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
CPA British Columbia
Not‐for‐Profit Organizations
Not‐for‐Profit Organizations
Thinking Outside the Box!
Bill Cox, CPA, CA
Partner BDO Canada LLP
Partner, BDO Canada LLP
January 2014
Schedule and Speakers for the morning
•
Bill Cox, BDO
•
•
•
David Geertz, SoKap
•
•
©
Community Contribution Companies
R
Rosanne Walters‐Terhart, BDO
W lt
T h t BDO
•
•
Social capital/fundraising
Brendan Burns, Miller Thomson
•
•
What’ss new with the CRA
What
new with the CRA
Outsourcing financial functions
Fraud and Board governance
Short wrap‐up – out by 10:00am
1
NOT FOR PROFITS –
Canada Revenue Agency What’s New?
CRA Non‐Profit Organization
Risk Identification Project
• ...not much new
©
2
CRA Non‐Profit Organization
Risk Identification Project
• Audit
Audit of 1440 NPOs 2010 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
Also concern over non‐profits
profits that do not 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
Mergers, amalgamations and l
ti
d
consolidations
• Endowments, 10 year gifts, perpetual trusts
• Giving a gift back
©
3
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
©
4
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 planned
circumstances (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
©
5
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 ahead the funds will be used for .......(other h d h f d
ll b
df
( h
good cause/project at NPO). Better not to offer funds back.
Notes
©
6
NOT FOR PROFITS –
TO ‘IN
TO IN‐HOUSE
HOUSE’ OR OR ‘OUT
OUT‐HOUSE
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 ©
7
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
As CEO, Executive Director, General Manager or whatever 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
©
8
IN‐HOUSE OR OUT‐HOUSE The push to operate like a ‘business’ • Same pressures as for profit companies ‐
p
p
p
if not more!
• Economy
• Social • Government And still find ways to fulfill your original mandate …
IN‐HOUSE OR OUT‐HOUSE Limited resources ‐ $$ and People • Optimizing resources
• Hire the right people • Internal – full time, part time, occasional • External – advisors, consultants, service providers • Retain the best people
• ‘Best / most important’ asset • Legal & government obligations • Optimize time and skills (yours & others) • How to make the most impact with limited time & attention • Delegate – internally, externally ©
9
IN‐HOUSE OR OUT‐HOUSE Rules of thumb • Always remember … • When hiring outside consultants or service providers
When hiring outside consultants or service providers
• Experts are experts in their field • But YOU know your business best
• Experts ADVISE. YOU make the decision. • Be clear on expectations
p
/
p
g g
• Responsibilities / scope of engagement
• Deliverables with associated timelines
• Costs – fixed & variable
• ‘Extras’ / Contingencies
• Reporting IN‐HOUSE OR OUT‐HOUSE Limited resources ‐ $$ 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
©
10
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?
©
11
• 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
p
community group
©
12
Social Enterprise ‐ a business that is set up to drive revenue to community based initiatives
©
13
This is NOT simple!
This is NOT simple!
©
14
Simple Social Enterprise
Simple. Social. Enterprise
SIMPLE
•fundraising
f d ii
•business management
•logistics
•consumer user experience
•consumer user experience
•reporting
©
15
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 costs
g
g
•vested interest from distribution partners who are social entrepreneurs.
©
16
Let technology do the h l
d h
heavy lifting
©
17
35
©
18
©
19
Methodology
• crowdfunding, p2p
crowdfunding p2p finance, and microfinance
finance and microfinance
• crowdsourcing and volunteerism. • distributed supply chain systems
• community value over shareholder value ©
20
David Geertz
• [email protected]
• 1‐778‐988‐4755
• @sokap1
©
21
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.
©
22
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
Companies
i
• First hybrid social enterprise structure in
Canada
Unique Features of C3s
1. Must have a Community Purpose
p
is broadly
y defined
• “Communityy Purpose”
– 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 the
group of persons related to the C3
©
23
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 directors
©
24
Unique Features of C3s (cont’d)
3. Dividends
pp
by
y shareholders holding
g
• Must be approved
voting shares
• Total of all dividends in a year cannot
exceed the total of:
profits,, and
a)) 40% of the C3s annual p
b) any unused dividend amounts from
previous years.
