not-for-profit organizations: thinking outside the box€for‐profit organizations thinking outside...

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

© 1

CPA British ColumbiaNot‐for‐Profit OrganizationsNot‐for‐Profit Organizations

Thinking Outside the Box!

Bill Cox, CPA, CA

Partner BDO Canada LLPPartner, BDO Canada LLP

January 2014

Schedule and Speakers for the morning

• Bill Cox, BDO• What’s new with the CRAWhat s new with the CRA

• Outsourcing financial functions

• David Geertz, SoKap• Social capital/fundraising

• Brendan Burns, Miller Thomson• Community Contribution Companies

R W lt T h t BDO• Rosanne Walters‐Terhart, BDO• Fraud and Board governance

• Short wrap‐up – out by 10:00am

© 2

NOT FOR PROFITS –Canada Revenue Agency

What’s New?

CRA Non‐Profit OrganizationRisk Identification Project

• ...not much new

© 3

CRA Non‐Profit OrganizationRisk Identification Project

• Audit of 1440 NPOs 2010 – 2013Audit 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‐profits that do notAlso concern over non profits 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 l ti d• Mergers, amalgamations and consolidations

• Endowments, 10 year gifts, perpetual trusts

• Giving a gift back

© 4

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

© 5

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 plannedcircumstances (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

© 6

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 h d h f d ll b d f ( hahead the funds will be used for .......(other good cause/project at NPO). Better not to offer funds back.

Notes

© 7

NOT FOR PROFITS –TO ‘IN HOUSE’ OR ‘OUT HOUSE’?TO IN‐HOUSE OR OUT‐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

© 8

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 CEO Executive Director General Manager or whatever• As 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

© 9

IN‐HOUSE OR OUT‐HOUSE The push to operate like a ‘business’

• Same pressures as for profit companies ‐ if not p p pmore!

• 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

© 10

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

• Responsibilities / scope of engagementp / p g g

• 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

© 11

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?

© 12

• 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 pcommunity group

© 13

Social Enterprise ‐ a business that is set up to drive revenue

to community based initiatives

© 14

This is NOT simple!This is NOT simple!

© 15

Simple Social EnterpriseSimple. Social. Enterprise

SIMPLE

f d i i•fundraising

•business management

•logistics

•consumer user experience•consumer user experience

•reporting

© 16

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 costsg g

•vested interest from distribution partners who are social entrepreneurs.

© 17

h l d hLet technology do the heavy lifting

© 18

35

© 20

Methodology

• crowdfunding p2p finance and microfinance• crowdfunding, p2p finance, and microfinance

• crowdsourcing and volunteerism.

• distributed supply chain systems

• community value over shareholder value

© 21

David Geertz

• [email protected]

• 1‐778‐988‐4755

•@sokap1

© 22

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.

© 23

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 iCompanies

• First hybrid social enterprise structure in Canada

Unique Features of C3s

1. Must have a Community Purpose

• “Community Purpose” is broadly definedy p y– 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 theor to a segment of society broader than the group of persons related to the C3

© 24

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


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 directorsNo residency requirements for directors

© 25


3. Dividends

• Must be approved by shareholders holding pp y gvoting shares

• Total of all dividends in a year cannot exceed the total of:

a) 40% of the C3s annual profits, and) p ,

b) any unused dividend amounts from previous years.


3. Dividends (cont’d)

• Exemption: no limits on dividends declared pon 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

© 26


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


5. “Asset Lock” on Dissolution

• On dissolution, the liquidator must , qdistribute all or 60% of the C3s distributable assets to one or more qualified entities

© 27


6. Reporting

• Must produce annual financial pstatements

• Must file normal annual corporate maintenance documents

• Must publish a community contribution p yreport annually


6. Reporting (cont’d)• Community Contribution Report must disclose:

a) description of how the C3s activities benefiteda) 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

© 28


d) the remuneration and position held of each person who made more than $75 000who made more than $75,000

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 C3sC3s 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 ActIncome Tax Act

© 29

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

© 30

Potential Uses

1. Stand alone social purpose business

• Owned by one or more people who want y p pto 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

• Used by a charity to operate an y y punrelated business

• CRA has stated that where an NPO incorporates a C3 and holds shares of a taxable subsidiary, this will not, in itself,

th NPO t l it t tcause the NPO to lose its tax-exempt status

© 31

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

© 32

Important factors to consider when choosing board members and how to gprotect your NPO from financial irregularities

Rosanne Walters Terhart, CA, CBV, CFE, Senior ManagerJ 2014January 2014

SPEAKER’S BIOGRAPHY

Rosanne Walters Terhart, CA, CBV, CFE, Senior Manager

R i Ch t d A t t C tifi d F d E i d Ch t d Rosanne is a Chartered Accountant, Certified Fraud Examiner and Chartered 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.

Rosanne has provided expert witness testimony for civil and criminal trials in the Supreme Court of British Columbia. She has also acted as a court-appointed special referee.

R i h P id f h V Ch C ifi d F d

rterhartbdo.caDirect: 604 646 4381

600 Cathedral PlaceRoseanne is the President of the Vancouver Chapter, Certified Fraud 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.

