts outstanding on all credit lines, credit cards, etc. Accounts receivable report Traditional financial statements 2 – Bullying behavior The largest scam of all time in the nonprofit world was The Foundation for New Era Philanthropy whose founder, John Bennett, created a Ponzi scheme in 1989 that brought in over $500 million before it was finally unmasked in 1995 by Albert Meyer, a Spring Arbor College accounting professor who asked this simple accounting question about the nonprofit's income statement and balance sheet. If New Era had all this cash in their account, why was there no income shown on the income statement?

Prevention: What can you do? Tone at the top Segregation of duties In smaller organizations, this will mean involvement of board members Whistleblower policy Tone at the top – it sounds silly, but it works. Have all employees sign upon hire and annually thereafter a code of conduct Whistleblower policy – studies have shown than many frauds were known by other employees. These employees don’t come forward for various reasons – fear of retribution, sympathy with fraudsters, etc. - have a fraud hotline

Free Takeaways Couple of hot topics not related to anything else we’ve talked about New Financial Reporting Rules for all NFPs Beware of using donor advised funds to fulfill pledges New Rules – No expected date yet. My guess would be 2018 Big deals: Combine PR and TR net assets - good Liquidity measures – Not good New required subtotals in income statement Required Stmt of FE CF Stmt will change Other minor changes Donor Advised Funds: IRS rules prohibit a donor from fulfilling a legally enforceable pledge w/ a DAF payment They view it as using a NFP to fulfill a personal obligation Donor has to pay 125% of the gift to the IRS CF has to pay 10% tax if it knew there was a pledge Charity has no tax to pay, only penalty would be alienating donors

Questions, Comments, Complaints? James R. Fries, CPA, MSA jfries@becpas.com (540) 434-6736 Melissa C. Stanley, CPA mstanley@becpas.com (540) 345-0936