Nonprofit Industry – Functional Expense Statement Tips

Nonprofit Industry – Functional Expense Statement Tips

Nonprofit organizations will need to include a breakdown of expenses by their natural expense classification and their function for years beginning after December 15, 2017. Nonprofits need to be aware of how they are spending funds and how they allocate costs between the functions under generally accepted accounting principles. Below are tips for nonprofits creating or assessing a statement of functional expenses.

  1. General and administrative (G&A) costs are not bad. In fact they are necessary, of course, like most things, they are better in moderation. When an expense does not fall into the program or fundraising bucket it is, by default, a G&A expense. A nonprofit should not hide from the need for funds to operate the organization. Having support staff (HR, accounting, administrative assistants) shows signs of a strong and growing organization.
  2. Fundraising costs are not bad. If an organization has contributions, they should have fundraising expenses. There are opportunities to allocate a portion of these costs to program or G&A expense, however, a series of tests and conditions need to be met.
  3. Create a plan to allocate costs. Ideally invoices coming into an organization would be for a specific function. In reality, many expenses need to be allocated, including rent, depreciation, salaries, and office supplies. Nonprofits need a plan to allocate these costs, for example, by a time study or square footage analysis. Ultimately, the allocation method needs to be reasonable for each item being allocated.
  4. Review and alter the plan to allocate costs. A pillar in accounting is to be consistent, but in a changing work environment, an individual’s time allocation this year may be drastically different than the prior year. As a result, the salary allocation should be reflected differently. 
  5. Executive Directors are not allocated based on the staff reporting to them. Any personal in a managerial role needs to have direct conduct or supervision of a program in order for it to be allocated to program expense. Oversight of personal in charge of the program does not reach the threshold to be included in program expenses.
  6. Categorizing all program expenses together may not be the best approach.  Nonprofits are required to report program expenses by major programs, however, organizations define what qualifies as a major program. These sub-categories of programs may change from year to year, just as they have on the 990 in the past. The same is true for support services (G&A and fundraising). They can be broken down into sub-categories if the nonprofit feels it conveys the information. 

A statement of functional expenses that accurately depicts a nonprofit and complies with generally accepted accounting principles, will take time and effort, but will add valuable perceptive on the financial statements.

Smith Schafer has helped local nonprofits throughout Minnesota grow and thrive in their communities for the past 45 years. To learn more about how we can help, please contact a Smith Schafer professional. Click here to contact us. We look forward to speaking with you soon.

New Study Reveals Costs, Means and Ways to Stop Fraud

New Study Reveals Costs, Means and Ways to Stop Fraud

Would you leave the front door unlocked to your business? Of course not. That would give thieves easy access to your assets. Yet a surprising number of organizations do not have strong antifraud controls in place to protect against dishonest people inside their organizations. And theft from insiders — also referred to as “occupational fraud” — can be costly.

Fraud losses vary significantly, depending on the nature of the scam and how soon it is detected. Globally, the median loss is $130,000, according to the findings from the 2018 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE). Here is a closer look at who was affected and how much was lost, as reported in the latest version of this biennial study.

VICTIM ORGANIZATIONS

Fraud can strike any organization regardless of the nature of its operations or its size. The latest ACFE study included 2,690 fraud cases occurring between January 2016 and July 2017.

While the news media focuses on high profile fraud incidents involving public companies, the median loss for those companies was only $117,000. Private companies suffered far greater losses — their median loss was a whopping $164,000. By comparison, the median losses for government and not-for-profit entities were approximately $118,000 and $75,000, respectively.

In addition, there are subtle distinctions between the types of fraud schemes that strike small and large organizations.

Top 5 Fraud Schemes by Size

Percent of Cases

Rank<100 Employees100+ Employees
1Corruption (32%)Corruption (43%)
2Billing (29%)Non-cash schemes (22%) 
3Check tampering (22%)Billing (18%)
4Expense reimbursement (21%)Cash on hand (14%)
5Skimming and cash on hand (20%)Expense reimbursment (11%)

To Catch a Thief

Small and large organizations also differ in how they catch fraudsters. Tips were the detection method in 29% of the cases involving small entities, compared to 44% of the cases involving large ones. This could result from the prevalence of reporting hotlines, which are more common among larger companies than small ones with limited resources.

Overall, tips are the most common way fraud is initially detected. But it is important to remember outside stakeholders may also provide tips on unethical behavior. In the 2018 study, 21% of tips came from customers and 9% came from vendors. So, it is important to educate your supply chain partners about any reporting mechanisms you set up.

Internal Controls

Beyond tips, a robust system of internal controls may help detect and prevent fraud. The latest study found that 15% of frauds were detected by internal audit procedures and 13% by management review.

What are the critical elements of an internal control system? In terms of lowering fraud losses, the most effective internal controls in the 2018 study were:

ControlPercent Reduction in Fraud Loss
Code of conduct50%
Proactive data monitoring and analysis52%
Surprise audits51%
External audits50%
Management review50%
Hotline50%

On the flip side, weak internal controls often provide dishonest people with the opportunity to steal assets or “cook the books.” In the 2018 study, a lack of internal controls and the ability to override internal controls were cited as the leading factors that contributed to fraud. Together, these factors were present in nearly half of the fraud cases in the latest study.

In addition, the 2018 ACFE study inquired about the types of antifraud controls fraud victims had implemented. The report revealed that 25% of frauds at larger organizations were caused by a lack of internal controls. In contrast, 42% of frauds at small organizations stemmed from weak controls. This finding helps explain why fraud seems to hit smaller organizations harder than larger ones.

Lessons Learned

Over the last two decades, the ACFE’s fraud report has taught important lessons including: No organization is immune to white collar crime. Driven by this report and recent high-profile public fraud cases, companies have increasingly implemented antifraud controls in recent years.

How do your internal controls measure up? Although strong internal controls do not guarantee fraud won’t occur at your organization, they can minimize your losses.