Category Archives: Not-for-Profit

Transferring Not-for-Profit Leadership

Founder’s Syndrome and Not-for-Profits

By Mike Klein, CPA

mbkFounder’s Syndrome is a term that describes the challenge a not-for-profit organization could encounter when the time comes to transition its leadership functions from its founder to new management. The ailment occurs if the original leader has resisted delegating key responsibilities to other staff members — or helping the organization transition to a new leader.

It’s worth noting that founders’ reluctance to loosen their grip isn’t necessarily due to a power-hungry need to control. Founders tend to care deeply for their organizations and may fear that the organization would falter without their continued connection.

For example, they worry that donations might drop off if they’re not reaching out into the community anymore. They may be concerned that others in the organization lack the background to make savvy decisions. Or founders might have invested so much of themselves and their lives in the organization that they simply can’t imagine a different path.

Is your organization vulnerable?
Not-for-profits suffering from this affliction generally share some common characteristics: For example, because the founder has earned the trust of board members through their long-time relationships working together to advance the organization, they may be reluctant to give up their reliance on the founder for advice and guidance through decision making.

Another characteristic is the founder may not have transitioned day-to-day decision making to his or her subordinates, more out of habit than disregard for their leadership skills. Nevertheless, the appropriate mentoring and sharing of power necessary to prepare a successor and a strong leadership team is not occurring.

These conditions leave organizations in a vulnerable and risky position. If something should happen to the founder — retirement, death, disability or something else — how would the organization carry on?

How can you treat the “syndrome”?
The good news is that Founder’s Syndrome is treatable. The first step is to address the situation with the founder. This can be uncomfortable, but it’s critical. Members of the board or perhaps senior staff should begin by acknowledging the founder’s invaluable role over the years. They can then move on to discuss the importance of preserving the founder’s legacy when he or she inevitably can no longer lead.

Here are some other advisable actions:
Form a succession plan. A succession plan is a vital ingredient in preserving the organization. If no one in the organization wants to tackle this discussion with the founder, a professional coach or consultant could be retained.

Encourage founders to be active in the transition. Don’t just impose a transition onto the founder. One important contribution founders can make is recording their institutional memories. The leader’s vast knowledge should be documented so the organization can continue to benefit from it.

Ask the board of directors to step up. The board may need to step up its accountability in the absence of the strong leader to whom they’ve been accustomed. Board members must seize the reins and educate themselves about the organization in any areas where they’re lacking. This may require replacing existing board members. Bringing on new staff may be advisable, too.

The board can form an active fundraising committee so that a single individual isn’t responsible for driving donations. An army of zealous volunteers could be deployed as a bulwark against donation decline.

Entering Phase Two
Your organization’s founder likely has invested the proverbial blood, sweat and tears into launching your not-for-profit and overseeing its growth. That person, ideally, should become part of the plan as you create a road map for the organization’s future. Planning for the second generation of nonprofit leadership is in its own way just as important as creating a start-up nonprofit — be sure to allow your organization the time it needs to ready itself for that next stage.

Founder’s Syndrome is a difficult ailment to manage. The best advice we can offer is, “Don’t go it alone.” One of the best benefits of working with a consultant is he or she can help with the difficult conversations. Ciuni & Panichi, Inc. offers a wide range of not-for-profit consulting services, including executive coaching, board development and engagement, strategic fundraising, and marketing. To learn more, contact Mike Klein, CPA, MBA, at 216-831-7171 or mklein@cp-advisors.com.

 

Donating Appreciated Stock Offers Tax Advantages

Not-for-Profit Donations and Tax Savings

By Mike Klein, CPA, Ciuni & Panichi, Inc. Partner-In-Charge of the Not-for-Profit Group

mbkThe best scenario for not-for-profit organizations is when they have the revenue they need to achieve their mission, their benefactors’ pain is eased, and their donors enjoy the rewards of contributing as well as a nice tax deduction. It’s important for donors to know that donating appreciated stock can help fulfill all three needs. And best of all for donors, a gift from his or her portfolio is not only possible, it can boost the tax benefits of the charitable gift.

