Preventing Theft, Fraud, and Embezzlement

From National PTA

Piggy-bank-theftIt is hard to acknowledge that theft, fraud and embezzlement are pervasive in today’s
society. In many cases, the person who
commits these acts is someone you know, like and trust. Convincing a nonprofit to prosecute is often difficult. A nonprofit’s duty to its members, the community, and its donors are significant and this should have strong consideration when determining whether to prosecute or not. Managers of nonprofit organizations must constantly be on the lookout for fraud. Fraud costs U.S. organizations more than $400 billion annually. The average organization loses approximately 6% of its total annual revenue to these abuses. And these abuses are perpetrated at all levels of the organization.

Internal Controls

Every organization should have a strong system of internal controls. Internal controls are not only for large organizations; there are steps small organizations can take to protect their assets as well. They may not have enough volunteers or employees to maintain strict delineation of duties but internal controls are still possible. Without good internal controls it could take months to become aware of a problem. View our Fraud Prevention Checklist. Also be sure to access the Preventing Theft in Your PTA e-learning course. This course will teach you how to detect theft in your unit and what to do if you suspect it is happening.

Internal controls are a process designed to provide reasonable assurance regarding the reliability of financial reporting, the effectiveness and efficiency of your operations, and compliance with applicable laws and regulations. Implementing proper internal controls provide assurance that:

  • Fraud will be discovered on a timely basis
  • Perpetrators will be identified
  • A strong deterrent to improper activities is in place
  • Loss will be covered by insurance

Good internal controls will take away the opportunity needed by desperate people to commit a crime. What will cause a normally good person to reach this point? Gambling debts, divorce, illness, drug problems, peer pressure, and work lay-offs are some of the reasons that are given when people are questioned about these abuses. It may be hard to take appropriate action when you have compassion for the person committing the fraud, but that should not be part of the consideration.

Internal controls include policies such as:

  • Always using deposit and expense vouchers for income and expenses
  • Requiring two signatures on every check
  • Having two independent money counters at an event before turning the collected funds over to the treasurer (who then counts again to confirm how much they are receiving)
  • Depositing funds immediately after events
  • Never using blank checks
  • Having bank statements sent to and signed off by a non-signatory to the PTA checking account who is familiar with the PTA’s activities (e.g., the PTA secretary if the president, vice president, and treasurer are all signatories to the account)

PTA-Specific Warning Signs

The following is a list of PTA-specific warning signs that may indicate that theft, fraud or embezzlement is taking place:

  • Treasurer’s report delayed or non-existent
  • Budget monitoring reports delayed (may be part of the treasurer’s report)
  • Delayed deposit of cash receipts
  • Missing supporting documents
  • Multiple corrections to the cash book
  • Checks bouncing when there should be sufficient cash
  • Lifestyle or behavior changes of staff or volunteers

The Cost of Not Prosecuting Fraud

There are many costs as a result of not prosecuting fraud:

  • Not pursuing action sets a precedent that may cause additional fraud later on or create an environment that encourages fraud rather than deters it.
  • This may cause loss of credibility and respect for the association among the members, community, partners and donors.
  • Lack of prosecution may void the insurance policy.

Fraud can have a significant impact on your association. It can lead to:

  • Financial loss
  • Costly investigation (in actual dollars and time lost)
  • Lost opportunities
  • Damaged reputation
  • Damaged relationships with vendors, partners, members and the community
  • Loss of donors
  • Litigation

Investigate all suspected fraud and decide if sufficient probable cause exists to prosecute. You may want to get an attorney involved from the beginning to make certain that evidence of possible fraud is properly preserved. They can advise the association on the likelihood of success in civil court, and protect the organization from issues related to improper actions or civil rights violations against the suspect.

Do not be afraid to talk about fraud. Make it well known that theft will not be tolerated and that prosecution may result. Promote safeguards to reduce incidents of fraud and encourage people to come forward if they suspect irregularities.

Suspected Fraud Action Step-by-Step

When you suspect fraud, be sure to consider the following:

  • Determine if insurance covers the loss.
  • Consider whether to call the police.
  • Consider whether to call the district attorney.
  • Consider whether to meet with the individual.
  • Contact your Illinois PTA district or region director for resources and guidance.

Be sure your PTA has a written policy with procedures describing how future incidences will be handled.

