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NPT SPECIAL REPORT
What Every Nonprofit Must Do to
Protect Against Misuse of Grant Funds
BY KENNETH R. DIEFFENBACH, CFE
M
ost nonprofits depend heavily on federal,
state and private grant funding.A vast majority of these funds are properly used to promote and operate important programs and
to help many facets of society.
However, the potential that grant funds can be misused is very real. If funds are misused, there can be devastating consequences. Whether the fraud is committed
intentionally, through a negligent act, by a simple mistake, or a series of mistakes, the results can range from a
loss of funding or public confidence to the extreme of
criminal charges.
In virtually every single case of grant fraud -- including
intentional theft of funds and false statements about the
use of the funds -- there was likely someone in a position to
prevent the problem or assist in detecting it. Every member of an organization, from the entry-level employee,
to the executive staff, to members of the board of
directors, has the opportunity to potentially
prevent or identify such problems. The prevention or early detection of fraud issues
provides a positive outcome for everyone -- including the organization, the
grantor, the community, and the individual perpetrator.
Following is a discussion of
three risks that every nonprofit faces, related to grant
funding, and the most important ways to mitigate
these risks to help prevent problems before
they occur.
There are steps to preventing COI, including:
• Annually educate every employee and board member
regarding the defined COI prohibitions that bind the organization.This reminds everyone of their obligations and
helps the organization to better steer clear of COI-related
problems.
• Refer every potential COI situation to legal counsel or
the grantor in writing and request a written opinion. (An
approved COI likely ceases to be a COI.)
• Ensure there is a written procurement procedure in
place and that it is followed. Most entities default to the
state or local government procurement rules, so the primary challenge is to ensure the procedures are followed
and properly documented.
• Carefully review every consulting contract for the fol-
CONFLICTS
OF INTEREST
Virtually every grant agreement requires compliance
with some type of conflict of interest (COI) statement
that prohibits an actual conflict of interest or the appearance of one. In practical terms, these agreements generally prohibit grant program decision-makers from making
decisions about the use of funds that have an impact on
their own personal interests, such as their consulting or
other businesses and the businesses or employers of their
family members, business partners, future or past employers, or others.
A common issue in this area is the independent (or
often not-so-independent) consultant who assists a
grantee in developing a grant proposal and then later receives a contract to provide some of those services.These
contracts are sometimes no-bid arrangements with little to
no best value or price reasonableness determinations.
Other common complications include the lack of a clear
purpose for the contract, well-defined deliverables, and
poor documentation of how the consultant earned the
funds they were actually paid. Additionally, board members often run local businesses, and therefore grantees
must exercise due care when making decisions to award
contracts to these related parties.
COI issues are rarely black and white or right and
wrong scenarios.They require careful analysis and disclosure to the appropriate parties, normally the grantors
themselves.
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J UNE 1, 2009
THE NONPROFIT TIMES
lowing key questions:Who,What,Where,When, How, How
Much? Does the written agreement clearly lay out these
details? Is the contract fairly valued and well documented?
• Consider having every consulting contract reviewed
by legal counsel and approved in writing by the board.
MISUSE OF FUNDS
A grant agreement is essentially a legal contract between a grantor and a grantee.The grantee promises to engage in certain activities or procure certain goods, and the
grantor agrees to transfer funds to the grantee to pay for
these costs. Some grant agreements are simple one-page
documents, and some are complex with multi-year budgets, program income allowances, indirect cost rates, multiple salaries, and other variable costs.
Regardless of the simplicity or complexity of a grant program, the funds must be used as agreed to and the grantee
must maintain appropriate documentation to prove
that the funds were indeed used as represented.
To properly track the use of these funds and
to support reimbursement claims, grantees
are required to have an accounting system
with an appropriately designed and implemented system of internal controls. One common issue in this
area is the proper accounting of
personnel cost claims. This becomes especially complex if
an employee’s salary is paid
from multiple sources of
funding.There must be a
process to accurately
document claims to
each
of
these
grantors via a timesheet or
other appropriate documentation.
