Not-for-Profit Organizations: Thinking Outside the...
Transcript of Not-for-Profit Organizations: Thinking Outside the...
Institute of Chartered Accountants of British Columbia Professional Development Course
Not-for-Profit Organizations: Thinking Outside the Box Presented by: Bill Cox, CPA, CA David Geertz Brendan Burns, LL.B Rosanne Walters, CPA, CA, CBC
COPYRIGHT © All rights reserved. No part of this publication/course material may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means (photocopying, electronic, mechanical, recording or otherwise) without the prior written permission of the copyright holder and publisher.
DISCLAIMER This course material deals with complex matters and may not apply to particular facts and circumstances. As well, the course material and references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. Although the course material has been carefully prepared, neither the Institute of Chartered Accountants of British Columbia, the course author and/or firm, nor any persons involved in the preparation and/or instruction of the material accepts legal responsibility for its contents or for any consequence arising from its use. Winter 2014
© 1
CPA British ColumbiaNot‐for‐Profit OrganizationsNot‐for‐Profit Organizations
Thinking Outside the Box!
Bill Cox, CPA, CA
Partner BDO Canada LLPPartner, BDO Canada LLP
January 2014
Schedule and Speakers for the morning
• Bill Cox, BDO• What’s new with the CRAWhat s new with the CRA
• Outsourcing financial functions
• David Geertz, SoKap• Social capital/fundraising
• Brendan Burns, Miller Thomson• Community Contribution Companies
R W lt T h t BDO• Rosanne Walters‐Terhart, BDO• Fraud and Board governance
• Short wrap‐up – out by 10:00am
© 2
NOT FOR PROFITS –Canada Revenue Agency
What’s New?
CRA Non‐Profit OrganizationRisk Identification Project
• ...not much new
© 3
CRA Non‐Profit OrganizationRisk Identification Project
• Audit of 1440 NPOs 2010 – 2013Audit of 1440 NPOs 2010 2013
• Believed to be concern over profit in a non‐profit
• May lead to a need to use other structures
• Also concern over non‐profits that do notAlso concern over non profits that do not meet the definition of an NPO
• Higher level of revocation in recent years
• Need to be squeaky clean
Other new issues with CRA and tax courts
M l ti d• Mergers, amalgamations and consolidations
• Endowments, 10 year gifts, perpetual trusts
• Giving a gift back
© 4
Mergers, Amalgamations and Consolidation of charities
• New version of CRA publication CSP‐A21 which discusses mergers, amalgamations and consolidations
• Most important consideration: MUST INFORM CRA IN ADVANCE AND RECEIVE APPROVAL
Endowments, 10 year gifts, Perpetual Trusts
• Real confusion over these terms
• Not really any such thing as “10 year gifts”
• Lawyers and accountants that don’t specialize in this area will have difficulty
• If you spend out of an endowment or trust this can be a breach of trust
• Your own words and actions can influence legal view if not good documentation
• Be careful, terms matter, check wording of all donation/gift/sponsorship agreements
© 5
Giving a gift back
• Prior to 2011, a gift with a string attached probably should not have been receipted until the condition satisfied
• 2011 CRA administrative changes allow for issue of tax receipt and return of gift in certain circumstances (but still should not be a plannedcircumstances (but still should not be a planned event)
• Requires filing of information return (see next slide)
Giving a gift back – CRA Explanation
• A qualified donee that issued an official donation receipt and later returns donated property must file an information return with the CRA if the fair value of the property is greater than $50.
• The Information Return must be filed within 90 days after the property is returned. A copy of the Return must also be given to the donor.
• This provision applies whether the property is:
• The same property as donated
• Property that was identical to the donated property
• Or a substitute for the donated property
© 6
Giving a gift back – Caution
• Always better to err on side of caution
• Could be adverse tax impact to donor
• Return of gifts can be viewed as a gift to a non‐qualified donee if not handled 100% properly
• Best bet: add a clause that if project does not go h d h f d ll b d f ( hahead the funds will be used for .......(other good cause/project at NPO). Better not to offer funds back.
Notes
© 7
NOT FOR PROFITS –TO ‘IN HOUSE’ OR ‘OUT HOUSE’?TO IN‐HOUSE OR OUT‐HOUSE ?
That is the question!
Bill Cox, CPA, CA
January 2014
IN‐HOUSE OR OUT‐HOUSE? That is the question!
