Tag Archives for " Nonprofit "

church theft
Jan 22

Preventing Church Theft: Tips and Best Practices

By Charles Hall | Asset Misappropriation

Church theft happens, and it’s not uncommon–though I wish it was.

Pastors, deacons, church members, priests, and even nuns steal. Yes, they do. Every time I see an article about this, I shake my head. But they are flawed human beings just like me. So theft happens in churches, synagogues, and other places of worship.

In this article, I explain why fraud is (more) common in the places you least expect. And I provide tips for preventing theft. 

church theft

Theft of Church Offerings

My mother gave me nickels and dimes to put in the offering plate as a kid, but I never thought about where they went. In my mind, maybe to God or Heaven. But no, they went to a church bank account to pay the expenses of our place of worship. And, thankfully, there were no thefts (that I know of).

But over the years, I’ve seen thefts from churches, synagogues, parishes, church schools, seminaries, campus ministries, relief agencies, and Bible colleges.

Why?

People are Flawed

As I said earlier, first, people are flawed, even religious folks. As I’m fond of saying, “Why is ‘Thou shalt not steal’ one of the Ten Commandments? Because people steal.”

Too Much Trust

Secondly, religious persons (and I’m one) tend to be too trusting. We think that because someone works for a ministry or a church-affiliated organization, they are always honest. While this is largely true, some religious people steal, especially when no one is paying attention to what they do. In other words, when there are no internal controls and no oversight.

Ironically, when religious bodies place too much trust in people, they tempt those pastors, priests, deacons, and others. Religious people usually don’t plan to steal but realize–after years of being in a position–they can. After all, no one is watching because trust is over-abundant. And since we can rationalize our actions, we do things we know we should not. No different than any other temptation.

Don’t Tempt Your People

Religious bodies do their people a favor by creating and maintaining proper internal controls. Yes, a favor. Temptation goes down because there are multiple eyes on the processes, as there should be.

I sometimes hear people say that a church is not a business, but a ministry, as though sound business practices are not necessary in a religious environment. My rejoinder is we need to be good stewards of the funds entrusted to us (funds that can be used for wonderful purposes). Ministries lose the trust of their contributors when theft occurs. So, churches need to institute sound internal controls. 

Church theft is common due to the nature of cash flowing into a place of worship. 

The Church Cash Problem

Most religious institutions receive cash contributions to support their missions. And that’s wonderful, but if you’re a fraud prevention guy like me, that’s problematic. Cash, especially physical currencies (like that received during church services), is easily stolen. So, all religious bodies need to review how cash comes into a church body to see if there are internal controls all along the way.

Monies coming in during church services, mail, or any other way need to make it to the bank account safely. So, consider how funds come into your places of worship or support organizations. And make sure multiple people are involved in the collection and deposit process, what we commonly refer to as segregation of duties.

For instance, multiple people (e.g., ushers or deacons) should count funds collected during a church service, and a count sheet should be signed by those present. Later, someone other than the count team should compare the count sheet to the bank deposit. Enter all contributions in the accounting software and periodically provide statements to those persons. The person making these bookkeeping entries should not be on the count team or have any access to cash. Why? The church bookkeeper could steal money but still make entries to the contributions software. Then, the contributor receives a periodic statement reflecting the amount given, but the money doesn’t make it into the church bank account.

In addition to considering regular church services receipts, think about those that are outside your normal processes. For instance, people might drop by the church during the week and provide a contribution to the bookkeeper. 

Church Cash Outflows

While theft of cash inflows is more common, funds can be stolen as they are disbursed. So, be sure you review your payment controls. Again, you want multiple people involved in the process. For example, the persons signing the checks should not be the person entering those transactions in the bookkeeping system. And it’s preferable for the person reconciling the bank account to not sign checks. Then, the person reconciling the bank statement can review the cleared checks for appropriate payees. 

Additionally, make sure your controls over credit cards are strong as well. Support (e.g., receipts) should be provided for each credit card charge, and the person using the card should not be the same person reviewing transactions for appropriateness. 