Check the insurance policy before you have a problem to see if it requires prosecution in order to recover a loss. You should also check the policy to see if it will cover losses if you do not have written controls in place or what happens if the controls are not followed. Many times this is grounds for denying a claim. You may want to check your state law to see if there are provisions that you may want to incorporate in your policy.

If you have evidence that fraud has occurred, take the following steps:

  • Do not make accusations.
  • Do not offer not to prosecute if the money is paid back. Doing so is a form of extortion.
  • Determine what other access the suspect has, what other types of fraud schemes the suspect could have perpetrated, the likelihood of collusion, and the possible duration of the schemes discovered.
  • Document all allegations.
  • Gather facts, documents and interviews.
  • Identify all bank accounts involved and consider closing or freezing the accounts. Follow the steps in your policy developed to cover such matters.
  • Contact the authorities.
  • Contact insurance company.
  • If it is determined that fraud did occur, National PTA recommends that the PTA should file an official report with the police department.

Protect Your PTA’s Tax-Exempt Status—File with the IRS On Time!

The IRS requires every 501(c)3 non-profit organization to file some variety of the Form 990 annually. Failure to file for three consecutive years will result in your PTA’s non-profit status being revoked and having to pay taxes on your PTA’s income. In addition, many businesses will not make donations to organizations that are not tax-exempt.

Which IRS Form 990 you need to file depends on your PTA’s gross income. Gross income is the total amount of money your PTA takes in over the fiscal year, including all membership dues. Here’s how the IRS breaks down who files which Form 990:

Your PTA will need to file by the 15th day of the fifth month after the end of your fiscal year. For PTAs that have their fiscal year end on June 30th, the filing deadline is November 15th.

For most PTAs, only the online Form 990-N is required. Completing the form takes less than ten minutes, and the IRS will usually notify you within an hour that your form has been accepted. Be sure to print out this receipt and send it in to the Illinois PTA state office along with a copy of your audit report by December 31st (you can send this along with your dues payment).

Here is the information you will need to complete the Form 990-N:

Organization’s legal name

An organization’s legal name is the organization’s name as it appears in the articles of incorporation or similar organizing document, as most recently amended and (when required by state law) filed with the appropriate state authority. If you have changed your organization’s legal name, you must inform the IRS of the new name and provide certain supporting documentation before filing your e-Postcard.  You should report the change of name as far in advance of your filing deadline as possible.  If you haven’t received an affirmation letter reflecting your name change by the time your return is due, you will have to file a paper return (Form 990 or 990-EZ) for the year in which you changed your name and report the change of name on the paper return.

Any other names your organization uses

If the organization is known by or uses other names to refer to the organization as a whole (and not to its programs and activities), commonly referred to as Doing-Business-As (DBA) names, they should be listed.

Organization’s mailing address

The mailing address is the current mailing address used by the organization. If the organization’s mailing address has changed since it filed its previous return (Form 990 or 990-EZ) or e-Postcard simply enter the new mailing address.

Organization’s website address (if you have one).

Organization’s employer identification number (EIN)

Every tax-exempt organization must have an EIN, sometimes referred to as a Taxpayer Identification Number (TIN), even if it does not have employees. The EIN is a unique number that identifies the organization to the Internal Revenue Service. Your organization would have acquired an EIN by filing a Form SS-4 prior to requesting tax-exemption.  The EIN is a 9-digit number and the format of the number is NN-NNNNNNN (for example:  00-1234567).

  • If you do not know your EIN, you may be able to find it on the organization’s bank statement, application for Federal tax-exempt status, or prior year return.
  • Please note that the EIN is not yourtax-exempt number.  That term generally refers to a number assigned by a state agency that identifies organizations as exempt from state sales and use taxes.
  • If you do not have an EIN, see theInstructions for Form SS-4 for different ways to apply for an EIN.  DO NOT use the EIN of a parent or other organization.

Name and address of a principal officer of your organization

Usually president, vice president, secretary, or treasurer – often specified in the organization’s bylaws.

Organization’s annual tax year

Like any taxpayer, exempt organizations must keep books and reports and file returns based on an annual accounting period called a tax year.  A tax year is usually 12 consecutive months that can be either calendar year or fiscal year and is often specified in the organization’s bylaws.

Answers to the following questions:

Protect your PTA’s tax-exempt status by filing your Form 990 on time. The IRS has additional information about protecting tax-exempt status, including online training videos.

