Nov. 13, 2008 - IRS Non-profit policy compliance date looms near (amended)

Non-profits, the time draws near! I've written in earlier blogs about the need to address the new IRS form 990: Now's the time!!  Here's the latest from the ASAE bulletin and some sample policies.  ASAE is also sponsoring a program on how the 990 impacts the governance structure of non-profits.  The date for the program is November 21--go to ASAE to register. 

"The retooled Form 990 is intended to give the IRS and the public more information about how tax-exempt organizations operate, and delves deeper into organizations’ governance for the first time.

Part VI of the core form asks all tax-exempt organizations, regardless of size or type, to disclose whether they have a number of policies in place, including conflict of interest, whistleblower and document retention policies. While some of these policies are not required of tax-exempt entities, the IRS has said it believes good governance is tied to organizations’ compliance.

Organizations that operate on a calendar year will need to adopt new policies before Dec. 31 in order to answer affirmatively to the policy questions on the new form next year.

ASAE has partnered with its general counsel Jerald Jacobs, Esq., of Pillsbury Winthrop Shaw Pittman LLP, to create sample governance policies to assist associations preparing to file the new Form 990 next year. The sample policies document, drafted by Jacobs, can be downloaded here. "

Nov. 13, 2008 - Leadership Training Program Available

• Prevent false consensus among group members
• Improve group interactions and decisions
• Help team members overcome their fear of speaking out
• Train volunteers to constructively discuss controversial issues

Have you watched members of your leadership team to say "yes" to a proposed group endeavor when "no" was their true response? It's a common dilemma among Realtor groups where members most both compete and cooperate--and it's the reason why many organizational efforts fail. This all-time favorite CRM Learning video program depicts individuals who support plans they really don't believe in--leading groups to meaningless, costly outcomes. Attendees  of this program will learn how to discuss issues effectively and constructively, and meaningful consensus.

Nov. 10, 2008 - Surety Bonds

An AE writes:

“In reading your post I was curious to hear more about "bonded employees" dealing with association funds.  I'm familiar with surety bonds for events in the event of an accident or other unforseable damage.  Is this the same concept, and, in your expereince what is the best route to obain such coverage (e.g. our local insurance provider, NAR or other)? “

Now I'm no insurance expert, and I hope there's someone out there who'd like to add to or correct my information, but here's what I do know.

The kind of insurance to which I was referring in my previous blog entry is known as the fidelity bond, or employee dishonesty bond. The bond is similar to insurance: the bonding company provides compensation if certain events covered by the bond do occur. For instance, if you bond an employee, the surety company guarantees that you will not suffer a loss if the employee steals from you. There are other types of surety bonds, of course: it's common in government contracts to require a performance bond, which assures that a company will perform the work for which it have been contracted.

In this case, however, it is the employee dishonesty bond that organizations need to consider. Fidelity Bonds can cover individuals, businesses and associations for money or other property lost because of dishonest acts. Similar to Employers Practices Liability Insurance (EPLI), the nature and scope of the coverage and defense can vary from policy to policy. In writing bonds, however, underwriters carefully screen the applications: when you are submitting an employee bond application, review it carefully to ensure accuracy and avoid future claim denial.

Depending on the size and complexity of your organization, you will want either a blanket fidelity bond or a named fidelity bond. In the first type, all employees of the insured are covered, including new employees. All are covered for the same amount, and liability limits are usually on a 'per occurance' basis. Your premiums will be calculated on the amount of coverage you need, the number of employees you have, your deductible, and the type of business you are. Blanket bonds are preferable if you have a large number of employees, frequent emplolyee turn-over, or organizations with volunteer members, like Realtor associations.

Named (or schedule) bonds are based on the inclusion of specific names or positions in an organization or business. Amounts of coverage can vary with the name or position involved, and the cost of the coverage will be based on the amount of coverage and deductibles, the position and the responsibilities of the insured. This coverage is may be selected by smaller operations, and ones where a person may be handling large sums of money (such as the manager of a real estate brokerage).

When you purchase fidelity bonds, expect to be asked detailed questions about the employees to be covered. Make sure that the bond includes a broad definition of “employee”, and will include directors and officers (compensated and non-compensated).

