HBK Nonprofits Insights

Insights

Best Practices of Highly-Effective Nonprofit Organizations

Public Support Test: Schedule A

By Teal Strammer, CPA MANAGER | SARASOTA, FL

Ashlynn Reeder, CPA, MST SENIOR MANAGER | NAPLES, FL

To be considered a “public charity,” organizations exempt from tax under Internal Revenue Code (IRC) section 501(c)(3) that file Form 990 (Return of Organization Exempt From Income Tax) or Form 990EZ (Short Form Return of Organization Exempt from Income Tax) are required to complete Schedule A, the Public Support Test. Organizations that are 501(c)(3) organizations but are private foundations and file Form 990-PF, return of Private Foundation, are not subject to the additional Schedule A reporting. Schedule A is used to indicate the reason for public charity status and to provide detailed information about an organization’s public support by means of a “public support test.”

Passing the public support test on Schedule A allows publicly supported organizations to continue to operate as public charities, which qualifies them for certain preferential treatments under the law. For instance, organizations with public charity status are not subject to private foundation excise taxes. Donors to public charities benefit from a higher AGI limitation on their charitable contribution deduction, with certain cash contributions subject to a limitation of 100 percent of AGI (that is, no limitation), while donations to private foundations are subject to a 30 percent of AGI limitation. This makes public charities more appealing to potential donors. As well, public charities may engage in limited lobbying activities, while private foundations are not allowed to engage in any lobbying.

So how is the public support test applied? The accounting method used when completing Schedule A must be the same accounting method used when

completing Form 990 or Form 990-EZ. Other accounting considerations when completing Schedule A include collectability of pledges, change in an accounting method, and change in a tax year.

Passing the public support test on Schedule A allows publicly supported organizations to continue to operate as public charities, which qualifies them for certain preferential treatments under the law.

When completing the public support test, the following main sources of income are considered:

• Gifts, grants, contributions, or membership fees if they provide support for the organization

• Gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity that is not an unrelated trade or business

• Net income from unrelated business activities

• Gross investment income (excluding capital gains)

• Tax revenues levied for the benefit of the organization and either paid to or expended on behalf of the organization

• Value of services or facilities furnished by a governmental unit to an organization without charge

March 2023

Vol. 3 // Issue 1

CONTENTS

GOVERNANCE

4 / SECURE Acts

This is what it takes.

5 / HBK Nonprofit Solutions Contacts

ASSURANCE

6 / Transparency Takes Work Create a Culture of Trust Through Transparency

GUEST ARTICLE

9 / Key Person Protection for Nonprofits

11 / Four Eyes on Everything! Handling Nonprofit Fraud and Theft

CLIENT SPOTLIGHT

14 / Keystone Adolescent Center: 30 Years of Making a Difference in Kids’ Lives

ABOUT HBK NONPROFIT SOLUTIONS

HBK Nonprofit Solutions is a dedicated team of subject matter experts within HBK CPAs & Consultants, an Accounting Today Top 100 CPA firm. With more than 800 clients in the nonprofit sector, and more than 70 years providing financial compliance and consulting to nonprofits, we offer the hands-on experience and technical skills to help nonprofit organizations fulfill their missions.

Schedule A Breakdown

Part I Only

• Churches

• Schools

• Hospitals

• Medical Research Organizations

• Government

• Public Safety

Part III

• Operating public charity

Proper completion of Schedule A is imperative for a public charity. Donors and others can review an organization’s public support, and the organization can use it to demonstrate that it is receiving the support necessary to carry out its mission.

Unusual grants should not be included as a main source of income. These types of grants are unusual or unexpected with respect to the amount, and by reason of size, can adversely affect the public support test. Organizations should keep accurate and complete records of all unusual grants they receive. However, forgiven Paycheck Protection Program loans are eligible to be included as income for the public support test.