Protect Your PTA Officers by Incorporating

The Illinois PTA encourages all PTAs to incorporate because incorporation offers additional liability protections for all PTA members. In the event an incorporated PTA is sued, barring willful or wanton conduct, only the PTA, as an entity, with its limited assets, would be subject to lawsuit and/or damages, not the individual members. Liability of the members is limited to the assets of the corporation.

Incorporation is a simple procedure requiring some moderate fees:

  • The Secretary of State’s website, com, has a great deal of information on filing for, maintaining and checking on incorporation. In addition to finding information, downloadable forms and filing fees, the site offers a new real time search of the corporate database. This allows you to check to see that your PTA incorporation is up to date. To contact the office by phone, call (800) 252-8980. When checking for information on filing to become a corporation, be sure to look for the not-for-profit corporate information.
  • Complete two copies of Form NFP-102.10 from the Secretary of State’s Office, Corporation Division and return to the Secretary of State’s office with a certified check, cashier’s check or money order ($50 currently).
  • Common PTA names (e.g., Washington PTA, Lincoln PTA, etc.) should be identified with the PTA District number, Region name and/or town. A search on the website can tell you if the name you are requesting is already being used.
  • A registered agent is required. This individual should be someone who will have a long-term involvement as a member of the PTA. Notification is necessary when there is a change of registered agent. The permanent address for the corporation can be the same address used for the Employer Identification Number (EIN) of the PTA.
  • Within fifteen (15) days after receipt of the certificate of incorporation, it must be filed with the Office of the Recorder of Deeds in the county in which the corporation is located.
  • Annual reports are required to be filed with the Secretary of State before the first day of the corporation’s anniversary month. Failure to file could lead to dissolution of the corporation. The Secretary of State’s office usually sends a reminder to file this report, but it is also available online and a minimal fee is charged to keep the incorporation up to date ($10/year currently).
  • Article I of the PTA’s bylaws must be amended following incorporation to add a new third sentence, “This PTA is incorporated under the laws of the State of Illinois.”
  • The office of the Illinois PTA should be notified at (800) 877-9617, providing the corporate 8-digit number.

Questions to Consider When Planning a PTA Fundraiser

As the new school year approaches, many PTAs are planning their budget for the coming year. One part of that budget is fundraising. The National PTA Back-to-School Kit has a list of questions for PTAs to use as guidelines when selecting and planning a fundraising project.

  • Does it adhere to the PTA mission and purpose?
  • Does it conform to the noncommercial, nonsectarian, and nonpartisan policies set forth in the PTA bylaws?
  • Does it refrain from using or exploiting children? Will it create goodwill for the PTA?
  • Is it a type of activity that can serve as a positive example for children and youth? Will it provide the revenue to help meet the PTA’s goals?
  • Did the fundraising committee provide a budget of expenditures (e.g., materials and advertising for the event), as required by the PTA’s bylaws and standing rules?
  • Do the state and local governments require the PTA to collect and remit sales tax? Are special permits, such as special licenses or health permits, required or needed?
  • Is the liability of the PTA and its members protected through sufficient insurance or otherwise?
  • Did the president sign the contracts for vendors or manufacturers? Do the contracts and products cover who is responsible for spoiled or damaged goods? For unclaimed goods?
  • Is the PTA using volunteers, or does it have to pay or contract with workers? (Note that in Illinois, paying workers may be considered working with a professional fundraiser, which can result in the PTA needing to file an AG-990 form with the Illinois Attorney General’s office. Also be aware that once a PTA files an AG-990, it must continue to file annually.)
  • Have procedures been established to safeguard the handling of products and money? What are the costs for using a facility? How long is the event going to be held? Are here special requirements or restrictions for using the facility? Are fire laws and safety precautions strictly observed? Is the facility accessible to people with disabilities?
  • Is it an infrequent or ongoing activity? Be aware that unrelated business activities could result in some federal or state taxation of the income earned or, in the extreme, the loss of your tax-exempt status.
  • Are there local, state, or federal laws that apply? Is care taken to see that no law is violated?

 

Depending on the PTA and the activity, there may be other questions that need to be addressed. When considering several funding ideas, review this list, as well as other questions and concerns, to determine which fundraising event to choose.

You can find more information on PTA fundraising in the National PTA Back-to-School Kit.