Anyone…at least that is how one should think when analyzing fraud risks.

Fraud is a hot topic. If you don’t think so ask someone who used to work for Enron or invested in Madoff’s investment company, they might change your mind. But, because of instances like these, people often think of fraud in large terms, and the mention of the words carries a lot of weight; when very often fraud occurs in all sizes and forms.

But, who is likely to commit fraud? Most people use what is commonly known as the fraud triangle to identify areas where one can commit fraud. The three criteria are Pressure/Incentive, Opportunity, and Rationalization.

The pressure/incentive trait is common with performance based jobs where there is motivation for employees to record false sales to meet sales/performance quotas or up their commission, or other incentive pay.

Opportunity rears its ugly head when an individual has too much control over one key process in a business. Let’s say a cashier at a bank did not have to reconcile the cash drawer at the end of the day. The “opportunity” is there for cash to be stolen without any knowledge of it being gone.

A big one in today’s economy is rationalization. This is commonly referred to as the “I deserve this,” mentality. Where an individual develops a frame of mind where they can justify their actions and commit the fraud even though it is outside their typical ethical guidelines. For example, the company is generating large revenue streams, but an employee needs money to pay for his kid’s summer baseball league; this employee could find themselves thinking “They won’t miss this money, and I can’t say no to my child.”

Now let’s not confuse fraud with honest mistakes, errors, or plain ignorance; there is a difference. Fraud is defined as “intentional” deception…intentional being the key word.

Stay tuned as we post methods to address these instances and help you to minimize fraud in your business.

The National Association of Church Business Administration has organized an event to celebrate the power of peer-learning to address the increasing complexity of running the business of a church in contemporary society. 

Scrutiny of non-profits, including churches, has increased in recent years and has magnified with the current condition of the economy. It is even more important during these times to run the business of a church properly.  Honest mistakes and inadequate safeguards can expose churches to many different negative outcomes. This event will provide an opportunity for leaders from different sizes of churches to meet with each other in a training session format to learn from each other how to manage some of these current challenges.

Debbie Miller, secretary of the Greater Kansas City Chapter of NACBA said “Churches need to be the example to our communities in doing things right and with excellence.” Phil Martin, NACBA’s deputy CEO has also made the point that most church leaders do not get formal training in business administration. With these facts in mind, Church Administration Day is a chance for larger churches to reach out to smaller churches that may not even have an administrator. 

The information above was summarized from the article “Complexity of congregational life inspires first annual event for church administration”, which can be found at the following website: http://www.nacba.net/cad/.

For locations and contact information for regional training events:
http://www.nacba.net/cad/cad_locations.htm

For contacting a NACBA chapter in your area:
http://www.nacba.net/Structure/chapterlst.htm

For more information on National Church Administration Day:
http://www.nacba.net/cad/

For information on the National Association of Church Business Administration:
http://www.nacba.net/index.html

With unemployment nearing the double digits, there is a large population of professionals in the marketplace. You might have seen the news cast that played on NBC this Wednesday the 23rd (click here).

One thing to know is if you have any professionals donate services that you would normally have to pay for you should be recording that time as an “in-kind” contribution. FASB states that if the services donated (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation.

Examples to watch for are …. Read the rest of this entry »

The American Society of Association Executives (ASAE) published the following information in a recent alert to members. This should be of high interest to all tax-exempt organizations.

Sen. Chuck Grassley (R-IA), ranking member of the Senate Finance Committee, has filed two amendments to the health care reform bill introduced by Senate Finance Chairman Max Baucus (D-MT) that directly impact tax-exempt organizations. These amendments were filed along with more than 500 others before the end of last week, and are being considered in the markup of the Baucus bill that got underway Sept. 22.

Read the rest of this entry »

As discussed in “Unconditional Promises to Give” post, promises to give can be unconditional or conditional. Conditional promises to give come with donor-imposed conditions. If the condition is not met, the donor is not obligated to fulfill the promise to give. If the donor has already fulfilled the promise but the condition is never met, the donor has a right to have the assets returned to them.

Conditional promises to give are recognized only when the conditions are satisfied. Therefore, no revenue or receivable should be recognized at the time the promise is received. If any assets are received prior to the conditions being met, the assets should be accounted for as a refundable advance (liability). Once the condition is met, the liability is removed and revenue is recognized.

Additional disclosures must be made regarding promises to give. When disclosing conditional promises to give, you should disclose the following:

1. the total of the amounts promised; and
2. a description and amount for each group of promises having similar characteristics, such as promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date. Read the rest of this entry »

A promise to give is a written or oral agreement to contribute cash or other assets to another entity. To be recognized in GAAP financial statements, you must have sufficient evidence that a promise to give was made and received. Sufficient evidence must be in the form of verifiable documentation such as a pledge card or written agreement. Oral promises to give may be substantiated by tape recordings, written registers or other means that permit verification.        

Promises to give can be unconditional or conditional. Unconditional promises to give are exactly that: unconditional (no strings attached). Once received, they can be used toward the ongoing operations or mission of the not-for-profit organization. 

The timing of recognition of contribution revenue or receivable depends upon the promise to give being unconditional or conditional. Unconditional promises to give are recognized when received, even if the donor restricts the promised contribution for use in a future period and even if the promise will not be paid until a future period. If the promise to give is restricted for use in a future period or won’t be paid until a future period, it should be reported as restricted support, either temporary or permanent. 