Part I

All organizations subject to Schedule A reporting must complete Part I of Schedule A. Entities described on lines 1, 2, 3, 4, 6, 9, and 11 of the Schedule, that is, public institutions, only need to complete Part I. Examples of public institutions include:

• Churches

• Schools

• Hospitals and medical research organizations

• Governmental units

• Public safety organizations

• Certain agricultural research organizations

Entities described on lines 5, 7, and 8 of Schedule A are publicly supported organizations and subject to the public support test on Part II. If they fail the test, they are subject to the test on Part III. These types of organizations include:

• Organizations operated for the benefit of a college or university owned or operated by a government unit

• Organizations that receive substantial funds from a government unit or from the general public

• Community trusts described in §170(b)(1)(A)(vi)

Entities described on line 10 are operating public charities and are subject to the public support test on Part III. These organizations receive more than one-third of their support from public contributions and exempt functions and less than one-third of their support from investment and net unrelated business income. Entities described on line 12 are supporting organizations that are involved financially with entities described on lines 1 and 2 or

are supported or controlled by certain organizations that are described on line 10. There are several types of supporting organizations, all of which have different filing requirements in Parts IV & V of Schedule A and may need to disclose additional information.

Part II

Organizations completing this public support test must have one-third or more of their support from governmental agencies, the general public, or other public charities. They should track contributions from excess contributors or disqualified persons so they can be removed for purposes of the test. Excess contributors are individual donors or other disqualified persons who give in excess of 2 percent of the organization’s total support. Disqualified persons are donors (and related persons) who donate in excess of 2 percent of the total support. There is a five-year look-back period for the excess contributor calculation.

Parts IV & V • Supporting organization

Part II • Donative public charity benefitting a state school or community

(All organizations subject to Schedule A reporting must complete Part I.)

Organizations that receive more than 10 percent but less than a third of their overall support from the public for two years must complete the “facts and circumstances test” to explain why it is not meeting the 33.3 percent requirement of public support but is attempting to do so. If an organization has less than 10 percent of public support and is not eligible to complete the facts and circumstances test, the organization should attempt to pass Part III of Schedule A.

Part III

Under the Part III test, just as in Part II, organizations must remove contributions from disqualified persons. However, under this test the organization must remove contributions from donors who have given more than 2 percent of total contributions in any year since inception. Once a donor has become

a substantial contributor, they will remain a substantial contributor for this test. Spouses who separately give to the organization are considered as one contributor in determining their status as disqualified. Donations from other public charities in excess of 2 percent are not excluded. Additionally, organizations must remove excess revenues from customers that exceed $5,000 or 1 percent of the total support reported. This is an annual calculation that must be considered. If an organization fails the Part III test in a given year but passed the test in the previous year, they automatically pass the public support test for

the current year. If the organization fails the Part III test for two consecutive years, it can attempt to pass the Part II test. If the organization does not correct their public support percentage after failing the Part III test in an initial year and cannot pass the Part II test, it must file form 990-PF, Return of Private Foundation.

Proper completion of Schedule A is imperative for a public charity. Donors and others can review an organization’s public support, and the organization can use it to demonstrate that it is receiving the support necessary to carry out its mission. As well, the IRS reviews the public support test to ensure that the organization is operating within the definition of a public charity. Please reach out to the Nonprofit Solutions Group for information on how HBK can help you comply with these requirements.

Teal Strammer, CPA

HBK Manager & Tax Specialist

Teal is a Manager in the HBK office in Sarasota, Fla. She specializes in tax preparation and assurance services for nonprofits and leads the firm’s Tax-Exempt Organizations Tax Specialists Group. Additionally, she does tax preparation for individuals, businesses, trusts, and estates, and has experience with employee benefit plans and the construction and manufacturing industries. As a part of HBK’s REVEAL team, she oversees recruiting efforts for the Sarasota office. Teal began her accounting career with HBK in 2016.

For more information, contact Teal at 941-957-4242 or tstrammer@hbkcpa.com.

Ashlynn Reeder, CPA, MST

Assistant Director | HBK Nonprofit Solutions

HBK Senior Manager & Tax Specialist

Ashlynn is a Senior Manager in the HBK office in Naples, Fla. She serves as Assistant Director in the HBK Nonprofit Solutions Group, as a Tax Specialist in the firm’s Tax-Exempt Organizations Tax Specialists Group, and is a resource for the firm at large as it relates to nonprofit engagements. During her career she has worked closely with small to mid-sized local businesses and their owners, high-net-worth individuals, trusts, and estates. Through her work with nonprofit organizations, she found a way to combine her passion and her profession. She has specialized her knowledge in nonprofit tax reporting, operations, and consulting, and through her role as Assistant Director of the Nonprofit Solutions Group she has helped initiate firm-wide policy, training, and guidance related to serving nonprofit organizations.

For more information, contact Ashlynn at 239-263-2111 or areeder@hbkcpa.com.

