8 Ways To Verify Employees Are Handling Cash Correctly
ByWilliam H. Devaney and Jeffrey S. Tenenbaum

Nonprofits are not immune from employee embezzlement. Because many nonprofits tend to be more trusting of their employees and have less stringent financial controls than their for-profit counterparts, they fall prey to embezzlement and other forms of employee fraud at an alarming rate.

 When you write a letter to a foundation or a corporate giving program in search of a grant you hope that the person who reads the letter will take an interest. If you succeed, what happens next? One of the first places a program officer may turn for more information is your 990 posted on Guidestar. Even if the funder has a history with your organization a quick review of the 990 might provide context for your current appeal. Sometimes the latest form will be enough and at other times it may help to look at a series of 990s to see trends or key changes. One note here is that we are in the midst of a transition of the 990 form. For a two-year period the budget and asset level for using the 990-EZ has been raised. Yet during that period, and when the budget and asset levels return to lower levels, organizations’ old 990 forms will still be available. For simplicity I’ll limit my comments to the full 990 form. What are some of the key things that your 990 tells us about your organization? First, the 990 reveals the total size of your budget. If the form is filled out correctly it also tells us a bit about where your resources come from. For example, though you lump foundation grants along with individual giving on the contributions line, there are other lines for showing the cash vs. non-cash resources. In an organization such as a food bank you may report a large non-cash donation (food) as compared to your cash budget. Usually that situation is good news for your organization because it shows that you leverage a large amount of in-kind with a small amount of cash. There are also lines for showing government grants, earned income (along with a schedule that tells us how you earned that income). Finally we can learn how much you brought in from special events, what it cost to run them, and what your net proceeds were. Another aspect of your budget affects organizations with multiple programs. On both the 990 and the 990-EZ there is a place to report your expenditures by program. Also, the new forms ask you to include the revenues by program. This information helps us understand how large a particular program is in the context of your organization. The 990 tells a story about how your organization is run. One major piece of information discloses how resources are spent between program, management & general, and fundraising. This portion of the form often holds the most surprises, and it’s the reason I encourage grant writers to look at their organization’s 990s. I’ve run across information which, on the surface, was quite misleading because the 990 was filled out incorrectly because the organization didn’t understand the importance of this information. For example, a small organization with only one staff person, the executive director, reported nearly all the costs of the organization as management & general. They reasoned that since they called their only employee a director, everything she touched was administrative. In reality, this person spent most of her time on program services. So a portion of her salary and many other costs should have been assigned to program based upon how her time and those resources were actually used. In another case, I was told by an organization that the accountant told them that “…all salaries are overhead.” So all salaries were reported as management & general. I won’t go into the details here, but if you find this sort of reporting on your organization’s 990 it might be time to sit down and check the assumptions that are guiding your organization’s financial management. For example, an accountant for a small business would rightly look at a salary as overhead. But a 501 (c) (3) has different standards both in how it accounts internally as well as forms such as the 990 and under Washington State’s Charitable Solicitations Act. Finally, another major area of the 990 I review is the board list. It helps to understand how many board members you have and who they are. While there is no correct size, there are a few red flags that come to light. For example, in Washington State you can register a nonprofit corporation with only one board member. The IRS does not set any higher standard. Yet an organization with only one board member raises some questions about governance and community support. On the other hand, twenty board members may be too many depending upon the nature of the organization and the community it serves. So even if a funder doesn’t ask for more information, such as the gender and ethnic composition of the board, your 990 still tells a funder a little about your board. Also, you should note that the new 990 asks for more information about governance. If you don’t make it a habit already, check Guidestar for your organization’s 990 and see what it’s saying about your work. Also, be aware that you can sign up with Guidestar to create a profile that may help explain information that you think is missing or should be read in another way.

The shift was made over a year ago, when staff realized the report was not relevant when it came to general operating support grants. “In the proposal, we already ask them to list their annual operating budget and the lump sum they want from us,” Peg Butler, grants manager at Saint Luke’s, says. “At the end of the grant, we don’t need to know what they’re spending on, itemized.”

As funders take a step back to examine their processes and requirements, many are questioning the value of grant reports for general operating support, wondering if the two main purposes of such reports—compliance and evaluation—apply. For example, an organization receiving general operating support is considered in compliance as long as it operated during the grant period with no major changes to its tax status or mission. And, while the organization’s programs may have specific outcomes, operating support does not have a direct, cause-and-effect connection to them that can be evaluated.