Obviously, religious bodies also need appropriate payroll controls to ensure those funds are paid to the right persons and in the correct amount.  

Church Theft

In summary, religious bodies need internal controls, just like any entity that receives and spends money. Placing too much trust in religious people is a mistake and can increase church theft. So, protect your church and your people by implementing sound internal controls for funds flowing into and out of your place of worship.  

Segregation of Duties
Sep 30

Segregation of Duties: How to Overcome

By Charles Hall | Auditing , Fraud

Segregation of duties is key to reducing fraud. But smaller entities may not be able to do so. Today, I tell you how overcome this problem, regardless of the entity’s size.

Segregation of duties

The Environment of Fraud

Darkness is the environment of wrongdoing.

Why?

No one sees us. Or so we think.

Fraud occurs in darkness.

In J.R.R. Tolkien’s Hobbit stories, Sméagol, a young man murders another to possess a golden ring, beautiful in appearance but destructive in nature. The possession of the ring transforms Sméagol into a hideous creature–Gollum.

And what does this teach us? That which is alluring in the beginning can be destructive in the end.

Fraud opportunities have those same properties: they are alluring and harmful. And, yes, darkness is the environment where fraud happens.

What’s the solution? Transparency. It protects businesses, governments, and nonprofits.

But while we desire open and understandable processes, our businesses often have just a few employees that perform the accounting duties. And, many times, no one else understands how the system works.

It is desirable to divide accounting duties among various employees, so no one person controls the whole process. This division of responsibility creates transparency. How? By providing multiple eyes to see what’s going on.

But this segregation of duties is not always possible.

Lacking Segregation of Duties

Some people says here are three key duties that must always be separated under a good system of internal controls: (1) custody of assets, (2) record keeping or bookkeeping, and (3) authorization. I add a fourth: reconciliation. The normal recommendation for lack of segregation of duties is to separate these four accounting duties to different personnel. But many organizations are unable to do so, usually due to a limited number of employees.

Some small organizations believe they can’t overcome this problem. But is this true? I don’t think so.

YouTube player

Here’s two easy steps to create greater transparency and safety when the separation of accounting duties is not possible.

1. Bank Account Transparency

First, consider this simple control: Provide all bank statements to someone other than the bookkeeper. Allow this second person to receive the bank statements before the bookkeeper. While no silver bullet, it has power.

Persons who might receive the bank statements first (before the bookkeeper) include the following:

  • A nonprofit board member
  • The mayor of a small city
  • The owner of a small business
  • The library director
  • A church leader

What is the receiver of the bank statements to do? Merely open the bank statements and review the contents for appropriateness (mainly cleared checks).

In many small entities, accounting processes are a mystery to board members or owners. Why? Only one person (the bookkeeper) understands the disbursement process, the recording of journal entries, billing and collections, and payroll.

Relying on a trusted bookkeeper is not a good thing. So how can you shine the light?

Allow a second person to see the bank statements.

Segregation of duties

Fraud decreases when the bookkeeper knows someone is watching. Suppose the bookkeeper desires to write a check to himself but realizes that a board member will see the cleared check. Is this a deterrent? You bet.

Don’t want to send the bank statements to a second person? Request that the bank provide read-only online access to the second person. And let the bookkeeper know.

Even the appearance of transparency creates (at least some) safety. Suppose the second person reviewer opens the bank statements (before providing them to the bookkeeper) and does nothing else. The perception of a review enhances safety. I am not recommending that the review not be performed. But if the bookkeeper even thinks someone is watching, fraud will lessen.

When you audit cash, see if these types of controls are in place.

Now, let’s look at the second step to overcome a lack of segregation of duties. Surprise audits.

2. Surprise Audits

Another way to create small-entity transparency is to perform surprise audits. These reviews are not opinion audits (such as those issued by CPAs). They involve random inspections of various areas such as viewing all checks clearing the May bank statement. Such a review can be contracted out to a CPA. Or they can be performed by someone in the company. For example, a board member.

