Category

Audit

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.

Nov 27
0

Internal Controls & Abila MIP Fund Accounting™

By | Accounting, Audit, CPA, Internal Controls, Nonprofit, Uncategorized | No Comments

Internal controls provide safeguards against losses, thefts and mistakes. An old-fashioned way of keeping internal controls may be to have one staff member count out the petty cash box while another watches the process. The watcher in this case is the internal control. An extra set of eyes on the counting process keeps the person holding the cash in hand from making “mistakes”, whether intentional or not, when it’s handed over for counting.

Implementing internal controls can be easy! Our “Internal Controls for Nonprofits: Best Practice Resource Guide” can help your nonprofit establish best practice principles, policies, and procedures.

In larger, automated accounting systems for nonprofits, such as those that run Abila MIP, internal controls are built into the system. By automating many of the financial processes, it becomes more difficult for someone to circumvent the system and steal from your nonprofit.

A publication from the Virginia Society of Certified Public Accountants brings home the point that good internal controls, through the use of Abila MIP fund accounting and processes around them, can help prevent loss and “keep honest people honest.”

Safeguards Against Loss: Simple Internal Controls

The first and best internal control is to avoid handling cash when at all possible. It’s not that cash is bad, it’s just that it can be “lost” more easily than money that is already in the bank account and tallied in Abila MIP fund accounting.

A system of checks and balances keeps careful watch over your finances. A few internal controls to keep losses to a minimum:

  1. Lock checks and cash in a safe or drawer both during business hours and afterwards.
  2. Monitor access to the keys.
  3. Make it a rule that all employees, regardless of their job title or function, must have another employee present when opening the safe or cash drawer, and counting out money.
  4. Don’t let checks and cash pile up in the office. Make a bank deposit when the threshold reaches a certain amount.
  5. Use timecards to monitor hourly workers’ wages.
  6. Have a manager review timecard information regularly to ensure no one is ‘padding’ the hours.
  7. Do not let anyone borrow funds from the organization’s accounts for personal reasons, or use business credit cards for personal reasons.

Acting Swiftly

It is important to have written policies in place regarding fraud and theft so that you can take the appropriate steps to document, correct, and if necessary, terminate employees who circumvent or ignore internal controls. Depending on the circumstances, your organization may also have a zero-tolerance policy for theft, and a written policy regarding grounds for termination should include such information.

Take steps to create policies and internal controls for your staff. Train and teach them their expectations. Set in termination policies in place. Know who is handling your accounts, who has access to cash and checks, and how such resources are handled. Keeping track of your finances using good fund accounting software is a way to detect fraud and act swiftly.

Abila MIP Fund Accounting

Abila MIP Fund Accounting includes fraud protection and analysis within the system, so you can use the data within it to detect patterns of losses, analyze data, and prevent fraud.

Most losses do not occur in isolation. People find that if they can get away with one theft, they return and try again. This leaves a footprint or a recognizable pattern. Data ran from your fund accounting system may be able to display such patterns so that you can take immediate, corrective action.

At Welter Consulting, we want to help our nonprofit customers prevent losses and fraud. By utilizing good nonprofit fund accounting software, such as Abila MIP, you can keep careful track of all of your accounts and detect suspicious activity quickly.  Click to learn more about Abila MIP fund accounting.

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.

Oct 30
0

How Important Are Internal Controls for Nonprofits?

By | Accounting, Audit, Nonprofit | No Comments

An office clerk “borrowing” money from the office petty cash is a classic example of why internal controls are necessary. How easy would it be for an office clerk to “borrow” a few dollars for her morning coffee?  What internal controls are in place so that this cannot happen?  One answer to this illustration is is to have someone who does not handle petty cash  conduct random and monthly audits of the petty cash box and keep records of the cash and receipt amounts.  If a large amount of petty cash is kept, it would be an added safeguard to audit petty cash with another person just in case the cash comes up short.

A wise person once said that locks just keep honest people honest. The same is true for internal controls.

A publication by the Virginia Society of Certified Public Accountants explains that good internal controls are essential to:

  • Prevent loss through errors, misappropriation of funds, or theft
  • Prevent an “honest” employee from making a mistake that can ruin his or her life
  • Document the responsibility of the board as it safeguards the assets of the NPO
  • Assure that all transactions are properly authorized and recorded

While seemingly time consuming, the simple act of having two people present during the petty cash audit protects both employees and assets – a distinct advantage of using adequate internal controls.

Internal Controls Defined

The National Council of Nonprofits defines internal controls as financial management practices systematically used to prevent misuse and misappropriation of assets, such as occurs through theft or embezzlement.  Internal controls protect not just assets but reputations as well.   It is critical for nonprofit organizations to maintain the highest integrity and ethical standards  in orderto attract and retain funders.

The objective of internal controls is to put “checks and balances” in place to protect the assets of the organization.

What Can Go Wrong

Any discussion of the most important internal controls for nonprofits Should be prefaced by answering the question,  , “Just consider what can go wrong.”

I scoured the internet to find examples of what can go wrong with weak or non-existent internal controls.  The following stories are true and could happen to you.

Scenario:  Cash – MIA (Missing In Action)

Suppose checks are merely kept in the bottom drawer of a file cabinet.  An enterprising employee might take a few checks from the bottom of the stack, forge a signature, and cash them, stealing thousands of dollars before being caught.

Internal Control Solution:  Secure the checks with keys held by two different financial managers. Ensure that bank reconciliations are performed by staff with no access to deposits or withdrawals.  Bank reconciliation should be prepared on a monthly basis, at minimum.

Scenario:  Employee Alert

A clever payroll employee adds overtime hours to pay himself or herself at time and-a-half.

Internal Control Solution:  Timecards should be signed by managers. A second person compares the payroll totals to signed timecards.

Scenario:  Sad but True Fundraiser Fiasco

During a fundraiser, a volunteer handled all aspects of the cash ticket sales, including depositing funds and reconciling the bank statement.  Occasionally short on cash, she would borrow funds and then pay them back….until she didn’t pay them back.  This well-meaning volunteer “borrowed” around $10,000.  The event intended to be financed by the fundraiser  had to be cancelled.

Internal Control Solution: Anytime cash is involved, the responsibilities should be divided among several people.  At least two people should be present when cash is counted.  Separate people should make the deposits and reconcile bank statements.

Closing Thoughts

Internal controls should be clearly documented in a procedural manual and authorized by the board or governing authority of the organization.  Discovery of theft or embezzlement and the resulting investigation is hard on the organization internally, and the external damage to the organization’s reputation can cause loss of funding.  Additionally, bonding insurance premiums could skyrocket, especially if it could have been prevented by using good internal controls.

Establishing internal controls protects the organization and the board members, officers, and staff.  For more comprehensive reading, Abila has created “Internal Controls for Nonprofits: Best Practice Principles, Policies, and Procedures.”

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.