Additionally, every grant requires some type of written
assurances from the grantee to the grantor that funds are
being or have been used properly.These assurances generally come in the form of financial certifications and narrative descriptions of the grantee’s activities and
accomplishments.
Here’s how to help prevent the misuse of funds:
• Ensure that the proposed grant program and budget
documents are accurate, complete and realistic in their
goals. Multiple parties should review the final grant application package before it is submitted to the grantor.
• Read and understand the final grant agreement. The
signed, written grant agreement is essentially a contract
between the organization and the grantor. The right people, possibly including the grantee’s employees, board of
directors, community partners, and others, should have access to and be required to read this document to ensure
compliance.
• Ensure there is an objective and well-designed
process to make certain that the funds are being used as
required.The establishment of written program goals and
milestones can help the organization stay on the right
road. Comparing budgets to actual spending can also yield
helpful information.
• Support all assertions. Financial status reports, narrative progress reports, and funds requests must be supported by verifiable facts. Before these reports or requests
are submitted to the grantor, ensure they are reviewed for
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NPT SPECIAL REPORT
accuracy, sufficiency, and completeness. In many organizations, one person fills out, signs and submits these forms
with no oversight or fact-checking by another party.
• Properly capture and disclose program income. How
does your accounting system treat program income, such
as training fees? Is there a clear policy on tracking such
revenues and reporting them to the grantor?
• If your organization receives funds from multiple
sources for the same program or overlapping purposes,
carefully plan and document the receipt and use of each of
these sources of funds.
• Develop written procedures for properly recording
time and personnel costs and regularly remind employees
of the importance of maintaining accurate time records.
• Use caution when it comes to indirect cost rates. Indirect cost rate calculations can be complex and cumbersome, yet they are critical to recovering costs that
otherwise might not be captured. If your organization uses
indirect rates, verify that the rate has been approved by an
appropriate authority, audited if necessary, and adjusted as
required.
EMBEZZLEMENT
By far the most common and potentially most damaging threat to any organization (whether funded by government grants or other sources) is embezzlement.
Embezzlers are often incredibly creative, manipulative and
smart people. That is why they can do so much damage
and remain undetected for an extended period of time.
From the simple scheme of writing themselves checks
or misusing an organization’s credit card to the complex
schemes of establishing dummy vendors or colluding with
outside parties, the common thread to all embezzlements
is poor or non-existent internal controls or overriding
those controls.
People often equate internal controls with the concept of
trust and therefore hesitate to question employees or others
when a practice violates or circumvents an internal control.
An accounting system where internal controls are ignored or
non-existent creates an environment where embezzlement
is virtually inevitable.
Here are some steps to prevent embezzlement:
• Separation of duties: The functions of receipt, disbursement, recording, custody, and audit/review of cash or
cash equivalents such as checks, credit cards or gift cards
should be done by separate individuals whenever possible.This can be especially challenging in smaller organizations where one person “has a good head for numbers”and
volunteers to “take care of the books.”
• Use of an outside bookkeeper, CPA or fiscal agent:
some organizations would strongly benefit from having an
outside entity manage their funds.
• Do not routinely allow employees to receive checks for
reimbursement of program expenses. If supplies, food, or
other expenses are regularly required for the grant program,
establish a billing or other financial process to ensure the
claims are legitimate, necessary and properly approved.
• Require that bank and credit card receipts be independently reviewed and affirmatively approved by two or
more people, including a board member, in a timely fashion.
• Carefully control and independently verify the proper
use of checkbooks, debit cards, credit cards, gift cards, and
cash. Some financial institutions offer read-only access to
J UNE 1, 2009
THE NONPROFIT TIMES
Internet-based banking and credit card records.
• Establish a clear policy and oversight mechanisms related to the following high-risk issues: payroll advances;
payment of Internal Revenue Service (IRS) and state revenue withholding taxes; and, past due vendor invoices.
These issues are very commonly used in embezzlement
schemes as a way to free up cash or extract it from an organization. An independent board member should keep
tabs on these types of transactions to help identify potential problem areas.
