Frequent Frauds Found in Not-For-Profits

• Chapter 0 - A Roadmap for Today’s Course
• Chapter 1 - Case 1 – Misappropriation of Benefits
  • Learning Objectives
  • Background
  • The Case
  • Exercises
• Chapter 2 - Case 2 – Grant Expense Allocations
  • Learning Objectives
  • Background
  • The Case
  • Exercises
• Chapter 3 - Case 3 – Pledges and Contributions
  • Learning Objectives
  • Background
  • The Case
  • Exercises
• Chapter 4 - Case 4 – Fictitious Employees
  • Learning Objectives
  • Background
  • The Case
  • Exercises
• Chapter 5 - Case 5 – Donated Assets
  • Learning Objectives
  • Background
  • The Case
  • Exercises
• Chapter 6 - Case 6 – Off-site and Out of Sight
  • Learning Objectives
  • Background
  • The Case
  • Exercises
• Chapter 7 - Case 7 – Overtime Fraud
  • Learning Objectives
  • Background
  • The Case
  • Exercises
• Chapter 8 - Latest Developments
• Appendix A - AU Section 316
• Appendix B - Excerpts from AICPA Audit and Accounting Guide Not-for-Profit Organizations
• Appendix C - Government Auditing Standards Excerpts
• Appendix D - Other Sources of Information
  • Other Guidance

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Chapter 1 Case 1 - Misappropriation of Benefits

Learning Objectives

• To study how benefits might be misappropriated.
• To consider the fraud triangle in light of operations at off-site locations.

Background

Healthy Families is a large regional not-for-profit corporation organized under Section 501(c)(3) of the Internal Revenue Code operating 25 branch locations in a five county area. Major sources of revenue for Healthy Families are membership dues (35% of operating revenues) and program fees (40% of operating revenues). Additionally, Healthy Families is a United Way agency and as such receives approximately $300,000 each year. For the current year, United Way funding is for three new after school and summer camp programs in low-income areas in two counties ($200,000) and for financial assistance to qualifying participants in after school and summer camp programs at any Healthy Families location ($100,000).

Oversight responsibility is performed by a centrally located administrative office. Branch operations range from providing minimal services off-site to providing a full range of services both on and off-site. Each branch is operated by a branch manager and each branch is staffed with at least one program coordinator and a full or part-time office manager.

Each branch manager hires and fires all personnel needed to operate the branch. The Board formally adopted a written Personnel Policy two years ago that included hiring and firing guidelines for branch managers. No formal compensation system exists at any level of the organization as the local economic circumstances of the various branch office locations dictate branch salaries. Administrative office personnel and branch managers are compensated commensurate with prevailing market rates for similar work. Mid-management, office support, and line personnel are paid less than the market which has resulted in high turnover rates throughout Healthy Families.

For the past 25 years, Healthy Families has employed a professional development director. The current development director was hired from a large out-of-state not-for-profit organization 10 years ago. He is responsible for all grant writing, preparing the annual United Way funding request, and fund raising for all Healthy Families locations. To date, Healthy Families has had very little grant activity because staff does not want to be limited by grant provisions and procedures. At the direction of the development director, all branch personnel are directly involved in the annual fund raising appeal conducted each February.

The Case

The following discussion takes place at the April all-staff meeting held at the administrative offices. Present at the meeting are the CEO, Jerry Bird; the two operating vice presidents, Kelly Nelson and John Carter; the CFO, Abby Brooks; the development director, Rob Strait; and all branch managers.

"All right, listen up everyone. As you know, we completed the annual campaign last month and Rob will now give us the final results."

"Thanks, Jerry. First, I want to thank all of you and your staff for working so hard to make this year's campaign such a success. It was touch-and-go the first few weeks but overall, I believe we were successful. Unfortunately, we were short of our goal by almost $500,000."

"Rob, what happened that caused us to be short of our goal? I thought we were on target and, frankly, I am surprised to hear we fell short."

"Well, John, one of the major reasons we fell short was because the Board fell short of their $750,000 goal by more than $200,000. We also had several branches that were unable to meet their goal and four of our perennial corporate sponsors decreased their level of sponsorship."

A lengthy discussion ensues among all present regarding the details of the successes and failures of the annual campaign.

"Jerry, I have a question."

"Go ahead, Abby."

"Regardless of who did or did not meet their campaign goals and why, we need to figure out how we are going to amend our budget for the $500,000 we did not raise. From where I am sitting, we will need to cut programs and/or staff to compensate for the shortfall."

"Abby, you are always so predictable. You are always crying how the sky is falling. Can we simply not find the money somewhere else?"

