Seeing Your Way Through Transparency

So, is transparency actually a good thing? And how does an organization reveal its inner workings without inviting misunderstanding or drawing criticism? Why Embrace Transparency? Your nonprofit’s reputation is its most important asset. With today’s immediate and widespread access to information on the Internet, a positive image can turn negative overnight. Major funders and individual contributors will run from a not-for-profit with a less than stellar reputation. And no one in the community — or in the organization itself — wants to be connected to a nonprofit that isn’t aboveboard in all its dealings. Transparency helps you protect your organization from a public perception that you have something to hide. A nonprofit that discloses its financial facts and other information about its governance is less likely to attract criticism and media scrutiny. And potential donors will be put at ease by learning that your organization is well managed and has strong board oversight. Your Website: A Good Place to Start Think of it as a key transparency tool. Post the organization’s annual audited financial statements on your website as soon as they’re approved by the board of directors. The audit process might entail a four- to six-month lag between the end of the year and final board approval. But such a delay is less than the nine to 11 months typically needed for nonprofits to complete and file their Form 990 and then have it posted on GuideStar, an online site that, among other things, facilitates research on not-for-profits by providing information to the public. Posting the financial statement on your own website (or elsewhere) doesn’t guarantee that the public will understand it. Consider using tools such as financial pie charts, Frequently Asked Questions (FAQs), third-party testimonials and informational brochures to make the numbers digestible. Translating financial results into program outcomes can be particularly effective. Also post on your website any of the board’s policies and procedures that demonstrate strong governance. This includes your nonprofit’s conflict of interest statement, whistleblower policy and political activities policy. Approaching Form 990 When addressing transparency, disclosing salaries of the nonprofit’s highest-paid employees — a Form 990 requirement — is often the first thing that comes to mind. Salary and benefits information can be sensitive material that may draw public scrutiny and criticism. Often you can prevent salary-related criticism by explaining how salaries at your organization are set. Schedule O, “Supplemental Information to Form 990 or 990-EZ, ” provides space to explain any of your answers, making it an ideal place to describe the steps taken to determine key individuals’ salaries. Your not-for-profit, for example, may have conducted an area wide or national salary survey of similar positions at like-size organizations. Form 990 also requires nonprofits to disclose the nonmonetary benefits it provides to key individuals — for instance, free housing or a free car for a university chancellor. In the “age of transparency,” nonprofits need to be aware that such “perks” might draw public ire. Even if a compensation package is deemed appropriate by the board after it performs the required due diligence, it’s important to consider how a potential contributor or funding source might view it. Funding has been pulled from some organizations because the funding sources disagreed on compensation levels. A preventive measure might be to offer a rational explanation on Schedule O of why the benefit was provided — or to eliminate the benefit altogether. It’s important to remember that your Form 990 will be available to the public on GuideStar. These days, potential donors are frequent GuideStar users. When Explanations Are a Must Sometimes explanations to Form 990 answers aren’t only desirable — they’re necessary. For example, a question in the form’s Governing Body and Management section asks if the organization has become aware of a significant diversion of assets, which includes embezzlement or theft. If you answered “yes” to this question, you need to explain this event and describe the steps you’ve taken to prevent such frauds from occurring again. Also, Form 990 asks several questions about having particular policies in place, even though there’s no legal or IRS requirement to have them. In some cases, there may be a sound reason why your nonprofit lacks a certain policy. A not-for-profit with a union, for instance, would follow federal laws regarding conflicts of interest rather than have its own conflict-of-interest policy. Transparency is Here to Stay All signs indicate that nonprofits may want to provide even greater transparency in the future. Annual reports can be used not only as a tool for donor acknowledgment, but also to provide details on the organization’s financial position. Nonprofits also can provide information including management’s discussion and analysis of significant events, such as new programs or funding sources. They might want to offer explanations of operational changes — for example, hiring 10 employees or opening a new location. The explanations can help to explain fluctuations in account balances from one year to the next. Seize the Day Transparency as the norm, rather than the exception, presents some challenges, including making the information your nonprofit presents accurate, understandable and consistent. Transparency also is an opportunity to present your organization in the best possible light as the public gets to know “what makes you tick.”

The Face of Fraud

Internal Controls Might Have Prevented Real-Life Fraud Most everyone likes to think of their employees as being honest and incapable of fraud or other wrongdoings. Unfortunately, that’s not always the case. Consider the following example inspired by a real-life event. The American Whatchamacallit Society (AWS) discovered that its bookkeeper, Heloise, had been writing checks to herself and recording them under an assortment of vendor names. As AWS dug deeper, it discovered that the employee, who’d had complete control over disbursements and general ledger entries, had been writing the checks to herself for eight years — to the tune of nearly $500,000. Nipping Fraud in the Bud How did such a huge accounting fraud get by the executive director, the board of directors and everyone else? And how could these crimes have been detected much earlier or prevented altogether? Here are several actions the AWS should have taken — any one of them could have caught Heloise in the act.

