Category

Accounting

Jan 08
0

How a Slippery Slope Can Help You Detect Nonprofit Fraud

By | Accounting, Audit, Fraud, Nonprofit | No Comments

Think about the term “slippery slope” for a moment. What do you imagine when you read it? How about a water slide? An article in the Journal of Accountancy compared Bedford’s Law with a theme park water slide, an apt image, and one that’s easy to keep in mind. Keep the concept of a curve in mind when looking at your data and you’ll be able to detect nonprofit fraud more easily.

A Picture of Nonprofit Fraud

In 1938, Frank Benford discovered a naturally occurring numerical law that predicts the frequency of digits in any number set. According to Bedford’s Law, an authentic data set includes the following frequency of digits:

  • the numeral 1 will be the leading digit in a genuine data set of numbers 30.1% of the time;
  • the numeral 2 will be the leading digit 17.6% of the time;
  • and each subsequent numeral, 3 through 9, will be the leading digit with decreasing frequency.

Using Excel data and some simple calculations, you can chart your nonprofit’s numbers on a Benford curve. If the numbers don’t resemble the curve, it’s time to investigate, as something may be amiss.

Using Benford’s Law in Nonprofit Accounting

Benford’s Law works best with large data sets, typically groups of numbers with more than 100 entries. Fewer numbers provide too small a data set to chart accurately. Some recommend 500 or more numbers for improved accuracy.

Other tips include:

  • The numbers must have an equal chance of starting with 1 through 9. If the dataset limits the numbers, Benford’s Law won’t work. Thus, calculating the average height of the Rockettes, the Radio City Dance troupe, doesn’t work because all Rockettes must be between 5’ 6” and 5” 10 1/2” tall; all digits begin with 5, therefore the curve won’t work. Think about this if your products are all priced with the same starting digit. Entering them into the spreadsheet and generating a curve won’t work to detect fraud, i.e., if all conferences run by your nonprofit have a fee of $199 for example.
  • Don’t use it as definitive proof of fraud. Benford’s curve cannot prove or disprove fraud. It’s like a clue that leads you to investigate more deeply into potential fraud. It’s not a good idea to use it to accuse someone of fraudulent activity. It can, however, point to a problem requiring further investigation or the addition of an outside consultant to your team.

To use Excel to plot a Benford Curve:

  1. Use the Column Chart, LEFT, and COUNTIF functions.
  2. Enter the data by name in column A, and numerically in subsequent columns.
  3. Use the LEFT function to extract the first digit of each number in a column.
  4. Copy and use the same formula to extract all the first digits.
  5. Use the =COUNTIF function to count the occurrence of the first digit from each number that you extracted in the step above.
  6. Copy the results to a new cell.
  7. Chart the results.

The previously linked Journal of Accountancy article provides an Excel spreadsheet already set up with relevant formulas that you can download.

By charting the numbers, you’ll either see the Benford curve or a random graph. Some graphs look like straight lines with slight bumps in the middle. This tends to indicate that the data was artificially produced, in which case, fraud may be occurring.

It also may not be an example of fraudulent activity. That’s why it’s important to perform additional checks and investigate potential fraud before making accusations. Sometimes, a bell curve is just a bell curve.

About Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Jan 02
0

Is Your Nonprofit Ready for the New FASB Rules?

By | Accounting, Audit, FASB, Nonprofit | No Comments

In the world of nonprofit accounting, only one thing remains constant: Change. FASB’s new rules are in effect in December 2017. Are you ready?

The Financial Services Accounting Board (FASB) issued new rules for nonprofits in August 2016. Since then, we’ve covered some of the clarifying questions nonprofits asked FASB about various aspects of the rules. This is the first major change to the guidelines for accounting for nonprofits since 1993 and thus a substantial amount of change is going into effect. Let’s take a look at the new rules and how they may impact your nonprofit organization.

Overview of the New FASB Rules

The new guidelines aim at making financial statements easier to read for all stakeholders. Stakeholders such as directors, the public, donors and granting institutions need clarity and consistency when reviewing nonprofit financial statements.

Nonprofit financial statements are more than debits and credits. To the keen eye, they provide a story of how your organization spends its time and money. Providing better clarity and consistency is critical because understanding the financial statements provides insight to decision-makers about which organizations they choose to support.

Four Major Areas of Impact

There are four major areas of impact to nonprofit financial statements. The goals of the changes are to improve:

  1. Simplicity and clarity: As previously stated, FASB hopes that the new guidelines will improve both the simplicity and clarity of nonprofit financial statements. Some level of consistency in the presentation of information is also desirable. The new rules simplify the treatment of net assets. The emphasis is on donor-imposed restrictions. The goal is to classify temporarily restricted versus permanently restricted funds. The current three classifications of net assets are replaced by two categories, restricted and unrestricted. Although the temporarily unrestricted category is eliminated, nonprofits can still provide clarification in the notes section and in other areas of their financial reports.
  2. Clarity on cash and available assets: Nonprofits are now required to reveal any limitations on the use of liquid assets. Quantitative and qualitative information must now be provided to demonstrate how an organization manages liquid assets. It’s a good idea to speak with your nonprofit auditing firm or CPA when preparing financial statements to adhere to this new guideline. Keep in mind that quantitative information is determined by the nature and limit imposed upon it.
  3. Consistency reporting investment expenses and returns: Income must be reported net of related internal and external expenses. Currently, this is optional.
  4. Communication about Statement of Cash Flows and Related Presentation Options: Nonprofits may continue to present operating cash flows using direct or indirect reporting methods at their discretion.