• Not‐for‐profits face many challenges:
• Maintaining vision purpose and high level focus• Maintaining vision, purpose and high level focus
• Operating in an efficient and socially responsible manner
• Meeting all legal requirements and ethical standards
• Raising capital and spending revenues in responsible manner
• The in‐house vs. Out‐house question:
– When should functions be carried out in‐house and when is it better to outsource?
• No definitive answers or solutions.
• Just thoughts and ideas to keep in mind as you lead your organization to success
© 8
IN‐HOUSE OR OUT‐HOUSE? That is the question!
• FRAUD ‐ (a teaser – Rosanne to expand on later)
• Drivers of fraud in small organizations• Lack enough staff for appropriate segregation of duties• Organizational leaders “too busy” to review their financial records• Organizational leaders do not see the warning signs
• Reasons employees cite for stealing:• Job dissatisfaction• Need to provide for family• Sense of entitlement (e.g. for long hours worked)• Perceived unfair compensation
IN‐HOUSE OR OUT‐HOUSE Management vs. Leadership
• As CEO Executive Director General Manager or whatever• As CEO, Executive Director, General Manager or whatever leadership title you go by, organizational leadership means:
• Making decisions that are good for the organization as a whole
• Being able to evaluate the talent that you have on the team
• Knowing the right questions to ask
• Knowing the right metrics to evaluate and recruit
• Making reasoned decisions based on quality financial information, rather than instinct
• or ‘gut” decisions
© 9
IN‐HOUSE OR OUT‐HOUSE The push to operate like a ‘business’
• Same pressures as for profit companies ‐ if not p p pmore!
• Economy
• Social
• Government
And still find ways to fulfill your original mandate …
IN‐HOUSE OR OUT‐HOUSE Limited resources ‐ $$ and People
• Optimizing resources
• Hire the right people
• Internal – full time, part time, occasional
• External – advisors, consultants, service providers
• Retain the best people
• ‘Best / most important’ asset
• Legal & government obligations
• Optimize time and skills (yours & others)
• How to make the most impact with limited time & attention
• Delegate – internally, externally
© 10
IN‐HOUSE OR OUT‐HOUSE Rules of thumb
• Always remember …
• When hiring outside consultants or service providers• When hiring outside consultants or service providers
• Experts are experts in their field
• But YOU know your business best
• Experts ADVISE. YOU make the decision.
• Be clear on expectations
• Responsibilities / scope of engagementp / p g g
• Deliverables with associated timelines
• Costs – fixed & variable
• ‘Extras’ / Contingencies
• Reporting
IN‐HOUSE OR OUT‐HOUSE Limited resources ‐ $$ and People
• When should you consider hiring a service provider?
• A financial service provider can help you• A financial service provider can help you
• manage day‐to‐day accounting needs and financial statements
• control payables & receivables
• reconcile bank balances
• negotiate tax laws
• Help transform raw financial data into real business information
• free up time so you can focus on priorities and strategies that are essential to maximizing efficiencies and growing your business
© 11
IN‐HOUSE OR OUT‐HOUSE? What’s out there in regard to bookkeeping,
accounting, payroll and CFO services?
• Full disclosure – there is a BDO “cloud” service called BDO outsourcing that is one of the options.
• Many/most of you will be aware of third party payroll providers, but true outsourcing takes it past just the calculations any payments but also the input to the system and the recording of the payments when made.the payments when made.
• There are packaged CFO services also available from other sources.
• Suggest compare some alternatives and see what seems right for your organization.
Questions?
© 12
• SoKap• Simple. Social. Enterprise
Social Capital ‐ aka SoKap
• The economic outcome resulting from leveraging social networks and accessing their Human, Physical and Financial Capital to provide benefit to a specific p p pcommunity group
© 13
Social Enterprise ‐ a business that is set up to drive revenue
to community based initiatives
© 14
This is NOT simple!This is NOT simple!
© 15
Simple Social EnterpriseSimple. Social. Enterprise
SIMPLE
f d i i•fundraising
•business management
•logistics
•consumer user experience•consumer user experience
•reporting
© 16
Social
•benefit to community•benefit to community
•media distribution
•encourages buy local mentality
Enterprise
•jobs jobs jobs!
•low cost growth capital for small businesses
•increases bottom line revenue from lowering outbound marketing costsg g
•vested interest from distribution partners who are social entrepreneurs.