Additionally, adopt a written policy stating that the surprise inspections will occur once or twice a year.

The policy could be as simple as:

Twice a year a board member (or designee other than the bookkeeper) will inspect the accounting system and related documents. The scope and details of the inspection will be at the judgment of the board member (or designee). An inspection report will be provided to the board.

Why word the policy this way? You want to make the system general enough that the bookkeeper has no idea what will be examined but distinct enough that a regular review occurs. 

Segregation of duties

Surprise Audit Ideas

Here are some surprise audit ideas:

  • Inspect all cleared checks that clear a particular month for appropriate payees and signatures and endorsements
  • Agree all receipts to the deposit slip for three different time periods
  • Review all journal entries made in a two week period and request an explanation for each
  • Inspect two bank reconciliations for appropriateness
  • Review one monthly budget to actual report (look for unusual variances)
  • Request a report of all new vendors added in the last six months and review for appropriateness

The reviewer may not perform all of the procedures and can perform just one. What is done is not as important as the fact that something is done. In other words, the primary purpose of the surprise audit is to make the bookkeeper think twice about whether he or she can steal and not get caught.

I will say it again. Having multiple people involved reduces the threat of fraud.

Segregation of Duties Summary

In summary, the beauty of these two procedures (bank account transparency and surprise audits) is they are straightforward and cheap to implement. Even so, they are powerful. So shine the light.

What other procedures do you recommend?

For more information about preventing fraud, check out my book: The Little Book of Local Government Fraud Prevention.

ASU 2018-08
Feb 02

ASU 2018-08: Conditional Contribution Recognition

By Charles Hall | Accounting and Auditing

In June of 2018, FASB issued ASU 2018-08: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.

Today I provide an overview of how this standard affects nonprofit revenue recognition. 

ASU 2018-08

ASU 2018-08: Nonprofit Contribution Recognition

The purpose of the standard is to provide guidance in regard to recognizing contributions in nonprofit organizations. This standard is conceptually consistent with Topic 606, Revenue from Contracts with Customers, which requires revenue to be recognized when performance obligations are satisfied. ASU 2018-08 requires contribution revenue recognition when conditions are met (see below).

Once ASU 2018-08 becomes effective (years ending December 31, 2019 for many nonprofits), nonprofits will recognize revenues in one of three ways:

  1. Exchange transaction
  2. Conditional Contribution
  3. Unconditional Contribution

The financial statement presentation of the revenue can be affected by the nature of the transaction. For example, there might be a conditional contribution and a donor restriction for the same monies. So contribution revenue will not be recognized until the barriers are satisfied (see below), but revenue will appear in with donor restriction or without donor restriction on the statement of activities, depending on the specifics of the transaction. 

1. Exchange transaction

If a nonprofit is paid based on commensurate value, then there is an exchange transaction. The nonprofit recognizes revenue as it provides the service or goods. Apply Topic 606, Revenue from Contracts With Customers, for these transactions. An example of an exchange transaction is a nonprofit is paid market rate for painting a local store.

ASU 2018-08 makes it plain that benefits received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider.

2. Conditional Contribution

A conditional contribution is one where: 

  • a barrier is present and
  • a right of return or right of release for the contributor exists

Barriers

The following are indicators of a barrier:

  • Recipient must achieve a measurable, performance-related outcome (e.g., providing a specific level of service, creating an identified number of units of output, holding a specific event)
  • A stipulation limits the recipient’s discretion on the conduct of the activity (e.g., specific guidelines about incurring qualifying expenses)
  • A stipulation is related to the primary purpose of the agreement (e.g., must report on funded research)

Recognize revenue when the barrier is overcome.

ASU 2018-08

Measureable, Performance-related Outcome

An example of meeting a measurable outcome would be if the donor requires serving meals to 1,000 homeless persons. Another example is a matching requirement.

Limited Recipient Discretion

An example of limited discretion would be a requirement to hire specific individuals to conduct an activity.