Unusual grants should not be included as a main source of income because these grants, by reason of size, can adversely affect the public support test.

HBK NONPROFIT SOLUTIONS // AUTHOR PROFILES

SECURE Acts

By Jennifer M. Mitchell, CPA PRINCIPAL | MEADVILLE, PA

Historically, plan sponsors were not required to let employees participate in their company’s 401(k) plan unless they worked at least 1,000 hours in a plan year. The U.S. Congress, in a bipartisan effort to make saving for retirement easier for all workers, has enacted laws that include making employer-sponsored plans more accessible to long-term, part-time employees.

SECURE Act of 2019

Signed into law in December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) changed participation eligibility rules for 401(k) plans by requiring that long-term, part-time employees be allowed to contribute elective deferrals into the plans. The SECURE Act defines a long-term, part-time employee as an individual who works more than 500 hours, but fewer than 1,000 hours for three consecutive 12-month periods. Plan sponsors for plan years beginning after December 31, 2022, are not required to include long-term, part-time employees in their 401(k) plan nondiscrimination testing, which includes the actual deferral percentage (ADP), coverage, and topheavy testing.

Based upon SECURE Act rules, then, the earliest date a long-term, part-time employee would become eligible to participate in a calendar year

plan would be January 1, 2024, assuming the employee worked at least 500 hours for each plan year from 2021 to 2023.

SECURE 2.0

Signed into law at the end of 2022, SECURE 2.0 Act further modified the long-term, part-time employee rules by reducing the eligibility period for participants to make elective deferrals to two consecutive 12-month periods, providing that, for vesting purposes, services in the 12-month periods beginning before January 1, 2023, are not taken into account. It also extends the new rule and provision to 403(b) plans. But because they are already subject to the universal availability rules, the modifications may not substantially expand eligibility for 403(b) plans. The provisions under SECURE 2.0 are effective for plan years beginning after December 31, 2024.

Additional considerations

Plan sponsors should consider additional ways the SECURE Act and SECURE 2.0 will impact their 401(k) or 403(b) plan its administration. They will likely need to coordinate with payroll providers to ensure that employee hours have been properly tracked. Plan sponsors should also discuss with plan administrators what plan amendments may be necessary to bring their plan into compliance with these new rules.

The U.S. Congress, in a bipartisan effort to make saving for retirement easier for all workers, has enacted laws that include making employersponsored plans more accessible to long-term, part-time employees.

include new rules for long-term, part-time employee participation in 401(k) and 403(b) Plans

Employers might also review other plan provisions and determine how they might be impacted by the Acts, including:

• Do you want to allow all part-time employees to make elective deferrals into the plan? Doing so for both 401(k) and 403(b) plans could lessen the burden of needing to track hours for all employees. As mentioned, 403(b) plans are subject to the universal availability rule, whereby all employees must be given the opportunity to make elective deferrals into the plan unless they meet certain exceptions, one of which is for an employee who “generally” works fewer than 20 hours per week.

• Do you want to make long-term, part-time employees eligible to receive employer contributions? Although the SECURE Act and SECURE 2.0 require you to allow those employees to make elective deferrals into the plan, there is currently no requirement for employers to contribute to their accounts, such as matching contributions or profit sharing contributions.

• Do you want to revisit the vesting rules for employer contributions? Under the new vesting rule, long-term, part-time employees must be credited with a year of service for all 12-month periods during which they have at least 500 hours of service. Vesting will continue even in situations where the employee transitions from long-term, part-time to full-time employment, that is, more than 1,000 hours of service in a plan year.

• Do you want participation restricted by age? Federal law does not set a minimum age for employees to be eligible to participate in a 401(k) plan. Plan sponsors can restrict participation in the plan by setting a minimum age threshold not to exceed 21. This is not applicable to 403(b) plans as age restrictions for eligibility are not permitted.

When making decisions regarding these key plan provisions, consideration should be given to what will be required to implement as well as administer them on an ongoing basis. The less complex the requirements, the easier the provisions will be to administer; the more complex, the greater the chances for costly errors that could be difficult to correct.

HBK Nonprofit Solutions Contacts

Darby Beaverson, CPA

Principal | Naples, Fla.

T (239) 263-2111

E DBeaverson@hbkcpa.com

Kathleen Clayton, CPA, PSA, MBA

Co-National Director, Nonprofit Solutions

Principal | Clark, N.J.