  1. Insist on check cosigning. No matter how small the organization, checks should be cosigned by either the board treasurer or the president or executive director.
  2. Require review and reconciliation. The executive director — or another designated employee — should review all checks before they’re dispersed and follow up by reviewing the monthly bank reconciliation. Make sure that no unauthorized checks clear the bank and that all adjustments are explained.
  3. Have bank statements sent directly. Require that your bank send a copy of the bank statement directly to the executive director and your organization’s treasurer each month for review. The statement should include images of all checks. The treasurer’s independent review helps to ensure that expenses are reasonable and no alterations have been made to returned checks to cover up fraud.
  4. Require an annual audit. Hire an external auditor to conduct an annual financial statement audit. If that doesn’t fit into your budget, authorize a special purpose audit, for example, of disbursements. You could change the focus of your special purpose audit each year to keep fraudsters off guard.

The bottom line is that the lack of segregation of duties is often the culprit when fraud occurs. You should not only have different people cosign and review transactions, but also make sure these individuals are from different sides of the organization — the board, the accounting department, the executive director’s office, and so on. When fraud occurs or is suspected, the need for knowledgeable professionals with fraud examination and forensic accounting experience becomes a necessity. Marks Paneth provides a wide range of civil and criminal fraud investigation, prevention and forensic accounting services to not-for-profit entities. We can also work with you to develop the appropriate internal controls.

Take the Initiative with the IRS

IRS Attention Grows Hard statistics aren’t available, but most experts agree that the IRS is paying greater attention to not-for-profits these days. The redesigned IRS Form 990, for instance, asks more extensive and probing questions about nonprofit governance than it has in the past — and the focus on nonprofits continues to grow. Another recent area of IRS scrutiny makes sure that nonprofit workers are properly classified as employees (not as independent contractors) and that all required payroll taxes are being paid. Also, the IRS has cracked down in the last few years on organizations that have failed to file to keep their tax-exempt status. At the same time, the agency has announced its willingness to work with struggling organizations to help them maintain their nonprofit status and, in some cases, has waived heavy penalties to allow delinquent organizations to catch up on their filings. Act Quickly In addition to failing to file regularly, nonprofits may trigger an IRS investigation, fine or other consequence by compensating executives excessively or improperly using funds. Even an innocent math or other filing preparation error can stir up trouble. If you discover you’ve made a mistake, act quickly and get professional advice. The earlier you bring an error to the attention of your accountant, the easier it is to make right. Also, make sure that you don’t brush off a potential compliance problem because you don’t understand it or don’t have time to deal with it. Burying your head in the sand is never a wise policy when it comes to the IRS. Remember to keep some perspective. Don’t let embarrassment, guilt or fear prevent you from taking the right steps. Innocent mistakes aren’t character flaws and don’t have to reflect badly on your organization. Getting caught trying to sweep mistakes under the rug, however, can bring your judgment — not to mention your nonprofit’s reputation — into serious question. Correct Errors Accountants have experience working with the IRS, so listen carefully to your expert’s advice and follow his or her lead in amending any errors. He or she can even accompany you if you need to meet with the IRS. Approach the meeting with an open mind and, once there, simply explain the facts. Don’t act defensive, assume the government is “out to get you” or engage in other hostile behavior. By taking the proactive path and approaching the IRS before you receive a notice, you’ll find that the agency is likely to be more amenable to finding a solution. Proactive — vs. defensive — steps can also speed up the process so that you can get back to running your organization. Be Proactive IRS scrutiny of not-for-profits could continue to increase. For example, several U.S. senators earlier this year called for IRS investigations into potential abuse of tax-exempt status by groups engaged in campaign activity. Other targeted areas include loans to executives, unrelated business income and supporting organizations (those established solely to support another organization). If your nonprofit has a compliance question, be sure to contact your attorney or CPA promptly. Don’t put the organization at risk for interruptions, stiff fines or censure.