Stipulation Related to Grant's Primary Purpose

An example of a stipulation related to the agreement's primary purpose is a grant that requires filing an annual report of funded research. If the grantor requires repayment of the amount received should the report not be filed, then the requirement is a barrier. 

Questionable Barriers

Judgment is necessary to determine whether a requirement is a barrier.

For example, filing routine reports to a resource provider showing progress on a funded activity may be seen as routine and not a barrier. Goals or budgets where no penalty is assessed if the organization fails to achieve them are not considered barriers.

Are budgets an indicator of limited discretion? A line-item budget for a grant is often seen as a guardrail rather than a barrier. A June 2019 FASB Q&A states, “Thus, stipulations other than adherence to a budget (for example, the need to incur qualifying expenses) would normally need to be present for a barrier to entitlement to exist.” The Q&A goes on to say, “The unique facts and circumstances of each grant agreement must be analyzed within the context of the indicators to conclude whether a barrier to entitlement exists.”

Recognition of Contribution

Per ASU 2018-08 “Conditional contributions received are accounted for as a liability or are unrecognized initially, that is, until the barriers to entitlement are overcome, at which point the transaction is recognized as unconditional and classified as either net assets with restrictions or net assets without restrictions.”

3. Unconditional Contribution

If there are no barriers or if barriers have been overcome, the receipt is unconditional. There might still be a purpose or time restriction, resulting in the funds being classified as “With Donor Restrictions” until the restriction is satisfied. Recognize the revenue either as:

Effective Date 

A public company or a not-for-profit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market would apply the new standard for transactions in which the entity serves as a resource recipient to annual reporting periods beginning after June 15, 2018, including interim periods within that annual period. Other organizations would apply the standard to annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

A public company or a not-for-profit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market would apply the new standard for transactions in which the entity serves as a resource provider to annual reporting periods beginning after December 15, 2018, including interim periods within that annual period. Other organizations would apply the standard to annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.

Applicability

Per ASU 2018-08,Accounting for contributions is an issue primarily for not-for-profit (NFP) entities because contributions are a significant source of revenue for many of those entities. However, the amendments in this Update apply to all entities, including business entities, that receive or make contributions of cash and other assets, including promises to give within the scope of Subtopic 958-605 and contributions made within the scope of Subtopic 720-25, Other Expenses—Contributions Made.”

Cash overdraft
Jan 21

Cash Overdrafts: Negative Cash Accounting

By Charles Hall | Accounting

How should you account for cash overdrafts (also called negative cash balances) on a balance sheet and in a cash flow statement? There are different ways to do so. I explain those accounting methods below. 

It is year-end and your audit client has three bank accounts at the same bank. Two of the accounts have positive balances (the first with $50,000 and the second with $200,000). The third account has a negative cash balance of $400,000. Since a net overdraft of $150,000 exists, how should we present cash in the financial statements?

Cash overdraft

Cash Overdraft in Balance Sheet

In the balance sheet, show the negative cash balance as Cash Overdraft in the current liabilities. Or you can also include the amount in accounts payable.

If you are netting the three bank accounts, consider using the Cash Overdraft option. If you bury the overdraft in accounts payable, the financial statement reader may think, “there is a mistake, where is cash?” Using Cash Overdraft communicates more clearly. (The right of offset must exist in order to net bank accounts. The right of offset commonly exists for multiple bank accounts with one bank.)

Some companies have multiple bank accounts with multiple banking institutions. In such cases, the net balance of one bank might be positive and the net balance of the second bank might be negative. Then the company would reflect the positive balance as cash and the negative cash balance (of the second bank) as an overdraft.  

Suppose a company has bank accounts with two different banks and the net balance of the first bank is $1,350,000 and the net balance of the second bank is an overdraft of $5,000. Then show cash as one amount on the balance sheet ($1,345,000). The $5,000 is not material.

Cash Overdraft in Cash Flow Statement

Some companies do not include overdrafts in the definition of cash; instead, they include it in accounts payable. Consequently, the company treats the overdraft as an operating activity (change in accounts payable). So, the company includes the negative cash as a change in a liability in the operating section of the cash flow statement. (Some accountants treat overdrafts as a financing activity, but they clear quickly. Therefore, an operating activity classification is more appropriate.)