No pain from gains
Inform your potential and current donors that charitable organizations are more than happy to receive appreciated stock as a gift. Depending on the not-for-profit’s policy, it may maintain a stock portfolio or sell donated stock.

Contributing appreciated stock entitles donors to a tax deduction equal to the securities’ fair market value — just as if the stock was sold and the cash was contributed. The difference is neither the donor nor the charity receiving the stock will owe capital gains tax on the appreciation. Avoiding capital gains tax and also taking a tax deduction is a double benefit for donors.

The key word here is “appreciated.” The strategy doesn’t work with stock that’s declined in value. In this case it’s better to sell securities that have taken a loss and donate the proceeds. This way also allows for a double deduction for donors: one for the capital loss and one for the charitable donation.

Inevitable restrictions
Inevitably, there are restrictions on deductions for donating appreciated stock. Annually donors may deduct appreciated stock contributions to public charities only up to 30 percent of their adjusted gross income (AGI). For donations to nonoperating private foundations, the limit is 20 percent of AGI. Any excess can be carried forward up to five years.

So, for example, if you contribute $50,000 of appreciated stock to a public charity and have an AGI of $100,000, you can deduct just $30,000 this year. You can carry forward the unused $20,000 to next year. Whatever amount (if any) you can’t use next year can be carried forward until used up or you hit the five-year mark, whichever occurs first.

Moreover, donors must own the security for at least one year to deduct the fair market value. Otherwise, the deduction is limited to the tax basis (generally what was paid for the stock). Also, the charity must be a 501(c)(3) organization.

Last, these rules apply only to appreciated stock. If you donate a different form of appreciated property, such as artwork or jewelry, different requirements apply.

Intriguing option
A donation of appreciated stock is one of many strategies to encourage your donors to support your mission.

Need help? Contact Mike Klein, CPA, Ciuni & Panichi, Inc. Partner-in-Charge of the Not-for-Profit Group at 216-831-7171 or  mklein@cp-advisors.com. In addition to audit and accounting services, the Not-for-Profit Consulting Group offers a complete menu of advisory services including:  Resource Development, 990 Preparation, Strategic Management, Executive Coaching and Marketing.

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Tax Smart Gifting Strategies

© 2016

 

Why Good Governance Depends on Effective Oversight

Effective Finance Governance Protects Your Organization

MikeKlein9848Unlike public companies, an audit committee is not required by not-for-profit boards. In fact the Stanford Graduate School of Business 2015 Survey on Board of Directors of Nonprofit Organizations found a surprising 42 percent of not-for-profit organizations don’t have audit committees. If your organization is among that 42 percent, think seriously about creating an audit committee or assigning these all-important functions to another committee (e.g., finance committee).

Good audit and finance committees help ensure financial integrity, limit risk, and protect your reputation with regulators and the public. Most importantly, they help ensure good governance. Finance committee responsibilities include monitoring the organization’s budget and approving the distribution of its financial resources. Duties specific to the audit committee include oversight of:
• Financial reporting
• External and internal audit
• Compliance with legal and regulatory requirements
• Internal controls
• Form 990 review and filings and other reporting to regulatory agencies
• Recommendations in response to audit results
• Deciding whether a second opinion is required to resolve auditing issues

Ultimately, the audit (or finance) committee members are responsible for ensuring that all financial reports are accurate and portray your organization’s condition and performance transparently. Additionally committee members should look for signs of fraud — such as unreported revenue — in your organization’s financial statements.

Internal and external auditors
Finance and/or audit committee members regularly interact with the internal and external auditors. They approve the annual internal audit plan and review the internal auditors’ reports. Your committee members also may be responsible for approving the appointment of the internal audit head.  Committee members are also responsible for hiring, compensating and overseeing the external auditors as well as being their point of contact. Your committee members should regularly communicate with the auditors. For example, hold pre-audit meetings to discuss the work plan, request regular updates during the audit and conduct post-audit discussions to review findings before you present them to your board.