© 17
h l d hLet technology do the heavy lifting
© 18
35
© 19
© 20
Methodology
• crowdfunding p2p finance and microfinance• crowdfunding, p2p finance, and microfinance
• crowdsourcing and volunteerism.
• distributed supply chain systems
• community value over shareholder value
© 22
Community Contribution Companies
January 23, 2014
Presentation by Brendan Burns
Community Contribution Companies
• Since July 29, 2013 a new category of company called “Community Contribution Companies” (CCCs or C3s) can be incorporated in B.C.
© 23
What is a C3?
• New corporate vehicle for social enterprises in B.C.
• Hybrid social enterprise structure– Combines elements of a for-profit business
with those of a non-share capital entity
• Similar to UK model of Community Interest C iCompanies
• First hybrid social enterprise structure in Canada
Unique Features of C3s
1. Must have a Community Purpose
• “Community Purpose” is broadly definedy p y– Includes the purpose of providing health,
social, environmental, cultural, educational or other services
– Purpose must be beneficial to society at large or to a segment of society broader than theor to a segment of society broader than the group of persons related to the C3
© 24
Unique Features of C3s (cont’d)
1. Community Purpose (cont’d)
• Doesn’t need to be charitable
• Must be primary purpose of C3
• Must be set out in the articles
Unique Features of C3s (cont’d)
2. Directors
• Must be a minimum of three directors– Meant to provide greater accountability
• Directors must act with a view to the community purposes of the C3
• No residency requirements for directorsNo residency requirements for directors
© 25
Unique Features of C3s (cont’d)
3. Dividends
• Must be approved by shareholders holding pp y gvoting shares
• Total of all dividends in a year cannot exceed the total of:
a) 40% of the C3s annual profits, and) p ,
b) any unused dividend amounts from previous years.
Unique Features of C3s (cont’d)
3. Dividends (cont’d)
• Exemption: no limits on dividends declared pon classes of shares that can only be issued to “qualified entities”
• “Qualified entities” include:– a community service cooperative
– a registered charity
– a “qualified donee”, as defined in section 149.1(1) of the Income Tax Act
© 26
Unique Features of C3s (cont’d)
4. Transfer of Assets
• Prohibition on the transfer of assets, ,unless:– It is for fair market value;
– It is to a qualified entity; OR
– It is in furtherance of the C3s purposes
Unique Features of C3s (cont’d)
5. “Asset Lock” on Dissolution
• On dissolution, the liquidator must , qdistribute all or 60% of the C3s distributable assets to one or more qualified entities
© 27
Unique Features of C3s (cont’d)
6. Reporting
• Must produce annual financial pstatements
• Must file normal annual corporate maintenance documents
• Must publish a community contribution p yreport annually
Unique Features of C3s (cont’d)
6. Reporting (cont’d)• Community Contribution Report must disclose:
a) description of how the C3s activities benefiteda) description of how the C3s activities benefited society
b) description of assets (including amounts) that were transferred during that year in furtherance of the C3s purposes
c) details of any transfers of money or other assets $with a fair market value over $10,000, including:
i. The identity of transferee
ii. The purpose of the transfer
iii. The amount transferred
© 28
Unique Features of C3s (cont’d)
d) the remuneration and position held of each person who made more than $75 000who made more than $75,000
e) the financial statements
f) the amount of dividends declared on each class of shares
• Community contribution report must be kept at C3s records office and posted on the C3sC3s records office and posted on the C3s website (if it has one)
Taxation of C3s
• C3s have no special tax treatment under the Income Tax Act• C3s do not qualify as non-profit organizations
under the Income Tax Act
• C3s will be subject to tax in the same manner as a regular company under the Income Tax ActIncome Tax Act
© 29
Taxation of C3s (cont’d)
• C3s can donate to a registered charity and receive a tax receipt
• Speculation that provincial government will introduce an investment tax credit for investments in C3s
Benefits of C3s
• Can operate anywhere in Canada by extraprovincial registration
• Brand recognition– Customers
– Socially responsible investors
– Depends on uptake and traction
© 30
Potential Uses
1. Stand alone social purpose business
• Owned by one or more people who want y p pto do good and make money
• Can be a new business or could convert an existing business
Potential Uses (cont’d)
2. Subsidiary of a Charity or NPO
• Used by a charity to operate an y y punrelated business
• CRA has stated that where an NPO incorporates a C3 and holds shares of a taxable subsidiary, this will not, in itself,
th NPO t l it t tcause the NPO to lose its tax-exempt status
© 31
Potential Uses (cont’d)
3. Replacement Vehicle for an NPO
• If an NPO becomes too successful and is making a profit it will lose its tax-exempt status
• Could convert an NPO into a C3
VANCOUVER
CALGARY
EDMONTON
SASKATOON
REGINA
LONDON
KITCHENER – WATERLOO
GUELPH
TORONTO
MARKHAM
MONTRÉAL
© 32
Important factors to consider when choosing board members and how to gprotect your NPO from financial irregularities
Rosanne Walters Terhart, CA, CBV, CFE, Senior ManagerJ 2014January 2014
SPEAKER’S BIOGRAPHY
Rosanne Walters Terhart, CA, CBV, CFE, Senior Manager
R i Ch t d A t t C tifi d F d E i d Ch t d Rosanne is a Chartered Accountant, Certified Fraud Examiner and Chartered Business Valuator. She has over 25 years experience in accounting, auditing and forensic investigations. Rosanne’s practice focuses on forensic investigations addressing allegations of fraud, quantification of economic damages, business valuations, special purpose audits and financial consulting.