T (732) 453-6528

E KClayton@hbkcpa.com

Melissa Crowley, CPA

Principal | Youngstown, Ohio

T (330) 758-8613

E MCrowley@hbkcpa.com

Amy Dalen, JD

Co-National Director, Nonprofit Solutions

Principal | Naples, Fla.

T (239) 263-2111

E ADalen@hbkcpa.com

Jeremy Hartzell, JD, MBA

Principal-In-Charge | Pittsburgh, Pa.

T (724) 934-5300

E JHartzell@hbkcpa.com

By HBK Nonprofit Solutions

Jen is a Principal in the Meadville, Pennsylvania office of HBK and has been with the firm since 2008. Prior to joining HBK, she worked for a regional accounting firm in Pittsburgh.

Jen provides accounting, audit and financial reporting services to a wide range of industries, including manufacturing, not-for-profits, and extensive experience with employee benefit plans. She is one of HBK’s Quality Control Principals, providing secondary review services as well as research and counsel on complex accounting issues, and also serves as the Assurance Director overseeing the firms employee benefit plan audit practice.

For more information, contact Jennifer at (814) 336-1512 or or jmitchell@hbkcpa.com.

Sean Kocan, CPA

Principal | Pittsburgh, Pa.

T (724) 934-5300

E SKocan@hbkcpa.com

Dominic Mastropietro, III, CPA, MBA

Principal | Hermitage, Pa.

T (724) 981-7550

E DMastropietro@hbkcpa.com

Ashlynn Reeder, CPA, MST

Assistant Director, Nonprofit Solutions

Senior Manager | Naples, Fla.

T (239) 263-2111

E AReeder@hbkcpa.com

Jennifer M. Mitchell, CPA Principal | Meadville, Pa.

HBK NONPROFIT SOLUTIONS // AUTHOR PROFILE

Transparency Takes Work

Create a Culture of Trust Through Transparency

By Kathleen M. Clayton, CPA, PSA PRINCIPAL | CLARK, N.J.

Inits “Trust in Civil Society 2022 Report,” the Independent Sector notes, “Public trust is the currency of the nonprofit sector.” Eighty-three percent of the respondents in the study indicated that “nonprofits must earn my trust before I support them,” and only 56 percent said they trust nonprofits, down from 59 percent in 2020.

Trust is given based on two attributes: delivering on promises and doing the right thing to improve society. For many, trust in nonprofits is a perception or an assumption; it should be more tangible — and transparent.

Being open and honest — that is, transparent — with stakeholders takes work. Some transparency initiatives are more challenging than others.

Financial transparency basics

Some financial transparency is legally required while other information can be provided voluntarily. Some ways for nonprofits to practice and demonstrate financial transparency include:

• Communicate truthfully with donors about how their gifts are used and how that aligns with the organization’s mission.

• Make it a priority to establish donor and data privacy policy.

• Be honest about your tax exempt status.

• Make information such as 990s and annual financial statements easily accessible.

Wikipedia defines transparency as operating in such a way that it is easy for others to see what actions are performed.

• Make current financial data accessible and easy to comprehend.

• Make it easy for interested parties to request organizing documents such as your exempt application and the IRS determination letter.

• Send current, timely donor acknowledgements.

Rating groups

Most of the well-known rating agencies attempt to measure transparency in their rating systems. Many stakeholders will look to these ratings when they evaluate your organization.

• Charity Navigator assesses four key domains, including accountability and transparency, using their Encompass Rating System, then awards a zero- to five-star rating. Charity Navigator is the largest nonprofit evaluator and rating service.

• Guidestar by Candid issues four “Seals of Transparency.” Their “basic” seal asks for eight data points with eight optional points before assigning the rating. Their highest seal, “platinum,” requires information on mission, donating, grant-maker status, leadership, programs, branding details, financial data, board data, strategic plan, and metrics demonstrating progress on your mission. Candid is known to be the largest source of information on nonprofits.

• CharityWatch rates organizations from A+ to F, and is not strictly focused on financial information.

• The Better Business Bureau (BBB) evaluates five characteristics of charities: accountability, governance, result reporting, finances, and transparent communications. Organizations can receive the BBB Charity Seal.

If an organization has achieved any of these ratings, they should be noted on its website, social media, and written communications. It is time well spent for nonprofits to focus on keeping these ratings current as a means of highlighting their transparency. Also, know that the IRS and most state charity compliance regulators post relevant, publicly accessible information.