Controlling risk
An audit committee function that sometimes goes unmet by a finance committee relates to risk management. Committee members should ensure that  specific measures are in place to reduce your not-for-profit’s risk profile by conducting a comprehensive risk assessment to identify financial vulnerabilities such as those related to investment practices, antifraud policies, insurance coverage, and compliance with laws, regulations and donor and grantor requirements. And your committee members should take the lead in ensuring that internal controls are effective in minimizing those risks it identifies as the greatest threats.

Ideal committee members
The composition of finance and audit committees might vary, but one thing is certain — most members should have strong financial expertise including a working knowledge of financial reporting (including Generally Accepted Accounting Principles) and internal controls. Specific knowledge of not-for-profit-sector accounting and financial reporting issues is valuable too.
In addition, the American Institute of Certified Public Accountants recommends that at least a few committee members also serve on the board of directors. However, some states limit the number of audit committee members who may also serve on the board. And also be aware that appointing your board treasurer to the audit committee may create a conflict of interest, because the audit committee is responsible for independent monitoring of financial results.
Above all, committee members must maintain their independence.

We can help
The best advice we can offer is: “Don’t go it alone.” Ciuni & Panichi, Inc. has a dedicated team of professionals available to provide financial services including audit, accounting and 990 Form filings and a consulting practice to help you enrich and engage volunteer committees including the finance and audit committees. To learn more, contact Michael B. Klein, CPA, Partner-in-Charge of the Not-for-Profit Group at 216-831-7171 or mklein@cp-advisors.com.

 

Cybercrime and Not-for-Profit Organizations

By Reggie Novak, CPA, CFE
Ciuni & Panichi, Inc. senior manager and certified fraud examiner

Is Your Not-for-Profit a sitting duck?

ReggieNovakNot-for-Profits generally have limited administrative personnel and often lack dedicated IT staffers. They also typically have smaller budgets for technology solutions such as firewalls, antivirus programs, and intrusion protection. It’s no surprise, then, that the nonprofit sector is one of the most frequently compromised by hackers.

Your Not-for-Profit’s computer network probably contains a wealth of data to entice hackers — for example, donor information, including names, addresses, credit card numbers and bank account information. Also coveted by cybercriminals are personnel data, such as employee Social Security numbers and direct deposit information, and accounting records related to payroll, payables, banking, investments and other financial functions.

Hospitals and other Not-for-Profit health care organizations that collect and store patient data, including medical records and insurance information, are particularly vulnerable. Colleges and universities also are popular targets because of their multiple networks and many users — that includes students who participate in risky online behavior such as illegal file downloading.

Is your defense strong enough?
Most Not-for-Profits are already familiar with protections such as firewalls and antivirus programs. And as long as you keep your programs current and download updates as soon as they become available, you can count on some measure of cyber security.

But your defensive strategy should extend to include policies and procedures, such as data-handling rules. Overworked staffers may neglect to weed out old files and it’s important to implement procedures for disposing of sensitive data that’s no longer needed. Key data and systems should be backed up regularly and stored in a safe offsite location. Because Not-for-Profit employees often share responsibilities, be sure to create accountability for specific jobs.
Training for staffers, volunteers and board members is critical, too. For example, your network’s users should be made aware of such issues as e-mail scams and “social engineering,” where criminals manipulate people into volunteering passwords and other information. Also educate your employees about the proper use of laptops and mobile devices.

Finally, consider taking proactive steps against an attack by hiring a “white hat” hacker. This consultant uses the latest techniques to test your network and devices for holes so that you can plug them.

Are you up for a fight?
Of course, a robust cybercrime-fighting program takes time and at least a small bite out of your Not-for-Profit’s budget. Convincing your board that such expenditures are necessary may be tough.