Rosanne has provided expert witness testimony for civil and criminal trials in the Supreme Court of British Columbia. She has also acted as a court-appointed special referee.
R i h P id f h V Ch C ifi d F d
rterhartbdo.caDirect: 604 646 4381
600 Cathedral PlaceRoseanne is the President of the Vancouver Chapter, Certified Fraud Examiners. She is also a frequent speaker on topics related to fraud for the Institute of Chartered Accountants of British Columbia, Continuing Legal Education, universities and other organizations.
925 West Georgia StreetVancouver, BC V6C 3L2Tel: 604 688 5421Fax: 604 688 5132www.bdo.ca
© 33
NPO - BOD
• Mandate and challenges of the NPO
Outline
g
• Board responsibilities
• Best practices for choosing a board
• Fraud in the NPO Environment
• How to protect your NPO
• Fraudster profile and red flagsFraudster profile and red flags
• Types of schemes and prevention
• Case studies
NPO - BOD
NPO Mandate
- Stayed focused on the organization’s mission
- Manage funds effectively
© 34
NPO - BOD
- Environment of trust
NPO Challenges
- Failure to include individuals with financial oversight expertise on the board
- Failure to devote adequate resource to financial management
- Lack of proper controls
- Existence of nonreciprocal transactions (contributions) that are much easier to steal than other forms of income
- Public perception is so important for continuity of organization
NPO - BOD
• Carry out the mission
Board Responsibilities
y
- Policy: Set organizational policies and ensure compliance
- Planning: Establish and implement short time and long term plans
- Public relations: Concern for public image by composition of board and communication to the community
© 35
NPO - BOD
• Manage funds effectively
Board Responsibilities
g y- Budgeting and financial planning
- Monitoring revenue and expenses in light of the budget
- Ensuring adequate cash flow and other resources for the organization’s programs
- Safeguarding the organization’s resources
- Management of financial riskg
- Building appropriate reserves
- Compliance with requirement imposed by funding sources
NPO - BOD
Choosing board members
Step 1 – Understanding of mission
• Ensure the potential candidate has an understanding of the needs of the NPO’s clients and the resources to provide for those needs.
Ha e the done their research?• Have they done their research?
© 36
NPO - BOD
Choosing board members
Step 2 – Share the passion
• The candidate must believe in this mandate and be committed to effectively carry out the mandate of the organization.
Ho ha e the sho n a passion for the organi ation?• How have they shown a passion for the organization?
NPO - BOD
Choosing board members
Step 3 – Willing to serve
• Ensure the candidate is interested in serving the organization and not for other reasons.
• Other reasons could be fear to disappoint if being asked, prestige or other personal benefits prestige or other personal benefits.
• Why do they want to serve?
© 37
NPO - BOD
Choosing board members
Step 4 – Know the expectations
• Select individuals who know what is expected of them and are prepared for the time commitment required.
• Time commitments can include attendance at meeting, preparation for meetings NPO acti ities and committee preparation for meetings, NPO activities and committee meetings.
• Ask candidate to estimate the time they can dedicate and assess if this is sufficient.