Finally, every nonprofit should regularly educate employees and board members regarding the risks of grant
fraud and the consequences if such activities occur. By emphasizing the above prevention strategies, every organization can make great strides in reducing the impact of fraud
and ensuring a focus on its primary mission.
If you become aware of fraud issues related to grant
funded organizations or programs, report them to grantors
and the appropriate federal, state, or local Office of the Inspector General (OIG).A list of federal OIG’s can be found
at www.ignet.gov
Ken Dieffenbach is a senior special agent with the U.S. Department of Justice, Office of the Inspector General, Fraud
Detection Office. The Fraud Detection Office focuses on
the prevention, detection, and investigation of fraud related to Department of Justice grants and contracts and
related employee misconduct matters. The views in this
article are that of the author and not necessarily those of
the Department of Justice or the Department of Justice
OIG. His email is [email protected] The
DOJ OIG Web site is www.usdoj.gov/oig
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NPT SPECIAL REPORT
Grant Writers And
Corporate Sponsors
You’re pitching a product, too: Your organization
BY WADDY THOMPSON
Y
ou’ve spent years perfecting
your grant writing skills: shaping a logical argument for why
your project needs funding;
creating detailed budgets to reinforce
your narrative; and, gathering a variety of
attachments to support your case. Now
you’ve been asked to create a corporate
sponsorship proposal and wonder what
you can use from your grant writing experiences.Well, as they say in New York,“forgetaboutit.”
Sponsorship and grant proposals are as
different as night and day. When writing a
grant, you certainly make a point to tie
your project to the foundation’s guidelines
and mission. But, the main point of the pro-
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J UNE 1, 2009
posal is how important it is for your organization to accomplish its project. With a
sponsorship proposal the situation is reversed -- you will spend the largest part of
the proposal describing how your project
will help the company meet its goals. It’s
mostly about what you can do for them.
To write a corporate sponsorship proposal, you need to think like the market-
ing people who will evaluate it. They will
want to know:
• Tangible and intangible benefits to
the corporation;
• Demographics of your audience;
• Reach of your nonprofit and your
project; and,
• Description of the organization and
project.
FUNDRAISING
Continued from page 11
necessary to hire additional major gift and
legacy fundraisers if you can find ways to
ensure that your current staff is as productive as possible. No doubt, a move of this
sort will be met by groans and complaints.
But when times are tough, we’ve all got to
pull our weight.
3. Gang print your materials.
As you’re well aware, printing in larger
quantities brings economies of scale. The
difference per piece between printing
10,000 brochures and 50,000 is substantial, and it’s a lot more so when the difference is between 10,000 and 100,000 or
500,000.
Obviously, you’re not going to save
money merely by increasing the quantities of your print runs. However, there are
at least three ways you might be able to
do so: a) by ordering standard materials
such as envelopes for a six- or 12-month
period rather than a single mailing; b) by
finding ways to print at one time several
components of different mailing projects;
and c) collaborating with other, non-competing nonprofits in your area to print together items of similar specifications.
The charge for a “plate change” -- a different layout or design using the same ink
color or colors on the same size and shape
of paper -- can be negligible compared to
the cost of printing the two items separately. By combining printed materials into
a single print run, you can often save substantially.
4. Clean your mailing list.
THE NONPROFIT TIMES
www.nptimes.com
When you receive a piece of mail, where
do your eyes first alight? Careful now. If
you’re like the overwhelming majority of
people, what you notice first is your name
and address. And if there’s an error in addressing you, the chances are that much
greater that you’ll toss the mail aside.
Yet the state of “list hygiene” in the nonprofit sector is, on the whole, deplorable.
Misspelled names, undeliverable addresses,
missing zip codes, and dead people abound
on many so-called donor lists.The owners of
these lists are losing money two ways: by
wasting printing and postage costs on mail
that goes nowhere but the trash, and by discouraging or insulting donors.