Increasingly, nonprofits are creating technology committees led by tech executives or other knowledgeable board members. If your board lacks tech expertise, make recruiting someone who understands the need for cyber security — and how to achieve it — a priority. Your tech committee might be tasked with creating policies, determining budgets, evaluating software and products such as cyber liability insurance, and planning how your organization would respond to a cyber attack.

If your tech committee plans to act as first responders to a cyber security incident, be sure to include a public relations expert in the group. The timing and wording of communications can significantly affect how the media and your organization’s stakeholders respond to an event.

Thwarting cyber thieves
Unfortunately, cybercrime will continue to threaten organizations of all types. Join us for a free seminar to learn more about how you can protect your organization on Thursday, April 21 at 7:30 am at the Doubletree Independence, 6200 Quarry Lane, Independence. Click here for more details and to register for the event.

Reggie Novak is a Senior Manager in the Audit and Accounting Services Group.  As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services, including recommending internal controls and other measures to be implemented to prevent theft or misappropriation.  If fraud is suspected, he can investigate and present his findings and recommendations.  Contact Reggie Novak at 216.831.7171 or rnovak@cp-advisors.com for more information.

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What it takes to manage an endowment

March Tax Tips

Not-for-Profit: What it takes to manage an endowment

NFP Endowments

not-for-profit-290x300Every nonprofit dreams of receiving a large endowment that will keep it financially worry-free in the future and allow it to fulfill its mission with ease. But, in the real world, endowments also carry serious responsibilities, created by the Uniform Prudent Management of Institutional Funds Act (UPMIFA). When managing endowments, nonprofit leaders must keep the following realities in mind.

An investment policy drives fund management
Every endowment should have a comprehensive investment policy that drives the management of the fund. According to UPMIFA, investment decisions must be made in relation to the nonprofit’s overall resources and purposes. And the endowment investment policy should be different from the policy for other investments of the organization.

“Prudent” investment decisions must consider the entire portfolio and be made as part of an investment strategy with risk and return objectives reasonably suited to the fund and the organization. UPMIFA also permits “only investment costs that are appropriate and reasonable.” (UPMIFA applies only to “true” endowments funded by donors, not “quasi” endowments created by boards.)

The endowment’s objectives should guide its investments and management. For this reason, it’s important not to simply adopt a generic objective but to articulate an objective that reflects the organization’s own circumstances. For many not-for-profits, the primary goal is to preserve and grow funds for the organization’s long-term stability while providing a predictable contribution to support current activities. As a living document, the investment policy can change over time as objectives or other factors change.

Asset allocation is key
The investment policy will include an optimal asset allocation. The nonprofit’s investment committee must analyze the risk and return of potential investments (including stocks, bonds and alternative investments such as hedge funds and private equity) to determine the best mix and to obtain the total desired return. To maintain flexibility for responding to changes in the investment environment, it’s best to establish ranges for each asset class instead of set percentages. The investment committee should review performance quarterly and adjust the allocations accordingly.

Your spending policy: A crucial component
The investment policy should include a spending policy for the endowment, setting a percentage that can be spent annually. The spending policy will impact the performance of the fund, as well as its ability to fulfill the donor’s intent.

UPMIFA sets standards for endowment fund spending. It provides that an organization can spend as much of a fund as it determines to be prudent for the “uses, benefits, purposes and duration” for which the fund is established.

UPMIFA’s seven criteria to guide annual spending decisions are: 1) duration and preservation of the endowment, 2) the purposes of the organization and the fund, 3) general economic conditions, 4) effects of inflation/deflation, 5) expected total return from income and appreciation, 6) the organization’s other resources, and 7) the organization’s investment policy.
Unlike its predecessor, the Uniform Management of Institutional Funds Act, UPMIFA allows nonprofits to adopt a “total return” strategy that bases the spending rate on the endowment’s total value (including appreciation) rather than on only income. To ensure reasonably consistent cash flows, many organizations using a total return spending policy apply “smoothing” mechanisms to minimize the effect of market volatility. An organization might, for example, use a three- or five-year rolling average calculation.