Organizational transparency basics

Transparency goes hand-in-hand with good governance. Ways to demonstrate transparency in governance include:

• Publish a list of board members and their affiliations.

• Publish a directory of key staff members.

• Adopt conflict-of-interest policies for board and staff.

• Adopt applicable IRS best-practice policies, including officers’ compensation, whistleblower policy, and document retention practices.

• Publish current ratings by Charity Navigator, Guidestar, CharityWatch, and BBB.

Transparency challenges

Organizations spend a great deal of time creating policies, updating rating directories, and gathering important financial and governance data. It’s only time well spent if stakeholders can access what they are seeking, so communicating with constituents is vital.

CHALLENGE ONE: Communicating financial data

Financial information and ratings by the big rating agencies may not be based on current data. Stakeholders searching for data often find information that is more than a year old. While the data may be easily accessible on websites, such as IRS.gov and Guidestar, readers often want more current information.

Audited financial statements are often seen as strategic tools for proving financial transparency, but often the timing of the audits only provides reasonable historical assurance to readers of those statements. IRS 990 Forms also demonstrate some level of financial legitimacy, but again are primarily historical documents. Studies have found that many donors are more interested in prospective financial

data, such as budgets, than in historical financial data like audits and tax returns.

Annual reports or impact reports are also historical in nature, though they give the organization more leeway in highlighting progress and outcomes and often serve as a critical tool in communicating with constituents. While there are some drawbacks to historical data, it is still a common and recommended practice to make financial statements and tax returns (990s) available on the organization’s website.

CHALLENGE TWO:

What else do stakeholders want to know?

Some information is relatively easy to gather, such as listings of executive staff and board members. Policy information, including whistleblower and conflict-of-interest policies, is often made available to the general public on the organization’s website. Organizations must spend the time required to develop relevant data to meet the needs of its stakeholders, data often not captured in accounting reports. Many call this “social information.”

People want a platform to connect with causes they are interested in and the nonprofits that support those causes. Organizations must develop a system of impact reporting, that is, measuring performance against goals and mission. The most sought-after information, measuring outcomes and long-term impact, is a challenge for many nonprofits; collecting data on the organization’s activities is key and a good way to get started. Making that information easily accessible is another key element of being transparent.

In recent years, stakeholders have been looking for information beyond the basics, such as:

• How spending decisions are made and by whom?

• What internal controls does the organization have in place?

• Is the organization’s exempt status current?

• How are restricted assets used?

Many stakeholders, including donors, are influenced most by data or policy, but just as many are story driven. They are more likely to support local community-based organizations because they can see the direct impact of the organization’s programs. Honest storytelling can be an effective way to attract and influence prospective stakeholders. Videos and social media postings have become a popular method for communicating snapshots of success stories and other touch points. They don’t have to be professionally prepared, just open, honest, and current.

Trust is given based on two attributes: delivering on promises and doing the right thing to improve society.

Transparency

CHALLENGE THREE: Communicating with myriad constituents

Different stakeholders will access information differently. Some will use online sources and texting, while others visit the organization’s website. And do not be surprised that some still use email, telephone, and voicemail to communicate with your organization.

It is a challenge for most nonprofits to manage all communication channels.

Some basic recommendations for communicating include:

• Keep your website current.

• Maintain a current online presence, particularly with third-party rating sites such as Charity Navigator and the BBB.

• Provide contact information for key staff members.

Kathleen M. Clayton, CPA, PSA, MBA

Co-National Director, Nonprofit Solutions Principal | Clark, N.J.

• Update all publicly available data as often as possible.

• Be absolutely clear in all solicitation materials about how donations will be used.

• Consistently deliver new news.

• Be honest with good and bad news.

• Make it easy for constituents to participate, to ask questions and get answers or give feedback.

• Respond to inquiries in a timely and open manner … always. Yes, transparency takes work. And there are obstacles, including the wide variety of stakeholders, competitiveness within the nonprofit sector, and difficulty in measuring achievements relative to your goals and mission. Building trust through transparency is the responsibility of management and the governing body. It takes work, but the ultimate prize is increased public trust, more financial resources, and organizational sustainability.

Kathleen has more than 40 years of experience in providing auditing, accounting, tax and consulting services to privately held businesses and not-for-profit organizations. She specializes in preparing tax exempt status applications, consulting on charitable regulations and providing outsourced management and accounting services to numerous organizations, including membership organizations, public charities, private foundations, and special improvement districts. She routinely consults with organizations that receive federal and state funding. Kathleen is also a licensed public school accountant.