Alternatively, include the negative cash in the definition of cash (rather than in accounts payable). In doing so, you combine the cash overdraft with other cash (that with positive balances) in the cash flow statement. The beginning and ending cash–in the cash flow statement–should include the negative cash amounts.

FASB ASC 230-10-45-4 requires that the total amounts of cash and cash equivalents in the cash flow statement agree with similarly titled line items or subtotals in the balance sheet. If negative cash is included in the definition of cash, the cash captions in the statement of cash flows should be revised accordingly (e.g., Cash (Cash Overdraft) at end of year).

If the balance sheet contains a positive cash balance in assets and a cash overdraft in liabilities, provide a reconciliation at the bottom of the cash flow statement (or in a disclosure). In the reconciliation, show the composition of the balance–one line titled Cash, one line titled Cash Overdraft, and a total line titled Total Cash (Cash Overdraft)

One Other Consideration

If checks are created but not released by year-end, reverse the payment. Merely printing checks does not relieve payables. Payables are relieved when payment is made (checks are printed and mailed, or electronic payments are processed).

See my post about auditing cash.

nonprofit accounting
Jan 01

Understanding the New Nonprofit Accounting Standard

By Charles Hall | Accounting

Are you ready to implement FASB’s new nonprofit accounting standard? Back in August 2016, FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. In this article, I provide an overview of the standard and implementation tips.

Nonprofit accounting

New Nonprofit Accounting – Some Key Impacts

What are a few key impacts of the new standard?

  • Classes of net assets
  • Net assets released from “with donor restrictions”
  • Presentation of expenses
  • Intermediate measure of operations
  • Liquidity and availability of resources
  • Cash flow statement presentation

Classes of Net Assets

Presently nonprofits use three net asset classifications:

  1. Unrestricted
  2. Temporarily restricted
  3. Permanently restricted

The new standard replaces the three classes with two:

  1. Net assets with donor restrictions
  2. Net assets without donor restrictions

Terms Defined

These terms are defined as follows:

Net assets with donor restrictions – The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Net assets without donor restrictions – The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Presentation and Disclosure

The totals of the two net asset classifications must be presented in the statement of financial position, and the amount of the change in the two classes must be displayed in the statement of activities (along with the change in total net assets). Nonprofits will continue to provide information about the nature and amounts of donor restrictions.

Additionally, the two net asset classes can be further disaggregated. For example, donor-restricted net assets can be broken down into (1) the amount maintained in perpetuity and (2) the amount expected to be spent over time or for a particular purpose.

Net assets without donor restrictions that are designated by the board for a specific use should be disclosed either on the face of the financial statements or in a footnote disclosure.

Sample Presentation of Net Assets

Here’s a sample presentation:

Net Assets
Without donor restrictions
  Undesignated  $XX
  Designated by Board for endowment      XX
     XX
With donor restrictions
  Perpetual in nature      XX
  Purchase of equipment XX
  Time-restricted XX
XX
Total Net Assets $XX

Net Assets Released from “With Donor Restrictions”

The nonprofit should disaggregate the net assets released from restrictions:

  • program restrictions satisfaction
  • time restrictions satisfaction
  • satisfaction of equipment acquisition restrictions
  • appropriation of donor endowment and subsequent satisfaction of any related donor restrictions
  • satisfaction of board-imposed restriction to fund pension liability

Here’s an example from ASU 2016-14:

nonprofit statement of activities

Presentation of Expenses

Presently, nonprofits must present expenses by function. So, nonprofits must present the following (either on the face of the statements or in the notes):

  • Program expenses
  • Supporting expenses

The new standard requires the presentation of expenses by function and nature (for all nonprofits). Nonprofits must also provide the analysis of these expenses in one location. Potential locations include:

  • Face of the statement of activities
  • A separate statement (preceding the notes; not as a supplementary schedule)
  • Notes to the financial statements

I plan to add a separate statement (like the format below) titled Statement of Functional Expenses. (Nonprofits should consider whether their accounting system can generate expenses by function and by nature. Making this determination now could save you plenty of headaches at the end of the year.)