Benchmarks gauge performance
The investment policy should include benchmarks for evaluating the performance of investments and managers, too. Performance should be assessed over both full market cycles (seven to ten years) and the shorter time periods that compose them.
An investment committee can meet quarterly to review performance, consider recommendations for changes to the investment strategy and rebalance asset allocation as necessary.

GAAP requires disclosures
Whether or not it’s covered by UPMIFA, every endowment must make certain financial statement disclosures under Generally Accepted Accounting Principles (GAAP). Among these are descriptions of the organization’s endowment spending — and investment — policies, and of the nature and types of permanent or temporary restrictions on the endowment net assets. You also must report:

  • The governing board’s interpretation of the law(s) underlying the organization’s net asset classification of donor-restricted funds,
  • the composition of the endowment by net asset class at the end of the period, in total and by type of endowment fund, with donor-restricted funds shown separately from board-designated endowment funds, and
  • the aggregate amount of the deficiencies for all donor-restricted endowment funds where the fair value of the assets at the reporting date is less than the level required by donor stipulations or law.

Finally, be sure to include a reconciliation of beginning and ending endowments, in total and by net asset class.

Not just a dream
One of the most important roles of your board of directors is managing your endowment funds. Guided by good stewardship, the endowment will contribute to your nonprofit’s financial health and stability — no longer a dream, but a reality.  Contact Mike Klein , Partner in our Not-for-Profit Group at 216.831.7171 or mklein@cp-advisors.com for additional information and assistance.

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© 2015

Nonprofits: Five Strategies for Recruiting New Board Members

A board is a nonprofit’s backbone.

boardYour board is your nonprofit’s backbone, responsible for the strategic decisions and fiscal oversight that keep your organization running and your reputation with the public intact. Unfortunately, many nonprofits are always short a few board members and finding new ones is a never-ending quest.

Here are five steps to better board member recruiting:

  1. Step back and assess. Before you begin a search, determine what you have and what you don’t. Most boards benefit from financial, tax, insurance and legal knowledge, development experience, community influence and personal contacts with potential major donors. Your board’s demographic makeup matters, too. The group should represent a diversity of gender, race and age — depending on such factors as your nonprofit’s mission and location.
    Take, for example, a community medical clinic providing prenatal and infant care to low-income families. In addition to financial, legal and fundraising expertise, the clinic’s board should include medical professionals and public health experts.
  2. Spread the word. Ask current board members to recommend friends and colleagues. If they don’t know of anyone offhand, they can at least spread the word through their social and professional networks. Although word of mouth is often best, you also might want to advertise the opening in your nonprofit’s newsletter, on your website and through social media channels.
  3. Look local. Community movers and shakers are critical to your board’s success, so focus your search among local politicians, businesspeople and philanthropists. Because board members must be committed to your mission, do a little research into the outside interests of community leaders. An avid animal lover, for example, is ideal for a no-kill shelter’s board.
  4. Get to know them. After you identify prospective board members, invite them to your facilities for a tour. Provide an overview of your mission, challenges and objectives, and ascertain their interest. It’s important to remember that board members are your organization’s head cheerleaders; they have to be willing to go “all in.”
  5. Formalize the relationship. When you find a qualified and enthusiastic prospect, ask him or her to fill out an application. Be sure to quantify your expectations. How many meetings and events must board members attend? Are they expected to raise a certain amount of funds every year? With a full understanding of their responsibilities, new board members start off on the right foot and are less likely to drop out.

Finding board members is the biggest hurdle, but retaining them is also a challenge. So that your recruiting work doesn’t go to waste, provide new members with a thorough orientation, and then monitor their meeting attendance and participation — at least for the first year.  Want more inforamtion or assistance?  Contact Mike Klein, Partner-in-Charge of our Not-for-Profit Group.  Call him at 216.831.7171 or email at mklein@cp-advisors.com.