For more information, contact Kathleen at (732) 453-6528 or kclayton@hbkcpa.com.

HBK NONPROFIT SOLUTIONS // AUTHOR PROFILE

implies openness, communication, and accountability and hand in hand with good governance.

Key Person Protection for Nonprofits

Protect Against the Loss of Your Most Valuable Asset

Onething that can keep your nonprofit’s board members up at night is the thought of losing a key executive or employee to a disability or death. Often the organization’s most valuable asset is its employees. Small to medium-sized nonprofits especially depend on a small number of key people to be successful. The tragic loss of any one of them could have a devastating impact on the organization and its mission. Losing a key person can create significant challenges for the organization to overcome. For one, there is the time and financial resources associated with finding a suitable replacement. The problem could be exacerbated by the difficulty of finding and hiring individuals with similar skills, such as a technology specialist or an engineer or a practiced, capable development officer. As well, the loss of a key person might deprive the organization of the community and service relationships that were closely connected to that individual. She or he might have worked with community leaders and local providers for many years, and the nonprofit had relied on heavily on those relationships to support its purpose and achieve its mission. The loss of a key person could also translate to a loss of revenue and focus on its mission due to the interruption in management or program development.

Facts:

• Over a 45-year career, an employee has a 1 in 4 chance of becoming disabled and unable to work for at least one year 1

• Over a 45-year career, an employee has greater than a 1 in 10 chance of dying prior to retirement 2

Zach Peterson: A Fictional Case Study

Consider the case of Derrin Williams, who serves on the board of Riparian Recovery Trust (RRT), a nonprofit, the mission of which is to protect the Chesapeake Bay by ensuring the streams and rivers in the Bay’s watershed are healthy. That watershed includes waterways in six states from New York to Virginia. Ten years ago, the board hired Zach Peterson as RRT’s chief scientist, and over the years, Zach has been instrumental in developing capabilities to identify and remediate some of the most polluted waterways.

Derrin and the others on the board are thrilled with Zach’s effectiveness, but they are also concerned about what might happen to RRT’s mission if Zach were to die or become disabled. Zach has developed strong relationships with key stakeholders across the watershed and is responsible for securing significant amounts of funding via grants and corporate contributions.

Derrin estimates Zach’s loss would require at least $750,000 to make up for reduced revenue and fund the search for an adequate replacement. So the Trust purchases a $750,000 life insurance policy and a $750,000 key person disability policy on Zach. With the new policies in place, RRT is now protected against the negative financial consequences that would be associated with Zach’s death or disability.

OUTSIDE THE LINES // GUEST ARTICLE AUTHOR

Matt Erpelding, CLU®, ChFC Advanced Markets Team Lead | Ash Brokerage

Key person insurance

To protect itself against the loss of a key person, organizations, including nonprofits, can purchase key person insurance. Key person insurance is a life insurance policy the organization buys for the executive or employee. If that person dies unexpectedly or becomes disabled, the key person insurance provides the funds to keep the business running until it replaces the executive or closes shop.

Typically, the process involves three main factors or steps. First, the nonprofit purchases life and/or disability insurance on the key employee or employees. As well, the nonprofit pays the premiums and is the owner and beneficiary of the policies. In the case of the insured key person’s death, the benefit is paid directly to the nonprofit; in the case of the key person’s disability, there is a waiting period prior to the benefit being paid.

Getting started

Ask yourself if your organization would experience a financial loss if a key employee died or became disabled. If so consider key person insurance. As well, revisit any previous key person insurance and disability coverage you might have in place to ensure your policies are relevant and up to date.

Matt Erpelding has been with Ash since 2005, developing a broad-based understanding of Life Marketing, Life Audit and Advanced Markets. His primary focus is on educating our agents with advanced markets questions and working closely to develop strategies in these areas and tie in the proper product and design to fulfill their planning needs.

Matt is a graduate of Indiana University-Purdue University Fort Wayne where he majored in finance and minored in economics. He can be reached at 260-478-0725 or by email at matt.erpelding@ashbrokerage.com.

Four Eyes on Everything!

Getting a handle on nonprofit fraud and theft.

By Kathleen M. Clayton, CPA, PSA PRINCIPAL | CLARK, N.J.