External and direct internal investment expenses are netted with investment income and should not be included in the expense analysis. Disclosure of the netted expenses is no longer required.

Example of Expense Analysis

Here’s an example of the analysis, reflecting each natural expense classification as a separate row and each functional expense classification as a separate column.

expenses by function and nature

The nonprofit should also disclose how costs are allocated to the functions. For example:

Certain expenses are attributable to more than one program or supporting function. Depreciation is allocated based on a square-footage basis. Salaries, benefits, professional services, office expenses, information technology and insurance, are allocated based on estimates of time and effort.

Intermediate Measure of Operations

If the nonprofit provides a measure of operations on the face of the financial statements and the use of the term “operations” is not apparent, disclose the nature of the reported measure of operations or the items excluded from operations. For example:

Measure of Operations

Learning Disability’s operating revenue in excess of operating expenses includes all operating revenues and expenses that are an integral part of its programs and supporting activities and the assets released from donor restrictions to support operating expenditures. The measure of operations excludes net investment return in excess of amounts made available for operations.

Alternatively, provide the measure of operations on the face of the financial statements by including lines such as operating revenues and operating expenses in the statement of activities. Then the excess of revenues over expenses could be presented as the measure of operations.

Liquidity and Availability of Resources

FASB is shining the light on the nonprofit’s liquidity. Does the nonprofit have sufficient cash to meet its upcoming responsibilities?

Nonprofits should include disclosures regarding the liquidity and availability of resources. The purpose of the disclosures is to communicate whether the organization’s liquid available resources are sufficient to meet the cash needs for general expenditures for one year beyond the balance sheet date. The disclosure should be qualitative (providing information about how the nonprofit manages its liquid resources) and quantitative (communicating the availability of resources to meet the cash needs).

Sample Liquidity and Availability Disclosure

The FASB Codification provides the following example disclosure in 958-210-55-7:

NFP A has $395,000 of financial assets available within 1 year of the balance sheet date to meet cash needs for general expenditure consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year.

NFP A has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. NFP A has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, NFP A invests cash in excess of daily requirements in various short-term investments, including certificate of deposits and short-term treasury instruments. As more fully described in Note XX, NFP A also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.

Alternatively, the nonprofit could present tables (see 958-210-55-8) to communicate the resources available to meet cash needs for general expenditures within one year of the balance sheet date.

Cash Flow Statement Presentation

A nonprofit can use the direct or indirect method to present its cash flow information. The reconciliation of changes in net assets to cash provided by (used in) operating activities is not required if the direct method is used.

Consider whether you want to incorporate additional changes that will be required by ASU 2016-18, Statement of Cash Flows–Restricted Cash. If your nonprofit has no restricted cash, then this standard is not applicable.

You can early implement ASU 2016-18. (The effective date is for fiscal years beginning after December 15, 2018.) Once this standard is effective, you’ll include restricted cash in your definition of cash. The last line of the cash flow statement might read as follows: Cash, Cash Equivalents, and Restricted Cash.

Effective Date of ASU 2016-14

The effective date for 2016-14, Not-for-Profit Entities, is for fiscal periods beginning after December 15, 2017 (2018 calendar year-ends and 2019 fiscal year-ends). The standard can be early adopted.

For comparative statements, apply the standard retrospectively. 

If presenting comparative financial statements, the standard does allow the nonprofit to omit the following information for any periods presented before the period of adoption:

  • Analysis of expenses by both natural classification and functional classification (the separate presentation of expenses by functional classification and expenses by natural classification is still required). Nonprofits that previously were required to present a statement of functional expenses do not have the option to omit this analysis; however, they may present the comparative period information in any of the formats permitted in ASU 2014-16, consistent with the presentation in the period of adoption.
  • Disclosures related to liquidity and availability of resources.
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