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© 2014

Nonprofit: How to protect your tax-exempt status

A Titanic Loss

Tax exempt statusWhat would happen if your nonprofit lost its federal tax-exempt status? The thought might send shivers down your spine, and it should. Here are reminders about some of the actions that are required — or should be avoided — to maintain your 501(c)(3) status.

If your 501(c)(3) designation is revoked, your nonprofit will no longer be exempt from federal income tax — it will have to pay corporate tax on annual profits. It also might be subject to back taxes and penalties for failure to pay corporate income taxes as of the revocation’s effective date.

And that’s just the tip of the iceberg. Losing your tax-exempt status also might subject your organization to state taxes on income, property, and sales or usage.

The hits on your finances wouldn’t end there. Your donor base might be whittled away because donors would no longer be able to receive a tax deduction for their gift to your organization. And if you receive funding from private foundations, that would likely end, because their guidelines usually require grant recipients to be tax-exempt public charities.

But don’t despair. If you play by the rules, your organization will likely be able to keep its special status.

Reporting Duties
First of all, make sure that you’re filing required reports on time. This involves filing some type of IRS Form 990 each year — Form 990, Form 990-EZ or Form 990-N, depending on the amount of your total annual receipts and total assets. If you fail to do so for three years in a row, your tax-exempt status will be revoked.

If you’re required to file the full Form 990 or Form 990-EZ, be sure to annually complete Schedule A, Part I (“Reason for Public Charity Status”) to identify why you aren’t a private foundation. Check the box that coincides with the reason that you’re a public charity for the current tax year.

Also on Schedule A, if your nonprofit is largely supported by a government unit or the general public or is a community trust (Box 5, 7 or 8 on Schedule A, Part I), you’ll need to pass the public support test on Part II. If your organization is exempt because it receives more than one-third of its support from contributions and activities related to its exempt function, as outlined in IRC Section 509(a)(2), you’ll need to pass the public support test on Part III each year.

You also must file all required payroll tax returns for your employees and 1099 forms for independent contractors, and answer related questions about these workers on your Form 990.

Executive Compensation
Setting salaries for key employees requires a formal process. Information on the salaries and benefits you pay your executive director and “key” employees is available to the public on your Form 990. This has been identified as a primary focus of exempt organizations’ audits by the IRS.
Even more important than the compensation total is the process you use to determine that the compensation is reasonable and comparable to amounts paid by organizations of similar size and activity. The IRS sees this review and approval as a responsibility of your board of directors or one of its committees.

Not only is granting executives an out-of-whack salary frowned upon, but you also can’t operate for the “benefit of private interests.” In other words, no part of a 501(c)(3) organization’s earnings or equity can benefit individuals, such as the organization’s founders, executives or board members — or their family members.

Unrelated Business Income
As your organization carries out its operations, it must be careful not to raise what’s considered excessive unrelated business income (UBI). UBI is income from a trade or business activity that is regularly carried on that is unrelated to your exempt mission. Although the Internal Revenue Code is silent as to how much is too much, excessive UBI has been interpreted as spending a “significant” amount of time on the unrelated activity.

For example, if an organization has more expenditures for the unrelated activity than program expenses, the IRS likely will consider terminating its exempt status. But courts have considered a nonprofit spending even as little as 10% of its total efforts on a UBI activity to be too much.

Goods and Services
Your organization also must make sure that it doesn’t pay more than market rate for goods and services. It’s wise to secure at least three quotes before purchasing a significant asset or establishing a service contract or standing order for supplies. If you ever decide to do business with related parties (board members, founders, executives or their businesses), the other quotes will support the “going rate” in your market and show you aren’t providing an excess benefit to the related party.

Should the IRS determine that you’ve provided excess benefits, your organization and its leaders will be subject to penalties. The possibility of losing your exempt status also exists.

