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Weekly UpdatesMost nonprofits depend heavily on federal, state and private grant funding. A vast majority of these funds are properly used to promote and operate important programs and to help many facets of society.
However, the potential that grant funds can be misused is very real. If funds are misused, there can be devastating consequences. Whether the fraud is committed intentionally, through a negligent act, by a simple mistake, or a series of mistakes, the results can range from a loss of funding or public confidence to the extreme of criminal charges.
In virtually every single case of grant fraud--including intentional theft of funds and false statements about the use of the funds--there was likely someone in a position to prevent the problem or assist in detecting it. Every member of an organization, from the entry-level employee, to the executive staff, to members of the board of directors, has the opportunity to potentially prevent or identify such problems. The prevention or early detection of fraud issues provides a positive outcome for everyone--including the organization, the grantor, the community, and the individual perpetrator.
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Following is a discussion of three risks that every nonprofit faces, related to grant funding, and the most important ways to mitigate these risks to help pre vent problems before they occur.
CONFLICTS OF INTEREST
Virtually every grant agreement requires compliance with some type of conflict of interest (COI) statement that prohibits an actual conflict of interest or the appearance of one. In practical terms, these agreements generally prohibit grant program decision-makers from making decisions about the use of funds that have an impact on their own personal interests, such as their consulting or other businesses and the businesses or employers of their family members, business partners, future or past employers, or others.
A common issue in this area is the independent (or often not-so-independent) consultant who assists a grantee in developing a grant proposal and then later receives a contract to provide some of those services. These contracts are sometimes no-bid arrangements with little to no best value or price reasonableness determinations. Other common complications include the lack of a clear purpose for the contract, well-defined deliverables, and poor documentation of how the consultant earned the funds they were actually paid. Additionally, board members often run local businesses, and therefore grantees must exercise due care when making decisions to award contracts to these related parties.
COI issues are rarely black and white or right and wrong scenarios. They require careful analysis and disclosure to the appropriate parties, normally the grantors themselves.
There are steps to preventing COI, including:
* Annually educate every employee and board member regarding the defined COI prohibitions that bind the organization. This reminds everyone of their obligations and helps the organization to better steer clear of COI-related problems.
* Refer every potential COI situation to legal counsel or the grantor in writing and request a written opinion. (An approved COI likely ceases to be a COI.)
* Ensure there is a written procurement procedure in place and that it is followed. Most entities default to the state or local government procurement rules, so the primary challenge is to ensure the procedures are followed and properly documented.
* Carefully review every consulting contract for the following key questions: Who, What, Where, When, How, How Much? Does the written agreement clearly lay out these details? Is the contract fairly valued and well documented?
* Consider having every consulting contract reviewed by legal counsel and approved in writing by the board.
MISUSE OF FUNDS
A grant agreement is essentially a legal contract between a grantor and a grantee. The grantee promises to engage in certain activities or procure certain goods, and the grantor agrees to transfer funds to the grantee to pay for these costs. Some grant agreements are simple one-page documents, and some are complex with multi-year budgets, program income allowances, indirect cost rates, multiple salaries, and other variable costs.
Regardless of the simplicity or complexity of a grant program, the funds must be used as agreed to and the grantee must maintain appropriate documentation to prove that the funds were indeed used as represented.
To properly track the use of these funds and to support reimbursement claims, grantees are required to have an accounting system with an appropriately designed and implemented system of internal controls. One common issue in this area is the proper accounting of cost claims. This becomes especially complex if an employee's salary is paid from multiple sources of funding. There must be a process to accurately document claims to each of these grantors via a timesheet or other appropriate documentation.
Additionally, every grant requires some type of written assurances from the grantee to the grantor that funds are being or have been used properly. These assurances generally come in the form of financial certifications and narrative descriptions of the grantee's activities and accomplishments.
Here's how to help prevent the misuse of funds:
* Ensure that the proposed grant program and budget documents are accurate, complete and realistic in their goals. Multiple parties should review the final grant application package before it is submitted to the grantor.
* Read and understand the final grant agreement. The signed, written grant agreement is essentially a contract between the organization and the grantor. The right people, possibly including the grantee's employees, board of directors, community partners, and others, should have access to and be required to read this document to ensure compliance.
* Ensure there is an objective and well-designed process to make certain that the funds are being used as required. The establishment of written program goals and milestones can help the organization stay on the right road. Comparing budgets to actual spending can also yield helpful information.
* Support all assertions. Financial status reports, narrative progress reports, and funds requests must be supported by verifiable facts. Before these reports or requests are submitted to the grantor, ensure they are reviewed for accuracy, sufficiency, and completeness. In many organizations, one person fills out, signs and submits these forms with no oversight or fact-checking by another party.
* Properly capture and disclose program income. How does your accounting system treat program income, such as training fees? Is there a clear policy on tracking such revenues and reporting them to the grantor?
* If your organization receives funds from multiple sources for the same program or overlapping purposes, carefully plan and document the receipt and use of each of these sources of funds.
* Develop written procedures for properly recording time and personnel costs and regularly remind employees of the importance of maintaining accurate time records.
* Use caution when it comes to indirect cost rates. Indirect cost rate calculations can be complex and cumbersome, yet they are critical to recovering costs that .otherwise might not be captured. If your organization uses indirect rates, verify that the rate has been approved by an appropriate authority, audited if necessary, and adjusted as required.
EMBEZZLEMENT
By far the most common and potentially most damaging threat to any organization (whether funded by government grants or other sources) is embezzlement. Embezzlers are often incredibly creative, manipulative and smart people. That is why they can do so much damage and remain undetected for an extended period of time.
From the simple scheme of writing themselves checks or misusing an organization's credit card to the complex schemes of establishing dummy vendors or colluding with outside parties, the common thread to all embezzlements is poor or non-existent internal controls or overriding those controls.
People often equate internal controls with the concept of trust and therefore hesitate to question employees or others when a practice violates or circumvents an internal control. An accounting system where internal controls are ignored or non-existent creates an environment where embezzlement is virtually inevitable.
Here are some steps to prevent embezzlement:
* Separation of duties: The functions of receipt, disbursement, recording, custody, and audit/review of cash or cash equivalents such as checks, credit cards or gift cards should be done by separate individuals whenever possible. This can be especially challenging in smaller organizations where one person "has a good head for numbers" and volunteers to "take care of the books."
* Use of an outside bookkeeper, CPA or fiscal agent: some organizations would strongly benefit from having an outside entity manage their funds.
* Do not routinely allow employees to receive checks for reimbursement of program expenses. If supplies, food, or other expenses are regularly required for the grant program, establish a billing or other Financial process to ensure the claims are legitimate, necessary and properly approved.
* Require that bank and credit card receipts be independently reviewed and affirmatively approved by two or more people, including a board member, in a timely fashion.
* Carefully control and independently verify the proper use of checkbooks, debit cards, credit cards, gift cards, and cash. Some financial institutions offer read-only access to Internet-based banking and credit card records.
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