Contributions received should be measured at their fair values.  If the promise is expected to be collected in less than a year, it is measured at net realizable value, which in most cases would be the face value net of any estimated uncollectible amount. If the promise is expected to be collected after one year, the fair value should be based on future cash receipts, discounted at a rate “commensurate with the risks involved.”  Basically, the discount rate should be based on the same criteria that would be used for trade receivables.  The entity should consider the following factors:

1. when the receivable is expected to be collected;
2. the creditworthiness of the other parties;
3. the entity’s past collection experience;
4. the entity’s policies concerning the enforcement of promises to give;
5. expectations about possible variations in the amount or timing of the cash flows; and
6. other factors concerning the receivable’s collectibility.

Additional disclosures must be made regarding promises to give. When disclosing unconditional promises to give, you should disclose the following:

1. the amount of promises receivable in less than one year, in one to five years, and in more than five years; and
2. the amount of the allowance for uncollectible promises receivable.

 Examples

 Unconditional Disclosure 1:

Unconditional promises to give are recorded as receivables and revenue when received. The Entity distinguishes between contributions received for each net asset category in accordance with donor-imposed restrictions. Pledges are recorded after being discounted to the anticipated net present value of the future cash flows.

              Pledges are expected to be realized in the following periods:

                                                                                                  20X1                20X0     

                    In one year or less                                                 $  1,438,547     $   1,313,217
                    Between one year and five years                                 1,970,255          1,780,764
                                                                                                 3,408,802          3,093,981
                    Less:
                        Allowance for uncollectible pledges                            (969,036)          (717,538)
                        Discount, at 6%                                                     (387,800)          (324,867)
                                                                                             $  2,051,966     $   2,051,576

Unconditional Disclosure 2:

The pledges receivable consist of operating and capital project fund-raising campaigns. At June 30, 20X1, all pledges receivable are expected to be collected during the next year. Management has determined that the pledges receivable are fully collectible; therefore, no allowance for uncollectible accounts are considered necessary at June 30, 20X1.

For more information about conditional promises to give, watch for my next post.

Mission Accountable is pleased to present another guest author, J. Daniel Beirute, an attorney serving churches and ministries across the U.S.

Internal Revenue Code section 7611, also referred to as the Church Audit Procedures Act, governs attempts by the IRS to audit a church. According to this law, the IRS may only initiate a tax inquiry of a church if the IRS’s Director of Exempt Organizations Examinations reasonably believes that the organization: (a) may not qualify for federal income tax exemption; or (b) may not be paying tax on unrelated business or other taxable activity.

The IRS may arrive at this “reasonable believ” regarding a church’s activities from information found in sources such as a new newspaper or magazine articles or ads, television and radio reports, Internet web pages, voters guides created and/or distributed by the church, tax returns filed by the church, and information provided to the IRS by informants or other agencies.

These rules do not prevent the IRS from requesting information from a church which does not pertain primarily to the church’s tax status or liability; which pertains to criminal investigations or a church’s failure to file a tax return; of which pertains to donors to the church.

Contact Dan Beirute if your organization receives any inquiry from the IRS.

In 1984 Congress enacted the Church Audit Procedures Act providing churches with important protection and guidelines relating to an IRS audit. Section 7602 of the tax code provides the authority under which IRS may examine individuals and organizations. Section 7611 of the tax code provides important protection for churches regarding IRS inquiries and tax examinations.

What is a church tax inquiry? An IRS inquiry determines:

1. Does the church qualify for tax exemption?

2. Is the church involved in an unrelated business or trade?

3. Is the church involved in other activities subject to tax?

If the IRS believes that the church may have activities that jeopardize the tax-exempt status, or involved in unreported taxes, then the IRS may proceed with certain inquiries.

How does the IRS proceed with an inquiry?  Read the rest of this entry »

Cash and cash equivalents are reported on the balance sheet of an organization. Cash generally consists of cash on hand (petty cash), available funds at financial institutions, and other items such as negotiable money orders and checks. Cash equivalents consist of highly liquid investments such as certificates of deposit and money market accounts. These accounts are considered to be highly liquid if they have an initial maturity of three months or less.

To be classified as a current asset, cash and cash equivalents must be readily available to pay current obligations and free from any contractual restrictions. Cash that is restricted should be segregated from the general cash and cash equivalents category. Cash is considered to be restricted if it is designated (by donor or the Board of Directors) to be used for a specific purpose. For example, if you have entered into a capital campaign to raise money for a new building, any cash received for that purpose would be restricted. This means that this cash can only be spent on costs incurred for the new building and cannot be spent for any other purpose. 

The restricted cash is classified on the balance sheet either as a current asset or a noncurrent asset – depending on the relationship to the asset for which the funds are restricted. If the cash is restricted for property and equipment, the restricted portion is classified as a long-term asset.

Restrictions on cash must also be disclosed in the notes to the financial statements. You must disclose the amount of restricted cash and the purpose for which it is restricted. The following example shows the balance sheet presentation and the disclosure for cash restricted for current and noncurrent purposes.

At December 31, 2008, the Company has $1,500,000 of restricted cash of which $900,000 is classified as a noncurrent asset. The restricted cash serves as collateral for an irrevocable standby letter of credit that provides financial assurance that the Company will fulfill its obligations with respect to a litigation settlement discussed in Note [X]. The cash is held in custody by the issuing bank, is restricted as to withdrawal or use, and is currently invested in money market funds. Income from these investments is paid to the Company. The current portion of restricted cash of $600,000 represents the amount of current liability for amounts billed to the Company for certain repairs agreed to be made under the settlement agreement.

Churches are classified as a charitable organization under the Internal Revenue Service code. Despite a number of references to the word “church”, the tax code provides no definition, primarily because of interfering with the constitutional guaranty of religious freedom or encouraging abuse.

The IRS has attempted to fill this void by developing a list of 14 criteria that characterize a church. In determining whether an organization can be defined as a church, the IRS considers the following operational and organizational activities:

Read the rest of this entry »