Icontinueto be amazed reading about nonprofits as victims of fraud or theft. Girl scout cookie money stolen, church collections under deposited, prom and wedding dresses and a fedora purchased from corporate accounts: the incidents just keep coming.

Nonprofits, particularly smaller ones, face a great number of challenges. They often operate with limited resources, have fewer financial controls, tend to be more trusting of staff and volunteers, have ongoing staff turnover, and many are not well versed in financial matters. The Center for Audit Quality noted, “Fraud cannot occur unless and an opportunity is present.”

Some red flags often ignored:

• An employee living beyond their means

• An employee unwilling to share job duties or take a vacation

• Vendors who are not “recognizable” outside the accounting department

• Bank accounts not reconciled timely and reviewed by a second responsible party

• Thinking the auditor will catch it

• Volunteers having access to confidential data, such as banking information

• Missing documents

A recent report indicated that 34.5 percent of fraud involves cash. How is the fraudster operating? Some usual schemes:

• Stealing from cash on hand: petty cash funds, cash register banks, church collections, and donation cans are all subject to cash theft.

Nonprofits, particularly smaller ones, face a great number of challenges. They often operate with limited resources, have fewer financial controls, tend to be more trusting of staff and volunteers, have ongoing staff turnover, and many are not well versed in financial matters.

• Creating fake vendors or fake employees and writing checks to them

• Creating fake or duplicate checks, then writing, cashing,and recording them in accounting records as vendor payments

• Falsifying financial reports and documents: altering or back-dating documents

• Submitting false expense reimbursement requests

• Paying personal expenses from organization accounts

The list is not all-inclusive, and, perhaps even more shocking, in a large number of reported frauds, the fraudster has been with the organization for years. Seniority didn’t matter.

Self-defense

So how can a nonprofit defend itself? Fraud prevention does not necessarily require a large budget or a fulltime risk manager. Smaller organizations can follow some simple steps to create an anti-fraud environment:

• Establish an anonymous reporting system.

• Create a culture of compliance, where nothing gets overlooked and no one gets ignored or criticized for coming forward.

• Require supporting documents for EVERYTHING!

• Control the use and access to credit and debit cards.

• Segregate duties as much as possible; require vacations be taken and those duties be handled by another staff member or volunteer.

• Rotate duties, particularly for volunteers.

• Establish and train a board audit committee to review safeguards throughout the organization on a regular basis.

• Train board members who may be less savvy. Someone on the board should have the skills, knowledge, and expertise to handle financial issues.

• Reconcile bank accounts immediately each month. Understand that “uncleared” anything may be a problem that should be addressed immediately.

• And my personal favorite: four eyes on everything. Require two signatures on checks and two people counting all cash being handled. Have a plan

A recent report indicates that about 40 percent of nonprofit frauds do not get reported to law enforcement. Nonprofits fear damage to their reputations, negative publicity, and the resulting loss of funding. So what should be the protocol when a fraud or theft is discovered? The organization should have a standard response plan that should address:

• Who gets notified of the situation: the board, the attorney, the insurance agent, the bank?

• How is an investigation handled?

• Who addresses the other employees and volunteers?

• Who addresses the public, donors, and the media?

Planning ahead and documenting the process should be a standard practice for every nonprofit. Good, consistent internal control systems can help to provide reasonable, if not absolute, assurance to the organization. Still, no organization is immune. If you have any questions regarding nonprofits as victims of fraud or theft, please reach out to your HBK advisor.

Fraud prevention does not necessarily require a large budget or a full-time risk manager. Smaller organizations can follow some simple steps to create an anti-fraud environment.

Create a culture of compliance, where nothing gets overlooked and no one gets ignored or criticized for coming forward.

Staff and volunteers work hard to make a home for the kids they serve.

Keystone Adolescent Center: 30 Years of Making a Difference in Kids’ Lives

A Q&A with Jim Gentile, Vice President & Director of Finance, and Ashlynn Reeder, CPA, MST, HBK Senior Manager

By Ashlynn Reeder

HBK SENIOR MANAGER

Looking to make a difference? Want to help a kid who really needs it? The directors and staff of Keystone Adolescent Center in Western Pennsylvania say, “Come join us.” Keystone, which has been helping at-risk adolescents since James Gentile opened the center in 1993, operates multiple facilities and programs, including shelters, but it is the staff and their approach to helping those kids, their empathy and how they impart accountability, that is their most important service.