"Well, Rob, we could do that but it will fall to you to make it happen. I am not comfortable expanding or continuing services based on 'future funding' that may or may not materialize. What programs will be most impacted if we have to cut services, John?"

"All you branch managers jump in and correct me if I am wrong, but I think the two new teen weekend programs we had planned at the Park South and Downtown branches would be one of the first to go. We might also have to consider limiting the number of scholarships for summer day camp and Camp Tahoe this summer."

"Wait a minute, John, we are already taking applications for Camp Tahoe and the number of registrants needing financial assistance seems to be more than last year. What am I supposed to do, turn them away?"

"Hold on there Scott. As the director of Camp Tahoe I expect you to try and find a solution instead of complaining."

CFO, Abby Brooks speaks up. "Hang on everyone. Now that I know what programs might need to be cut I have an idea. I was at a training session the other day and I heard Joe Durham from DHHS talking about some extra funding the state may have this spring for summer programs. Apparently, several of their grantees were unable to get some of their programs up and running and the state is looking to reallocate the funds before their year end in June."

"I do not know, Abby, we have always tried to stay away from state or federal funding because of all the strings. Besides, you are always telling us we will have to do things differently if we get any grant funding?"

"Well, Rob, we would possibly have to have a different kind of audit depending on how much we received and how much we spent. At this point, I would rather deal with the additional red tape than have to turn kids away from summer camp."

CEO, Jerry Bird looks at the group. "Here is what we need to do folks. Abby, you and Rob contact DHHS and get us first in line for those excess funds. Kelly, you and John figure out what programs might need to be cut or reduced in case the state money does not come our way. All you branch managers, get working on your donors and merchants to get us as many freebies and volunteers as you can so we will not have to buy as many supplies for our summer programs. Any money we do not have to spend on supplies and payroll can be used for scholarships. What are you waiting for people? We are adjourned!"

Later that afternoon Abby and Rob contact DHHS to determine if DHHS has any funding available for any programs like those offered by Healthy Families. The DHHS area manager, Rita Nichols, tells Abby and Rob their summer camp programs have the highest likelihood of being funded since they are the types of programs the original grantees were supposed to provide. She tells Abby and Rob to send a letter of interest and a detailed budget of the summer camp programs they would like to have funded to her as soon as possible.

Later Abby, John, Kelly, and Rob are in Abby's office.

"Thanks for helping me with these budgets and the letter of interest guys. I will overnight them to Rita on my way home today."

"I really hope we are able to get something out of the state guys. No one wants Jerry to have to tell the Board we are cutting services."

"You got that right, Kelly. I do not care what kind of hoops the state makes us jump through as long as we get the funding. It seemed that Rita was pretty receptive to looking at funding our summer programs."

"Let us all keep our fingers crossed that Rita can find some funding for us."

A week later, DHHS informs Healthy Families they will receive $350,000 to provide financial assistance to qualified individuals wishing to attend camps. Due to a requirement in the original funding agreement between the state DHHS and the federal Department of Education, the grantee will be Healthy Families with the benefiting branches the subrecipients. Monies available under the grant will be disbursed directly to qualified recipients at the direction of the applicable branch.

To ensure qualified applicants reimburse Healthy Families for the financial assistance provided, DHHS will send the beneficiary checks (payable to the recipient) directly to the branch providing the actual financial assistance. Branch personnel will then ask beneficiaries to endorse the checks over to Healthy Families. Under the terms of the grant, each branch will weekly send DHHS a listing of that week's grant recipients. The state has agreed to process and mail financial assistance checks within 10 working days.

CFO, Abby Brooks, calls a meeting with all branch managers and the operating vice presidents to go over the procedures that will need to be followed.

"Okay, everyone, settle down. I know we are all relieved and excited about the state funding but I need you to focus on some details with me for the next 30 or so minutes. There are some pretty rigid requirements applicants need to meet in order to receive the financial assistance available under this grant. In your packets you will find a copy of the state application for financial assistance which..."

Abby spends the next few minutes going over the procedures that will need to be followed in determining qualified individuals and documentation requirements.

"Alright, let me see if I have this straight. No one receives assistance unless they are at 200% or below of the state poverty line. We need a copy of their last pay stub or a letter from their employer stating their current salary and withholdings. Then we ask all these questions, get their social security number, and have them sign the form."

"That is right Scott. Do not forget, the documentation is very important. Whoever is going to be processing the paperwork needs to be aware of how important it is to follow all the procedures. We do not want to have to give back any money to the state because we did not properly qualify someone or document everything we needed in the file."

"Maybe if I am lucky, I will get everything filled out in time for the kids to attend the camp closing ceremony!"

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