Word Count: 660

Time to Read: About 10 minutes

Dear Colleague,

This is the November issue of Capability Company's ezine for nonprofit employers.  In this issue, our guest author will give you ideas about protecting your nonprofit from unethical employees.  Unfortunately, it's an all-too-common occurrence.

 Employees on the Take

How to Protect Your Nonprofit from

Internal Fraud

by Jacob Blass

The heightened focus on nonprofit accountability in recent years has spurred calls for foundations and public charities to have adequate policies and procedures in place to ensure sound governance. One such policy that has become a recommended best practice for the sector is a whistleblower protection policy, yet most non-profits still don't have one.

Now, in the wake of numerous financial scandals at charities nationwide, and in the recognition that non-profits lose over $10 billion annually to fraud, the IRS is introducing a revised form 990 that will require nonprofit organizations to reveal in more detail than ever before how they function. This is extremely important as potential and existent donors increasingly look at 990's to determine how the organization is spending its dollars.

States are following suit. California has already enacted legislation that mirrors parts of SOX with the Charity Integrity Act which spells out the makeup of a non-profit's audit committee, and requires that non-profits make their annual audits available to the public. The law also requires board approval of compensation packages for the CEO and CFO. Nearly 20 states are considering similar legislation.

"This is going to have a major impact on the way nonprofit public charities operate," said Thomas A. McLaughlin, a senior manager in the nonprofit practice at the Boston office of Grant Thornton, a national accounting firm. "It's asking in great detail about governance and leadership, particularly about who runs the organization, including paid and volunteer leaders, as well as any consultants. It doesn't leave a lot of wiggle room in the reporting."

The proposed new form asks direct questions about governance, requires information about past officers and directors who were highly compensated. And it asks if nonprofits have whistleblower and document destruction policies.

William Josephson, former chief of the charities division in New York, said the intention of the form is clear: "We want to know what you're actually doing. Tell us what you're doing, up-front, every year."

Insurance companies are also pressuring non-profits to adopt strict corporate governance standards, due to increased exposure. For audit committee members at non-profits, all these proposed and real measures may mean longer hours and a possible increase in liability exposure.

We give non-profits, religious and educational institutions an extra measure of trust to do the right thing and for the most part, justifiably. But when we hold people and organizations to a higher standard, there is an extra measure of hurt when they don't and are implicated in a scandal or unethical acts. Make sure your non-profit does the right thing: 

• Have excellent systems in place, including a whistle blowing policy. An Association of Certified Fraud Examiners study indicated hotlines are the best way to uncover fraud in organizations.

• Have the CEO/Executive Director and the CFO sign off on financial statements.

• Make sure you have signed conflict-of-interest statement for all pertinent staff, volunteers and board members.

• Ensure you have a compensation committee reporting to the executive committee that sets market-based goals for its CEO.

• In addition to overseeing the annual audit, the Audit Committee should oversee a continuing "internal-controls audit" that monitors internal procedures. 

Jacob Blass is President of the Ethical Advocate, a market leader in business process optimization for issue, incident and loss management. Ethical Advocate's systems anonymously and confidentially allow users to communicate issues and concerns associated with unethical or illegal activities.  Jacob can be reached at jblass@ethadv.com or 888/ETHICS 6. 

Capability Company helps nonprofits find, recruit and hire the best top administrative team members.  To find out more about our services and to see if we can help you, visit www.CapabilityCompany.com.