NPO - BOD
Choosing board members
Step 5 – Community Involvement
• Ensure the potential candidate is willing to go out into the community and actively persuade others to support the work of your organization.
In hat a s has the board member demonstrated • In what ways has the board member demonstrated community involvement in other ways?
© 38
NPO - BOD
Choosing board members
Step 6 – Skills and diversity• Consider the skills and experience each potential member can bring to
the organization.
• Ensure the board members compliment each other and are willing to support each other on a common mission. Team players.
• Consider mix of age and experience and transitioning of responsibilitiesresponsibilities.
• Ask candidate to describe skills and experience that they are bringing to the organization.
NPO - BOD
Choosing board members
Step 7 – Service individuals
• Consider selecting individuals who are service professionals. They bring knowledge and experience to the board.
B t remember that the are their to assist in the • But remember that they are their to assist in the governance of the organization and not to provide services for free.
© 39
NPO - BOD
Choosing board members
Step 8 – Conflict of interest
• Consider potential director’s relationship with management. Ensure they do not have a conflict of interest concerning management and key personnel.
• Consider potential director’s relationship with customers Consider potential director s relationship with customers and suppliers
• Must be willing to act prudently and in the best interests of the organization while fulfilling their responsibilities.
• Ask what relationship exist.
NPO - BOD
Choosing board members
Step 9 – Due diligence
• Perform proper due diligence to ensure the potential candidate has strong values and personal integrity.
• These values help members make decisions that are best for the organi ation and not for the financial gain of for the organization and not for the financial gain of themselves or others.
© 40
NPO - BOD
Choosing board members
Step 10 – Financial skill or commitment
• Ensure at least one individual on the board has some financial experience and/or knowledge.
• Ensure the board as a whole is willing to take on this responsibilitresponsibility
• Ensure the candidate understands their financial responsibilities
NPO - BOD
Is fraud happening in the NPO environment?
- Statistics, ACFE 2012 Report to the Nation
- Yes, estimate is that 5% of revenues are lost due to fraud
- Frequency, estimate 7/10 organizations
- Median fraud scheme is $150,000
- Schemes lasts on average 18 months or longer
- Over 50% of case of no recovery of losses
© 41
NPO - BOD
Is fraud happening in the NPO environment?
- Frequently organizations believe they are protected by a few good controls
Two signatures on cheques
Review of supporting documentation before signing cheques
Financial statement a dit or re ieFinancial statement audit or review
- Not enough
NPO - BOD
Preventative Measures – What can the BOD do
• Choose right director who will be watchful and aware
• Take financial responsibility
• Do budgets and compare to actual results on a timely basis• Do zero –based budgets• Look at actual bank statements and see where money went
R i b k d h• Restrict access to bank accounts and cheques
• Do not rely on the financial summaries prepared internally
• Be aware and involved
© 42
NPO - BOD
Victim Organizations
• Small organizations are vulnerable (fewer than 100 employees)
• All sort of industries and types of organizations
• Fraud can occur is all departments of the organization
NPO - BOD
Who commits fraud against organizations?
- Variety of perpetrators including:
- Inside: employees/volunteers, management, officers and directors
- Outside: outsourced functions, vendors, donors, members or program participants, donors, members or program participants, competitors.
© 43
NPO - BOD
Perpetrators - Statistics
I id
Position Frequency Median Losses
Employee 41.6% $ 60,000
Manager 37.5% $182,000
Owner / Executive 17.6% $573,000
Insiders
Losses rise with level of responsibility and authority within the organization
NPO - BOD
Perpetrator profile
• Equal chance of male or female
• More than 50% have tenure over 6 years
• Educated, most frequently has bachelors degrees
• No criminal history• No criminal history
© 44
NPO- BOD
The Fraud TriangleOPPORTUNITY
Weak internal controls or ability to override controls
FRAUDFRAUD
NEED / PRESSUREEmployee needs funds for
lifestyle or habits
RATIONALIZATIONEmployee feels funds are
deserved for various reasons
NPO - BOD
Who is the fraudster?
10 – 10 – 80 Rule
10% of employees will never steal, no matter what
10% of employees will steal at any opportunity
80% of employees will go either way depending on how they rationalize a particular opportunity
Where do you fit in?