Now is the time to prepare your accounting setup for the new year. If you haven’t adjusted your plans for reporting, this is the time to do so. We urge you to seek professional assistance with your audits or end of year reporting if you aren’t sure how to adhere to the FASB guidelines. It’s important for the financial health of your organization to report its funds and expenses in a clear, concise manner so that donors, the public, granting organizations and directors can understand the good work that you do and how their money is spent.

About Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Dec 26
0

Technology Budget: Getting Buy-In from the Board or Association

By | Accounting, Budget, CPA, Nonprofit | No Comments

Regardless of a non-profit’s budget, the technology world is quickly revolving and to stay competitive, it is imperative to stay current on technology.  Even the simplest of computing advancements can require that some hardware or software be upgraded from year-to-year. Failing to keep up with the techno-curve can leave your organization in a deep hole that ends up costing you more in lost time, money, and resources then it would if you were able to justify the expense of upgrading.

So, we have a need to communicate how to balance the cost of doing nothing with the cost of spending on new technology in a business environment.

The need to present an annual technical budget to an association or nonprofit board may have its own unique circumstances, such as the need to adhere to strict or mandatory budgeting requirements. To meet these constraints, consider the following criteria when preparing for your annual budget review with the board:

  • Supports mission statement: Be transparent about how any funding is being used to further the group’s mission.
  • Forecasts contributions: Show how future contributions, gifts, and grants can offset operating expenses.
  • Plans for updates: Communicate how budget updates will be handled throughout the year to keep the original budget on track.

Presenting the right budget for your organization will differ materially from what is right for another organization. Each organization will have its own challenges and needs. Some of these variables can include:

  • What an organization is capable of and prepared to spend on technology.
  • Access to a discounted or donated upgraded system.
  • Ability to absorb implementation and training costs.
  • How effectively current technological resources are being used.
  • The number of staff available to participate in a technological update.

Although it may be tempting to propose that your organization adopt the latest technology can offer, generating a business case that shows an immediate and positive return on investment (ROI) using such technology may be a stretch. For example: Are you able to demonstrate to the board how your present technology is slowing your business process down to the point where it’s causing lost revenue? And can you then show how the proposed upgrade will alleviate your staff’s business challenges resulting in smoother office operations and higher revenue returns?

Your ability to identify your organizations biggest technological challenges and technology needs will help you to better outline your budgeting options to your nonprofit or association board for their review and approval. Based on a clear understanding of these options, presenting a cohesive set of recommendations that are more likely to be approved by the board becomes more certain.

By remembering the importance of comparing the ROI to the cost of upgrading, while showing the cost of doing nothing, you have a better opportunity to realize board approval of your technology budget that moves your group’s stated mission forward.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Dec 18
0

The Right CFO Makes a Big Difference!

By | Accounting, CPA, Grant Management, Nonprofit | No Comments

Finding a CFO with the right skills, experience and chemistry with the organization’s leaders is critical. A CFO is more than an accountant. He or she is also a strategist. The CFO creates budgets, analyzes financial statements, provides strategic direction, and helps others in the company understand the plethora of data provided by the accounting and finance department.

When Should You Hire a CFO?

As your organization grows beyond its original size and begins to make a larger impact among its constituents, it’s natural to wonder when you should hire a CFO.  A few signs that indicate it is time to hire a CFO include:

  • The Executive Director, CEO or President is wearing too many hats. As a result, critical financial tasks aren’t getting done on time simply because the leader is too busy to handle them.
  • The organization’s finances have grown to be complex, requiring someone in the leadership chair who understands nonprofit accounting.
  • The Board of Directors feels a layer of oversight and leadership is needed to manage the accounting needs of the organization.

The right CFO will use their expertise to:

  • Bring a strategic, high-level perspective to the organization’s finance and accounting needs.
  • Build the organization’s capacity to manage its finances as it grows in size and complexity.
  • Reduce excessive workloads in the areas of finance, administration, real estate, technology or legal for the Executive Director (ED) and/or the Chief Operating Officer (COO).
  • Balance or supplement the skills of the controller or other finance team members.
  • Partner with the ED and COO to make decisions that benefit the organization from a financial perspective.

How to Find “CFO Right”

You may need to allow several weeks or months to search for the right CFO candidate.

The first task is to create a job description outlining the desired characteristics of the CFO. Focus on the necessary core capabilities, strengths, and experiences. It’s imperative that a non-profit CFO has experience with nonprofit financial management. Other core characteristics to look for among candidates include:

  • Understands non-profit budget models, contracts, and regulatory requirements
  • Knows and demonstrates passion about the organization’s mission
  • Produces detailed and precise work
  • Exemplifies strong listening and perspective-assessment skills
  • Communicates well, in a transparent fashion
  • Exercises good judgment in the midst of ambiguity

We mentioned it before, but the right CFO also has a certain chemistry with the leadership team. That’s not as an ambiguous term as you may think. Chemistry is essential to a calm, orderly, and productive relationship with the organization’s top leaders. The better they work together, the more work they can get done.

It’s difficult to assess chemistry, but allow all your top leaders to meet and interact with potential candidates. Give them time to get to know one another during the interview process. Ask them how they feel about each candidate. If you have several equally qualified candidates, you may need to rely upon the team’s judgment about compatibility as the deciding factor.

Can You Afford a CFO? Options

While hiring a full-time CFO is a great solution for many mid-sized and all large non-profit organizations, many are too small to afford or need a full-time CFO. If your organization falls into that category, there are several things you can do to afford to hire a CFO.

One idea is to hire an interim or temporary CFO. No one earns the title of CFO without building an extensive body of knowledge and experience. Bringing someone into the role on an interim or fractional basis gives the Executive Director and the organization immediate access to the many lessons learned over the course of their career, at significant cost savings.

If you’re interested in finding your next CFO or placing an interim CFO in your organization, Welter Consulting can help. Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.