An intensive effort to clean your mailing
list can significantly reduce the costs of
mailing invitations to events, newsletters,
and appeals. In the United States, the United
States Postal Service maintains address
changes that can be integrated into your
mailing list through software that’s widely
available through service bureaus all over
the country. It’s always worthwhile updating your list on at least an annual basis -- if
not with every large mailing you send. If, instead, your list is relatively small, it’s worth
the time to edit it, line by line, to correct obvious errors. NPT
This article is excerpted with permission
from Fundraising “When Money Is Tight:
A Strategic and Practical Guide to Surviving Tough Times and Thriving in the Future,” by Mal Warwick. Copyright © 2009
by Mal Warwick.
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All of those elements could be included
in a letter, but it is better to send a short
pitch letter and back it up with attachments giving the critical data.That way, you
can emphasize the most important facts for
a very quick read, while also supplying
greater detail once I have their attention.
Your sponsorship proposal will include the
following elements: Pitch letters, demographics and reach, and follow up.
PITCH LETTER
This short letter will note the most important benefits to the sponsor, especially
how you will recognize the sponsorship,
and just enough information on your nonprofit to convince the corporation that
you are a vital, ongoing operation. It
should be no more than a page and a half.
You really have to sell your organization
and project in this letter.
The more tempered approach you use
in a grant proposal cover letter won’t do
the job. You must make your project
sound like the best opportunity out there
for the corporation.
In a grant proposal, you always ask for a
specific amount based on a foundation’s
past giving and its guidelines.With corporate sponsorship, it’s very difficult to find
out what they have paid for other spon-
sorships, so you must determine what
sponsorship of your project is potentially
worth to your sponsor.This will be based
largely on the demographics and reach of
your project.
The International Events Group (sponsorship.com) provides a valuation service, which doesn’t come cheaply but can
be very important in securing a major
sponsorship. Reading their free downloadable brochure about the service,
however, will give you some good ideas
on how to decide what your property is
worth. (Yes, in the sponsorship biz, your
nonprofit is a property.) These will include tangible benefits such as logo
recognition in all publications and free
admission for employees, as well as intangible benefits, such as the loyalty of your
audience and your organization’s prestige
and position in the community.
Finally, it is customary to offer a range
of sponsorship fees rather than a single
price. This shows that you are willing to
negotiate based on the sponsor’s needs.
DEMOGRAPHICS AND REACH
This is the all-important “who” and
“how many” of the proposal. You should
mention the most relevant statistics in
the pitch letter, for example, if your audi-
ence is primarily women and the sponsor makes a product mainly used by
women.You will give more complete information in the one-page attachment,
such as gender breakdown, household
incomes, and buying habits. Include information on your constituents’ loyalty
to your nonprofit. If your donors/clients
tend to support your nonprofit for many
years, that loyalty will transfer to the
sponsor.
The sponsor will also want to know
about products or services your constituents purchase. If you don’t have information on your constituents, you’re not
ready to create a sponsorship proposal.
But all is not lost:You can do a quick constituent survey using one of the free online services like zoomerang.com or
surveymonkey.com and have some data in
less than a week.
In addition to demographics, the
sponsor will want to know how many
people will take part in the project or interact with your organization. If possible, back this up with the numbers from
past events/projects. Also include how
many people will see the sponsor’s logo
(Web site, print, at events, etc.). Be specific and accurate.You might believe that
you need to overstate the numbers you’ll
reach, but don’t.
You’ll have to report back to the
sponsor, and inflated numbers will come
back to haunt you. For Web site traffic,
use “visits” or “unique visitors,” not the irrelevant “hits” as a measurement.
Finally, you might include a small
brochure or one-page fact sheet about your
organization and/or the project you want
sponsored. You will never include (unless
specifically requested) a CD/DVD, annual
report, bulky brochures or publications.
FOLLOW UP
It is rare that a sponsor will call you as
soon as your letter is read. You must follow up within a week or so to start a conversation. Be prepared to negotiate and
keep in mind that most sponsorship dollars go for events with mass audiences,
such as like professional sports.
Chances are you can’t compete with
those numbers, but your nonprofit has
the specific and loyal audience for which
some company is looking. Many companies now require online submission of
sponsorship proposals. Even in these
cases, try to find a name of someone in
marketing to call to follow up. NPT
Waddy Thompson is the author of “The
Complete Idiot's Guide to Grant Writing.”
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