Reeder. Give us some background on your history and community impact.

Gentile. Our dad opened the doors in 1993 as a 24-bed residential group home. Ever since we have been expanding in response to the needs of

our community, including opening Pennsylvania’s first charter school. We provide 24-hour care and supervision for delinquent and dependent males and females from throughout Western Pennsylvania. We use a variety of treatment modules, focusing on the child’s history and future needs. In 1997, we opened up a 20-bed home for older kids coming into the program that focuses on transitional and independent living. As we recognized needs we developed programs to address them, including a specialized setting that addresses issues for boys and girls who have been the subjects of sex trafficking.

Our dad was a teacher and running a group home, then branched off to do it on his own. His vision

not

somewhere to live.

worked with probably more than

kids over the years, plus about 50 kids graduate each year from our charter school.”

was to get kids on the right path to success. We now have 96 beds and 150 employees who live within 20-minute radius of our facility. All four of us sons work at the Center, and much of the staff has been with us for years, upwards of 20 years for some. That kind of consistency is important to helping these kids, who will be with us from three or four months to more than three years.

We originally dealt mostly with delinquents, though we’re not a secure unit so we don’t take dangerous kids that need a lockdown facility. Today we deal more with dependent youth, not charged with a crime but they need somewhere to live. We’ve worked with probably more than 30,000 kids over the years, plus about 50 kids graduate each year from our charter school.

We work well with the community, and the community with us. The churches do things like bring the kids Christmas presents, and kids in restitution work off their community service with local businesses.

Reeder. How do you raise funds?

Gentile. Most of our funding is through county contracts. All our kids are referred by court order. Of the 67 Pennsylvania counties, we have contracts with about 30, including every county in Western Pennsylvania. We do have one fundraiser a year for student activities, like clothes for school or for a nice outing.

Reeder. What are your biggest challenges?

Gentile. It’s tough to spend six to nine months building rapport with kids and helping them become independent and accountable, then see them go back to their families and regress. We try to get the family into therapy sessions, but sometimes that’s hard to do. It’s frustrating to see kids who’ve had such good influences regress. We have a lot of success stories, but also some unfortunate stories of kids struggling or not doing well.

Another concern is staffing. We need people who are good role models, good mentors for the kids.

“Today we deal more with dependent youth,

charged with a crime but needing

We’ve

30,000

Jim Gentile, Vice President & Director of Finance, Keystone Adolescent Center

We train them on our model, but they have to be able to be a coach, a teacher, a counselor. You’re always learning but you have to have empathy. The people who work here get a lot of gratification they get from the job. Some have taken pay cuts to work here, and we’ve had staff leave and come back because they get so much gratification from making a difference in kids’ lives.

The staff does a lot for these kids, including sometimes taking some of their pay to buy them something. Like a birthday cake. Can you imagine a 16-year-old who never had a birthday cake? For some of these kids, their days at Keystone are some of the best times of their lives. They’re proud to live here, that this is their house.

Reeder. HBK is proud to serve as your accounting firm. How important is it to you to have an accounting firm with expertise and experience working with nonprofits?

Gentile. HBK has been our accounting firm from the beginning, for 30 years. Having them as our firm has been a feather in our cap. We look at the audit as a learning experience, how HBK is making us better. We were good at helping kids; now we do our finances well because of HBK. For more on Keystone, visit http://www. keystoneadolescentcenter.com.

“HBK has been our accounting firm from the beginning, for 30 years. Having them as our firm has been a feather in our cap. We look at the audit as a learning experience, how HBK is making us better.”

— Jim Gentile, Vice President & Director of Finance, Keystone Adolescent Center

Keystone facilities and programs

• Keystone Adolescent Center is a 28bed shelter and residential facility for delinquent and dependent males.

• Keystone Female Services is a 24bed shelter and residential facility for delinquent and dependent females.

• Male Transitional Living is a 20-bed facility directed specifically towards male adolescents between 14 and 21 years of age.

• Female Transitional Living is a 9-bed supervised facility helping youth ages 14-21 in the areas of education, safe housing, life skills, and employment.

• Keystone Adolescent Center Foster Care Program provides a community-based family service delivery system that assists children referred after efforts to maintain the family unit have been exhausted.

• Keystone’s Community Based Family Intervention Program provides an intensive program for delinquent and dependent youth and their families, and is a collaborative effort consisting of partnerships with schools, county agencies, community organizations, and families.