925 West Georgia StreetVancouver, BC V6C 3L2Tel: 604 688 5421Fax: 604 688 5132www.bdo.ca

© 33

NPO - BOD

• Mandate and challenges of the NPO

Outline

g

• Board responsibilities

• Best practices for choosing a board

• Fraud in the NPO Environment

• How to protect your NPO

• Fraudster profile and red flagsFraudster 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

© 34

NPO - BOD

- Environment of trust

NPO Challenges

- 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

• Carry out the mission

Board Responsibilities

y

- 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

© 35

NPO - BOD

• Manage funds effectively

Board Responsibilities

g y- 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

- Management of financial riskg

- 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.

Ha e the done their research?• Have they done their research?

© 36

NPO - BOD


Step 2 – Share the passion

• The candidate must believe in this mandate and be committed to effectively carry out the mandate of the organization.

Ho ha e the sho n a passion for the organi ation?• How have they shown a passion for the organization?

NPO - BOD


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 prestige or other personal benefits.

• Why do they want to serve?

© 37

NPO - BOD


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 NPO acti ities and committee preparation for meetings, NPO activities and committee meetings.

• Ask candidate to estimate the time they can dedicate and assess if this is sufficient.

NPO - BOD


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 hat a s has the board member demonstrated • In what ways has the board member demonstrated community involvement in other ways?

© 38

NPO - BOD


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 responsibilitiesresponsibilities.

• Ask candidate to describe skills and experience that they are bringing to the organization.

NPO - BOD


Step 7 – Service individuals

• Consider selecting individuals who are service professionals. They bring knowledge and experience to the board.

B t remember that the are their to assist in the • But remember that they are their to assist in the governance of the organization and not to provide services for free.

© 39

NPO - BOD


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 relationship with customers Consider potential 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


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 organi ation and not for the financial gain of for the organization and not for the financial gain of themselves or others.

© 40

NPO - BOD


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 responsibilitresponsibility

• 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

© 41

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 a dit or re ieFinancial statement audit or review

- 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 i b k d h• Restrict access to bank accounts and cheques

• Do not rely on the financial summaries prepared internally

• Be aware and involved

© 42

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, donors, members or program participants, competitors.

© 43

NPO - BOD

Perpetrators - Statistics

I id

Position Frequency Median Losses

Employee 41.6% $ 60,000

Manager 37.5% $182,000

Owner / Executive 17.6% $573,000

Insiders

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• No criminal history

© 44

NPO- BOD

The Fraud TriangleOPPORTUNITY

Weak internal controls or ability to override controls

FRAUDFRAUD

NEED / PRESSUREEmployee needs funds for

lifestyle or habits

RATIONALIZATIONEmployee 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?

© 45

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 M j Cl ifi i

Scheme Type Frequency Median Losses

Asset Misappropriation 87% $ 120,000

Corruption 33% $ 250,000

Financial Statement Fraud 8% $1,000,000

Three Major Classifications

© 46

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

Payroll Schemes 9 50,000

NPO - BOD

Most Frequent Scheme

• Corruption and billing schemes posed the greatest risk, more than 50% of the cases of fraud in Canada

© 47

NPO - BOD

Asset Misappropriation

Billing Schemes

• Organization pays for services or items that it does not need

• Accomplished by:

- Setting up sham company g p p y

- Purchasing unnecessary items or services- Purchasing items of personal nature

NPO - BOD


Billing Schemes – Prevention

• Zero-based budgeting

• Regular scrutiny of budget vs. actual• Consider source of the actual results presented

• Check actual expenditures to source documentsReview of bank statement and cancelled cheques• 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

© 48

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- 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• Question why certain suppliers are used

• Know who the suppliers are

• Perform proper due diligence of suppliers

© 49

NPO - BOD


Cheque Tampering

• Forged maker

• Forged endorsements

• Altered payee or amounts after cheque is signed

NPO - BOD


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 • Bank reconciliation procedure to scrutinize all cheques

periodically

• Review cheques after they have cleared the bank for payees, amounts and signatures

© 50

EMPLOYEE FRAUD


Cash Skimming

• Involves the taking of cash before it is entered in books

• Occurs in organizations where cash is used for payment

EMPLOYEE FRAUD


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

© 51

NPO - BOD

Detection - Statistics

Tips 43.3%p

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 i h li• Reporting hotlines

• Be aware and ask questions

© 52

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 unusualy g

• 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 ill i f d i• Video surveillance, perception of detection

• Fraud training

• Consider insuring against dishonesty- fidelity insurance

© 53

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 i i d i d d?• What did organization do once it was detected?• 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

© 54

EMPLOYEE FRAUD


How was it detected? • Management review/by accident, director looking up

information in general ledger and noticed unusual payments

Type of Scheme?Fraudulent Disbursement• 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


How booked?

• Consulting expenses

Red Flags?

• Friend frequently hanging around organizationF i d l id l• Friend was only person paid as consultant

• Friend’s invoices lacked detail

• Journal entries booked at year end

© 55

EMPLOYEE FRAUD


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


What did organization do?

• Contacted police

• Police seized Finance Manager’s computer and documents• Police recommended charges• Crown Counsel hired forensic accountant

N h f i il • No chance of civil recovery – money gone

• Both individuals pleaded guilty after forensic report prepared

© 56

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 $1 000 to each pay• Cheque Tampering - Bookkeeper added $1,000 to each pay-cheque

• Fraudulent Disbursements - Bookkeeper forged signatures of directors, wrote cheques to herself

© 57

EMPLOYEE FRAUD


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 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


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

© 58

EMPLOYEE FRAUD


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-submitted for civil proceedings, civil judgement, no recoveryRe 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?

not-for-profit organizations: thinking outside the box€for‐profit organizations thinking outside...

Documents