© 45
NPO - BOD
Behaviour Red Flags
Living beyond means 35.6%
Financial difficulties 27.1%
Unusually close relationship with vendor or customer 19.2%
Control issues (unwillingness to share duties) 18.2%
Wheeler-dealer attitude 14.8%
Divorce/family problems 14.8%
Defensive behaviour 12.6%
NPO- BOD
Types of Fraud
Th M j Cl ifi i
Scheme Type Frequency Median Losses
Asset Misappropriation 87% $ 120,000
Corruption 33% $ 250,000
Financial Statement Fraud 8% $1,000,000
Three Major Classifications
© 46
NPO - BOD
Asset Misappropriation – Schemes
87% of cases, $120,000 losses
% of Cases Median Loss ($)
Fraudulent Billing 25 100,000
Stealing Non-Cash Assets 17 58,000
Cash Skimming 15 58,000
Expense Account Abuse 13 26,000
, ,
Cheque Tampering 12 143,000
Stealing Cash on Hand 12 20,000
Payroll Schemes 9 50,000
NPO - BOD
Most Frequent Scheme
• Corruption and billing schemes posed the greatest risk, more than 50% of the cases of fraud in Canada
© 47
NPO - BOD
Asset Misappropriation
Billing Schemes
• Organization pays for services or items that it does not need
• Accomplished by:
- Setting up sham company g p p y
- Purchasing unnecessary items or services- Purchasing items of personal nature
NPO - BOD
Asset Misappropriation
Billing Schemes – Prevention
• Zero-based budgeting
• Regular scrutiny of budget vs. actual• Consider source of the actual results presented
• Check actual expenditures to source documentsReview of bank statement and cancelled cheques• Review of bank statement and cancelled cheques
• Periodic review of how expenditures are generally used in the organization
• Randomly pick an expenditure and see how it is used
© 48
NPO - BOD
Corruption
Corruption occurs in 33% of cases; losses $250,000
• Employees use their influence in a way that violates their duty to employers in order to obtain a benefit
- Receive or offer bribes Accept or extort illegal payments- Accept or extort illegal payments
- Engage in conflicts of interest• Transactions may not be on the books, so internal controls
not effective
NPO - BOD
Corruption – Prevention
• Establish code of conduct with specific expectations, state consequences
• Annual sign off for employees• Be aware of relationships with customers and suppliers• Occasional confirmation with customers / suppliers
Question why certain suppliers are used• Question why certain suppliers are used
• Know who the suppliers are
• Perform proper due diligence of suppliers
© 49
NPO - BOD
Asset Misappropriation
Cheque Tampering
• Forged maker
• Forged endorsements
• Altered payee or amounts after cheque is signed
NPO - BOD
Asset Misappropriation
Cheque Tampering – Prevention
• Proper security over unused cheques
• Proper security of mail procedures after cheques are signed• Segregation of duties, handling cheques should not enter
accounting entries• Bank reconciliation procedure to scrutinize all cheques • Bank reconciliation procedure to scrutinize all cheques
periodically
• Review cheques after they have cleared the bank for payees, amounts and signatures
© 50
EMPLOYEE FRAUD
Asset Misappropriation
Cash Skimming
• Involves the taking of cash before it is entered in books
• Occurs in organizations where cash is used for payment
EMPLOYEE FRAUD
Asset Misappropriation
Cash Skimming – Prevention
• Generally will be detected if proper cash and transaction reconciliation procedures are performed
• Have more that one person involved with handling cash
• Receipt giving separate from cash handling
• Skimming prevented by deterrent controls like video surveillance
• Surprise audits
• Be aware of results of fund-raising activities
• Compare to budget
• Compare to statistics and expectation
© 51
NPO - BOD
Detection - Statistics
Tips 43.3%p
Good oversight 14.6%
Internal audit 14.4%
By accident 7.0%
Account reconciliation 4.8%
Document examination 4.1%
External audit 3.3%
NPO - BOD
General Preventative Measures
• Internal and external audit functions
• Maintain proper internal controls
• Implement good accounting system• Effective management review of reports• Surprise audits
R i h li• Reporting hotlines
• Be aware and ask questions
© 52
NPO - BOD
Preventative Measures – Internal Controls
• Separate functions – no employee should have control over an entire financial transaction
• Where segregation isn’t possible, use compensating controls
• Look at bank statements and all cancelled cheques, wire transfers and debits for anything unusualy g
• More effective controls needed at the senior levels who can override controls
NPO - BOD
Preventative Measures - Employees
• Code of conduct
• Proper employee screening
• Proper supervision and review is critical• Job rotation / mandatory vacations• Employee support programs
Vid ill i f d i• Video surveillance, perception of detection
• Fraud training
• Consider insuring against dishonesty- fidelity insurance
© 53
EMPLOYEE FRAUD
Case Studies
• How was fraud detected?
