If that’s really true, then why are are nonprofit organizations involved in almost 10 percent of all fraud cases reported in the study?

We often let our desire to trust other people cloud our judgment. Especially people we hired personally and have spent years building relationships with Monday through Friday. Deep down, we all believe we’re exceptional judges of character.

And that’s when it happens. 

If the most important fraud control in place in your organization is the ability to judge character in the people you hire, you may already be a victim.

If you’re concerned that you may be the victim of a fraud, or want more information on preventing fraud, we can help.

Nonprofit boards had begun to change their focus, but not enough to stop the continued reports of fraud, misuse of assets, and excessive compensation for top executives.  The result was increased public scrutiny, new legislation, and the most significant changes to Form 990 in over 25 years. Those changes effectively required the board of directors to take responsibility for the oversight and governance of their organizations.

Although the fundamental principles of governance have not changed, governance practices have been completely redefined as boards have become more proactive in protecting the mission of their organizations by ensuring compliance with legal, financial, and ethical standards, and monitoring the progress and overall performance of their organizations. Time will tell if the “new” governance paradigm will protect nonprofit organizations from even more burdensome regulation that will divert already limited resources from the mission.

Employer Responsibility. An “applicable large employer,” defined as an organization that employs at least 50 full-time employees during the preceding calendar year, that does not offer coverage to all of its full-time employees, or offers coverage that does not meet certain criteria is subject to an excise tax penalty.

Maintaining Existing Coverage. Employers will be able to avoid certain of the law’s requirements by maintaining the same coverage for their employees after the effective date of the law (March 23, 2010). But keep in mind that at this point, it’s not clear whether minor changes in coverage, even those dictated by insurance companies, will affect the determination that the same coverage has been maintained. These issues will be clarified in future legislation.

Employer Tax Credits. The new law provides for certain tax credits designed to increase levels of health insurance coverage. Tax-exempt organizations would get a 35% credit against payroll taxes.

FSA/HSA/HRA Restrictions.Starting in 2011, employees can no longer receive pre-tax reimbursements from their FSA/HSA/HRA account for non-prescription over-the-counter medications.  In addition, the excise tax on non-qualified HSA withdrawals increases from 10 percent to 20 percent.  Starting in 2013, employee contributions to FSAs will be capped at $2,500 annually, adjusted each year based on the consumer price index.

Employee Reporting. The new law requires employers to disclose on each employee’s Form W-2 the value of the employer-sponsored coverage provided to that employee.

Information Reporting.The new law also changes several tax provisions completely unrelated to health care. One of the most significant changes requires organizations to file Form 1099 for all payments aggregating $600 or more in a calendar year to a single payee, including corporations.

So what can churches do to weather this environment? Here’s a few suggestions:

1. Don’t abandon your mission, and certainly don’t abandon your message. Despite this economy, I believe (and have seen) that people still want to give generously to causes they are passionate about. The problem caused by the economy is that more nonprofit organizations are providing more services to more people in need with less available funding. That’s why it’s so important to trumpet a compelling vision to your contributors. There are simply more options for donors to consider, and with limited resources, they give to causes they are the most passionate about.
2. Communicate, communicate, communicate. Churches (and lots of other organizations) make the mistake of not wanting to communicate negative financial trends and results. But if you don’t communicate, how will your contributors know there’s a need? Many churches also make the mistake of talking about money only when the numbers are down. Generosity is ultimately a spiritual issue not a financial one, and that message is lost if you only talk about money in a bad economy.
3. Rethink budgets. Churches are generally very slow to make difficult decisions about (i.e. cutting) budgets, minstries, and staff. The line between faith and stewardship is often very faint, but in a giving environment like we’re experiencing now, churches must consider the efficiency of their ministries. When giving is up year after year after year, churches often add a little more “flair” to ministries than is really needed and let certain ministries linger on a little longer than they should. Spend some time thinking strategically about your ministries in light of your mission and your investment in those ministries, and you might be surprised what you find.

The economy we’ve been dealt presents its share of challenges for churches and ministries, but there are opportunities to impact the quality and direction of your ministries. And who knows – you might even find youself in the 9% next year.

If we can be of any help or answer any questions as you wrestle through these issues, please don’t hesitate to call me.

But when was the last time your board took a look in the mirror at it’s own effectiveness?

Even the most effective boards can lose their “edge” over time, especially volunteer boards whose membership and leadership changes each year.  Many nonprofit boards have adopted the best practice of performing an annual self-assessment.  The self-assessment process can be very difficult, especially if there has not been a consistent pattern of evaluating the board’s performance in the past.

Consider the following items, as you develop a self-assessment checklist. Does the board…

1. Periodically align the organization’s activities with the organization’s mission (based on Form 1023′s exempt purpose – approved by the IRS in the determination letter)?

2. Actively participate in fundraising? Describe how every member participates? Monetarily and nonmonetarily?

3. Support/evaluate the chief operating officer? Describe.

4. Communicate strategically and effectively with each other? Describe candid discussion policies.

5. Determine how each member represents the organization? Who communicates what to the public? How often is the mission and accomplishments communicated to the public?

6. Annually review compliance with laws and regulations affecting the tax-exempt organization?

7. Have a short and long-term financial strategy?

8. Explain how financial statements and other financial data are used to monitor operating results of organization.

This is a short list of potential considerations. You might consider reviewing BoardSource’s governance series to determine your board’s effectiveness and governance responsibilities. You might also consider having specialists provide other considerations as you develop a personalized assessment. Good luck.

In October 2008, the IRS sent 400 letters to colleges and universities requesting detailed information about executive compensation and business activities. Now the IRS is considering expanding its investigation to include endowment investments.

Although schools are not required to respond to the inquiries, not doing so could invite further scrutiny by the IRS, or even an audit.

As quoted in a recent New York Times article, IRS commissioner Douglas H. Shulman said, “Universities are really part of a rapidly evolving sector, and as sectors evolve and the economy evolves, we’re going to periodically take a hard look.”

If the IRS finds that certain colleges and universities have avoided paying taxes on unrelated business income, my guess is that it won’t take the IRS long to expand the scope of its investigation to include private schools.  How will your institution respond?

If you’ve got questions about unrelated business income, take a look at this post.

So what exactly is transparency?  It’s just honest communication, right?  Not so fast.

Chris Freeland, who is a pastor at McKinney Memorial Bible Church, wrote in his blog about the difference between honesty and transparency.

“Honesty” means I choose the topic, and speak honestly about it. . . “Transparency” involves honesty, but the two words aren’t synonymous.  Transparency is more than pervasive honesty; it’s open and honest about everything.

That’s the standard the IRS has called for, and it’s a high standard to achieve.  But don’t the communities served by nonprofit organizations and the people who support them deserve that kind of accountability?

The redesigned 990 consists of an 11-part core form required for all organizations that file a 990, with several additional schedules to be completed based on certain requirements.  Some of the most significant changes to the new 990 are the required disclosures related to governance and compensation of officers, directors and key employees.

Because of the new reporting requirements, many organizations will need to reevaluate their overall governance policies and procedures, as well as the composition and responsibilities of the board of directors.  In some cases these changes will be significant and will require considerable time and resources to implement. 

Through the revised form, the IRS is effectively imposing a new standard of governance on nonprofit organizations.  Don’t wait until it’s time to file your 990 to consider how these changes will affect your organization. For more information see the IRS website and one of our previous posts.