Unique Features of C3s (cont’d)
3. Dividends (cont’d)
p
no limits on dividends declared
• Exemption:
on 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
©
25
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
q
must
• On dissolution,, the liquidator
distribute all or 60% of the C3s
distributable assets to one or more
qualified entities
©
26
Unique Features of C3s (cont’d)
6. Reporting
•
produce annual financial
Must p
statements
•
Must file normal annual corporate
maintenance documents
•
publish a community
y contribution
Must p
report annually
Unique Features of C3s (cont’d)
6. Reporting (cont’d)
• Community Contribution Report must disclose:
a) 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
©
27
Unique Features of C3s (cont’d)
d) the remuneration and position held of each person
who made more than $75
$75,000
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 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 Act
©
28
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
©
29
Potential Uses
1. Stand alone social purpose business
•
people
p who want
Owned byy one or more p
to 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
©
•
p
an
Used byy a charityy to operate
unrelated business
•
CRA has stated that where an NPO
incorporates a C3 and holds shares of a
taxable subsidiary, this will not, in itself,
cause the
th NPO tto llose itits ttax-exemptt
status
30
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
©
31
Important factors to consider when
choosing
g board members and how to
protect your NPO from financial
irregularities
Rosanne Walters Terhart, CA, CBV, CFE, Senior Manager
J
January
2014
SPEAKER’S BIOGRAPHY
Rosanne Walters Terhart, CA, CBV, CFE, Senior Manager
Rosanne iis a Ch
R
Chartered
t dA
Accountant,
t t C
Certified
tifi d F
Fraud
dE
Examiner
i
and
d Ch
Chartered
t d
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.
©
rterhartbdo.ca
Direct: 604 646 4381
Rosanne has provided expert witness testimony for civil and criminal trials in
the Supreme Court of British Columbia. She has also acted as a courtappointed special referee.
600 Cathedral Place
925 West Georgia Street
Vancouver, BC V6C 3L2
Tel: 604 688 5421
Fax: 604 688 5132
www.bdo.ca
Roseanne iis the
R
h P
President
id
off the
h V
Vancouver Ch
Chapter, C
Certified
ifi d F
Fraud
d
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.
32
NPO - BOD
Outline
• Mandate and challenges
g of the NPO
• Board responsibilities
• Best practices for choosing a board
• Fraud in the NPO Environment
• How to protect your NPO
• Fraudster 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
©
33
NPO - BOD
NPO Challenges
- Environment of trust
- 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
Board Responsibilities
• Carryy out the mission
- 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
©
34
NPO - BOD
Board Responsibilities
• Manage
g funds effectivelyy
- 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
g
of financial risk
- Management
- 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.
• Have
Ha e the
they done their research?
©
35
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.
• How
Ho have
ha e they
the sho
shown
n a passion for the organi
organization?
ation?
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.
benefits
• Why do they want to serve?
©
36
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,
meetings NPO acti
activities
ities 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 what
hat ways
a s has the board member demonstrated
community involvement in other ways?
©
37
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
responsibilities.
responsibilities
•
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
Butt remember that they
the are their to assist in the
governance of the organization and not to provide services
for free.
©
38
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
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 organization
organi ation and not for the financial gain of
themselves or others.
©
39
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
responsibility
responsibilit
• 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
©
40
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 audit
a dit or re
review
ie
- 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
Restrict
i access to b
bank
k accounts and
d cheques
h
Do not rely on the financial summaries prepared internally
Be aware and involved
41
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,
competitors.
©
42
NPO - BOD
Perpetrators - Statistics
I id
Insiders
Frequency
Median Losses
Employee
Position
41.6%
$ 60,000
Manager
37.5%
$182,000
Owner / Executive
17.6%
$573,000
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
©
43
NPO- BOD
The Fraud Triangle
OPPORTUNITY
Weak internal controls or
ability to override controls
FRAUD
NEED / PRESSURE
Employee needs funds for
lifestyle or habits
RATIONALIZATION
Employee 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?
©
44
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
Three
Major
M j Classifications
Cl ifi i
Scheme Type
Frequency
Median Losses
Asset Misappropriation
87%
$ 120,000
Corruption
33%
$ 250,000
8%
$1,000,000
Financial Statement Fraud
©
45
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
9
50,000
Payroll Schemes
NPO - BOD
Most Frequent Scheme
• Corruption and billing
schemes posed the
greatest risk, more than
50% of the cases of fraud
in Canada
©
46
NPO - BOD
Asset Misappropriation
Billing Schemes
• Organization pays for services or items that it does not
need
• Accomplished by:
g up
p sham company
p y
- Setting
- 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 documents
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
©
47
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
- 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
• Know who the suppliers are
• Perform proper due diligence of suppliers
©
48
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
periodically
• Review cheques after they have cleared the bank for
payees, amounts and signatures
©
49
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
©
50
NPO - BOD
Detection - Statistics
Tips
p
43.3%
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
Reporting
i h
hotlines
li
Be aware and ask questions
51
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
y
g unusual
• 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 surveillance,
Video
ill
perception
i off d
detection
i
Fraud training
Consider insuring against dishonesty
- fidelity insurance
52
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 organization
What
i i d
do once iit was d
detected?
d?
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
©
53
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
- 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 organization
• Friend
F i d was only
l person paid
id as consultant
l
• Friend’s invoices lacked detail
• Journal entries booked at year end
©
54
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
• No
N chance
h
off civil
i il recovery – money gone
• Both individuals pleaded guilty after forensic report
prepared
©
55
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
$1,000
000 to each pay
paycheque
• Fraudulent Disbursements - Bookkeeper forged signatures
of directors, wrote cheques to herself
©
56
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
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
©
57
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
Re-submitted
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?
©
58