Lobbying and Political Campaign Activities
The IRS requires that tax-exempt entities avoid “substantial”  lobbying and political campaign activities. To determine whether lobbying activities are “substantial,” consider the time spent by compensated employees and volunteers on lobbying activities or use an expenditure test.
Your nonprofit can elect to use the formal expenditure test — called a 501(h) election — by filing Form 5768.  (Note that churches are ineligible.) The 501(h) election sets a defined limit on the amount of resources an organization can use to influence legislation before losing its exempt status, based on a percentage of its exempt purpose expenses.

Political campaign activities include making contributions to a political campaign fund or making public statements for or against a candidate (either written or verbal). Participating in any of these activities can result in the IRS either revoking your exempt status or imposing certain excise taxes on your organization.

Your Lifeline
Your nonprofit’s tax-exempt status is its lifeline. Make sure that you and your staff do all that is required to maintain it. Follow the suggestions above, and discuss the matter with Mike Klein, Partner-in-Charge of our Not-for-Profit Group.  Contact him at 216.831.7171 or mklein@cp-advisors.com.

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Board Responsibilities and Fraud

© 2014

How Can Board Actions Impact an Organization’s Fraud Risks?

The Fiduciary Responsibilities of the Board

Fraud happens everywhere, in all industries and in companies of all sizes, and research by the Association of Certified Fraud Examiners (“ACFE”) shows that those organizations that focused more on fraud have less risk of fraud occurring.  Organizations worldwide lose an estimated five percent of annual revenue to fraud, according to the ACFE 2014 Global Fraud Study.  The results of this study demonstrate that the presence, or lack thereof, of Board oversight has a profound effect on the median loss and duration of fraud.  The business case for managing fraud risk should be at the front of every director’s mind when considering the cost/benefit of fraud detection and prevention efforts.

The basic fiduciary duty of care principle, which requires a director to act in good faith with the care an ordinarily prudent person would exercise under similar circumstances, is being tested in today’s business climate.  Personal liability for directors, including removal from the Board, civil penalties, and tax liability, as well as damage to the reputation of themselves and their organizations, appears not so far from reality as once widely believed.  Yet, many directors continue to be in the mindset of “that won’t happen in my organization.”  Because of this, a basic understanding of the director’s fiduciary obligations and how the duty of care may be exercised in overseeing the organization’s internal control and compliance systems has become critical.

While fraud risk management should be a part of an overall risk management program, effectively addressing the risk of fraud requires dedicated, deliberate focus and consideration, including a formal process for oversight by directors.  The Institute of Internal Auditors, American Institute of Certified Public Accountants, and ACFE jointly recommended that the committee charged with fraud risk oversight “should meet frequently enough, for long enough periods, and with sufficient preparation to adequately assess and respond to the risk of fraud, especially management fraud, because such fraud typically involves override of the organization’s internal controls.”

Dedicated and observable fraud risk oversight activities by the Board will not only enhance the ethical reputation of the organization but will also set the stage for an antifraud culture within their organization.  Moreover, the directors’ proactive involvement in fraud risk management initiatives has the added benefit of serving as a strong deterrent to fraud by heightening the perception of detection throughout the organization.  Increasing the perception that potential fraudsters will be caught is among the most effective deterrence mechanisms available.

Accordingly, a director must be educated on fraud’s “red flags” and be willing to ask the tough questions, both of a general nature and specific to potential fraud risks.  The best director is inclined to think like an investigator when details don’t add up or explanations don’t make sense.  Answers should not be accepted at face value as necessarily accurate or even, in some cases, honest or truthful.

By requiring, implementing, and overseeing a proactive fraud risk management plan, directors will meet their fiduciary responsibilities, while helping to secure a financially and ethically sound future for their organization.

For more information or if you have concerns about your organization, contact Reggie Novak at 216-831-7171 or rnovak@cp-advisors.com.

Reggie is a Senior Manager in the Audit and Accounting Services Group.  As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services including recommending internal controls and other measures to be implemented to prevent theft or misappropriation.  If fraud is suspected, he can investigate and present his findings and recommendations.