News for Nonprofits

A Tip from the Big Easy You don’t always need to be somber when talking about planned giving arrangements with potential donors. Sometimes light-heartedness is the best teacher. Consider a new book from the Greater New Orleans Foundation (GNOF), which teaches adults about the different ways they can give to their favorite charity before and after their death — even if they’re not cash-rich. Written in the style of a children’s book and containing whimsical illustrations, Giving While Living is the story of Lafayette LeChat, a dapper French Quarter cat, and his fat cat lawyer Claude DeMieux. While they eat po’boys in an outdoor cafe, meander through New Orleans’ colorful streets and line-dance their way to the French Quarter, the feline duo spend the day talking about bequests, retained life estate gifts, charitable trusts, and other ways in which LeChat can give back to the city he loves. “We wanted to make a book about planned giving that’s fun and positive,” said author Lauren Cecil, who writes children’s books and is a GNOF development associate. In true New Orleans fashion, the book was launched in January at a party on a streetcar. If no one reads the materials your organization currently produces about planned giving, it might be time to reinvent them using a livelier approach. IRS Tool Lets Contributors Check your Status Online Exempt Organizations Select Check is a new online search tool from the IRS that allows users to more easily find out information about not-for-profits. Users can now go to one site — http://apps.irs.gov/app/eos— where they can find out if your organization:

  • Is eligible to receive tax-deductible charitable contributions,
  • Has had its federal tax exemption automatically revoked for not filing a Form 990-series return or notice for three consecutive years, and
  • Has filed a Form 990-N (e-Postcard) annual electronic notice.

The search results are sortable by name, employer identification number, city, state, country and other categories. Users also may download the entire lists of organizations that fall into these categories. Expecting a Jump in New Nonprofit Jobs This Year A lively 43% of nonprofits responding to the 2012 Nonprofit Employment Trends Survey, conducted by Nonprofit HR Solutions, a consulting firm, said they plan to create new positions this year. Over one-third of the respondents indicated they planned to create jobs in the functional area of direct services in the coming year. The survey, which has been conducted annually since 2007, reported responses from more than 450 nonprofits nationwide.

New York State Attorney General's Report on Nonprofit Revitalization

Earlier this year, New York State Attorney General Eric T. Schneiderman released a report that was drafted by the Leadership Committee for Nonprofit Revitalization. The report, which is entitled “Revitalizing Nonprofits; Renewing New York” is divided into three sections:

  1. Reducing Burdens on Nonprofits
  2. Enhancing Governance and Maintaining Public Trust
  3. The Path Forward:

The goal of the report is to “enhance and revitalize New York’s nonprofit sector.” The dedicated professionals in our firm’s Nonprofit and Government Services Group can help answer questions you may have or implement any of the recommendations included in the report. If you would like to access the full report, please visit the Attorney General’s website.

Spotlight on Marks Paneth

Financial Regulations in a Post-Financial Crisis World The stability of financial institutions is improving, said Benjamin M. Lawsky, New York State’s first Superintendent of Financial Services, but they remain in a precarious place. Lawsky delivered his message at a breakfast conversation held Thursday, July 12 at Club 101 and hosted by The New York Observer. He also discussed his newly-created agency and offered his thoughts on financial regulation in a post-financial crisis world. Among the challenges, he said, is avoiding one-size-fits-all regulation. Getting it right is hard in this environment as regulators are being pulled in contradictory directions, and the regulatory culture needs to strike a new “symbiosis” with the institutions being regulated. Marks Paneth co-sponsored this event with The McCaffrey Group Limited, Cozen O’Connor, and Women Builders Council, Inc. and The New York Observer. Doing Business Guides Doing business around the world presents a variety of challenges. Morison International (MI), the association of independent accounting and consulting firms of which we are a member, has begun publishing a series of Doing Business Guides. To accompany the China, India and Singapore guides, we have added Australia to the Library on the Marks Paneth website. The guides are written by the MI member firm in the country that is being profiled and provide an introduction to foreign investors on the various aspects of doing business.

For Further Information

If you have any questions, please contact Michael L. McNee, Partner-in-Charge, Nonprofit and Government Services Group, at 212.503.8954 or mmcnee@markspaneth.com. You may also contact one of the following members of the group: Partners

Directors

IRS Circular 230 Disclosure

Treasury Regulations require us to inform you that any Federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © Marks Paneth LLP MANHATTAN | LONG ISLAND | WESTCHESTER | CAYMAN ISLANDS


About Michael McNee

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Michael McNee, CPA, is the Partner-in-Charge of Attest Services at Marks Paneth LLP. He is also a member of the firm’s Executive and Management Committees. In these roles, Mr. McNee is responsible for overseeing the execution of the firm’s audit and attest services and directing the operations of the Nonprofit, Government & Healthcare Group. He develops strategy, sets policy and acquires and develops talent. In addition to his managerial duties, Mr. McNee maintains client responsibilities and... READ MORE +


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