You should know, too, that fidelity bonds are often terminated upon the disclosure of past felony convictions of those who have been covered, even if you didn't know the history of the employee at the time you hired him (or her!). If you are a large organization, your entire coverage may be terminated in the event of such a discovery. As I mentioned earlier, prevention of this situation includes careful hiring procedures and thorough background checks, even in the smallest of organizations.

As with any complicated decision, the best advice is to consult a professional who can explain your options and customize coverage that's right for you and your organization. The employee bond should be a part of your risk management program, no matter how large or small your organization.

Nov. 9, 2008 - Loss Prevention

In a recent court case, a Realtor association executive was found guilty of embezzlement of a significant amount of association assets, and sentenced to a jail term and ordered to repay the organization. This incident, while shameful and embarrassing to our association management profession, is certainly not unknown: I am personally aware of several such cases in our community during my tenure as an AE.

Even more significant, however, is the fact that associations of all types seem ripe for abuse by employees (and by members—more on that later). There are several reasons that organizations fail to protect themselves successfully: often the leadership is not fully knowledgeable of available precautions, sometimes the leadership lacks the business expertise to recognize the symptoms of abuse, and occasionally the Board of Directors is focused on other concerns of the association or of their own business activities.

Responsible management is the answer—responsibility which rests with the leaders, the staff, and the outsourced professionals such as attorneys or accountants. My recommendation is that EVERY association hold an annual leadership training session to address the financial practices of the association and the legal responsibilities of all concerned.

Here are some tips for protecting your association funds:

1. Keep only small amounts of money in the organization's operating fund. Only maintain enough cash for usual operating expenses, and keep the remainder in a CD or other investment which must require more than one person's approval to cash.

2.Don’t let one person have too much control. Even in a small association the responsibilities should be spread among several employees, or a combination of employees and volunteers. Often the requirements of co-signed checks, for instance, seems to be inefficient and burdensome, and checks will be signed in a batch, ahead of time. This practice offers no protection at all: it might be better to have a single signature and ask a second person to initial the check register, or verify the expenditures in some other way. Best practice: Ask at least two board members to review monthly financial statements.

3. Bond and insure anyone who handles association funds, including staff and directors.

4. Do require co-signatures on large transactions. A policy suggestion: allow single signatures on checks under a certain amount, or which can be traced directly to an expenditure allocated in an approved budget. A regular review of check registers and credit card invoices is still encouraged.

5. Every board meeting should include a financial statement, and at least the association treasurer should be expected to be aware of expenditures and the reasoning behind them. While it is unreasonable to expect or even want every director scrutinizing every expenditure, the board should have a clear view of the association financial position, and two directors should have the express responsibility of closely monitoring income and expenses.

6. Pay vendors and collect assessments through electronic fund transfers. Aside from convenience, this practice prevents many types of fraud.

7. Match invoices with outgoing checks to help detect forgeries and phony invoices. A good internal practice is to keep a copy of the check with the invoice in the association's financial files and expect the association treasurer to periodically review or spot check these files.

8.The responsible leadership appointee should always verify that work is performed – don’t blindly approve invoices for repairs or services. By the same token, membership records must be verified and member dues payments substantiated.

9. Conduct an annual audit. If your association has a good financial structure and an ongoing presence of an independent CPA, you could hold a full audit every other year and a CPA review on the alternate years. But in any case, a qualified third party should examine the association books and financial practices.

10. Spend some time examining payroll practices. If appropriate, hire an outside service to pay employees. In any case, more than one person should have accessibility to payroll information, and payroll tax procedures need constant monitoring as well.

The smallest associations are often the ones with the greatest vulnerability for financial abuse. Often the leadership fails to see that investing in asset protection is a part of the cost of doing business. Directors need to know that they MUST invest in regular independent accountants, bonding insurance, and competent employees. In the cases I've seen where associations lost assets to employee dishonesty, it's this very attitude of 'we can't afford the expense' that can lead to even greater loss.

(Ed.note: a couple of years ago, with the help of Dale Stinton, the Great CPA in the Sky, I developed a financial operations checklist. Feel free to use it: it's on my website)