• What was scheme?
• How were transactions booked to cover fraud?
• Were there any red flags?
• Could it have been prevented?
Wh did i i d i d d?• What did organization do once it was detected?• What was resolution?
EMPLOYEE FRAUD
Case Study #1 – Best Friends Jailed
Organization
• Non-Profit Organization
• Finance Manager in charge of office and administration
Fraud
• Finance Manager embezzled $300,000 per year for two years
Internal Controls
• Good controls, all cheques signed by two designated board members
• Organization was audited
© 54
EMPLOYEE FRAUD
Case Study #1 – Best Friends Jailed
How was it detected? • Management review/by accident, director looking up
information in general ledger and noticed unusual payments
Type of Scheme?Fraudulent Disbursement• Fraudulent Disbursement- Finance Manager created weakness in internal controls- Given authorization to electronically transfer funds
between bank accounts- Instead wired funds to friend’s bank account
EMPLOYEE FRAUD
Case Study #1 – Best Friends Jailed
How booked?
• Consulting expenses
Red Flags?
• Friend frequently hanging around organizationF i d l id l• Friend was only person paid as consultant
• Friend’s invoices lacked detail
• Journal entries booked at year end
© 55
EMPLOYEE FRAUD
Case Study #1 – Best Friends Jailed
Prevention?
• Give employee opportunity to report
- Finance Manager living beyond means
- employees concerned about friends relationship with Finance Manager
• Board of directors did not question consulting expenses (i.e. who was being paid and for what?)
EMPLOYEE FRAUD
Case Study #1 – Best Friends Jailed
What did organization do?
• Contacted police
• Police seized Finance Manager’s computer and documents• Police recommended charges• Crown Counsel hired forensic accountant
N h f i il • No chance of civil recovery – money gone
• Both individuals pleaded guilty after forensic report prepared
© 56
EMPLOYEE FRAUD
Case Study #2 – Bookkeeper Steals from the Vulnerable
Organization
• Non-Profit Organization for Elderly
Fraud
• Bookkeeper embezzles $200,000 over three years
Internal Controls• Two directors sign each cheque• Organization reviewed, not audited
EMPLOYEE FRAUD
Case Study # 2 – Bookkeeper Steals from the Vulnerable
How was fraud detected?
• Tip from outside organization - bank manager contacted president to inform him that all trust and general funds were gone
Fraud scheme?Cheque Tampering Bookkeeper added $1 000 to each pay• Cheque Tampering - Bookkeeper added $1,000 to each pay-cheque
• Fraudulent Disbursements - Bookkeeper forged signatures of directors, wrote cheques to herself
© 57
EMPLOYEE FRAUD
Case Study #2 – Bookkeeper Steals from the Vulnerable
How were transactions booked?
• Amounts spread to various expense accounts
Red flags?
• Expenses kept increasing but organization activities did not change
• Reviewer commented that bank reconciliations and supplier Reviewer commented that bank reconciliations and supplier reconciliations were not performed on a timely basis
• Accounts payable showed large unpaid balances
• Amounts of cheques written to bookkeeper were round amounts and cheque numbers were out of sequence
EMPLOYEE FRAUD
Case Study #2 – Bookkeeper Steals from the Vulnerable
Prevention?
• BOD did not question increase in expenses and why organization was facing hardship
• BOD did not consider compensating controls like occasional review of bank statement and cancelled cheques directly from bank
• BOD placed much trust and reliance in bookkeeper
© 58
EMPLOYEE FRAUD
Case Study #2 – Bookkeeper Steals from the Vulnerable
What did organization do?
• Bookkeeper was let go
• Hired local accountant to put together evidence
• Civil proceedings thrown out because evidence did not meet court standards
• Forensic accountant became involved
• Re-submitted for civil proceedings, civil judgement, no recoveryRe submitted for civil proceedings, civil judgement, no recovery
• Proceeded to criminal proceedings
• Bookkeeper received 18 months jail time
• Organization lost historic building as a result of the embezzlement
QUESTIONS?