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HomeMy WebLinkAboutFundamentals1 Fundamentals Second 0uarter 2007 Ways and means for the public sector • • • • • • • • • • Fraud i ails merit: Prograrns to fit any budget The fall of corporate behemoths like Enron and WorldCom demonstrates that fraud can bring down even the mightiest of corporations. The magnitude of the problem is staggering. According to a recent survey conducted by the Association of Certified Fraud Examiners — its 2006 Report to the Nation on Occupational Fraud and Abuse — a typical organization loses 5 percent of its annual revenues to occupational fraud. Corporate giants aren't the only organizations dealing with this problem. Government and not -for -profit organizations also experience the devastating consequences of fraud. The median loss suffered by organizations with fewer than i0o employees was $19o,000 per scheme — even higher than losses in larger organizations. Fortunately, public administrators can take simple steps to reduce the cost of fraud without breaking the budget; Why are small and midsized organizations so hard hit by fraud? Most often, it's because these organizations are less likely to have robust fraud management programs, especially at smaller organizations where many agency and NFP executives believe that comprehensive programs are beyond the reach of their limited budgets. Fortunately, public administrators can take simple steps to reduce the cost of fraud without breaking the budget. In many cases, the following steps can even pay for themselves. 1. Establish an anonymous fraud hotline. Fraud schemes at government and NFP organizations are more often identified through tips than by any other means. Organizations with fraud reporting hotlines tend to identify fraud earlier — before problems can grow. In fact, according to the survey, the median cost of fraud schemes perpetrated in companies with reporting hotlines is about half the median cost of schemes committed in companies without hotlines. And because many service providers will staff a 24-hour hotline and charge based on number of calls received, it's feasible to implement a hotline in nearly any organization. 2. Provide fraud awareness and ethics training for all employees. According to the survey, organizations that provided fraud awareness training reduced the cost of the average fraud scheme by half. With a few hours of relatively low cost training, the likelihood that employees will notice and report a problem increases significantly. 3. Ensure regular internal and external audits. Organizations with an internal audit function had a median loss of $120,000 per incident, compared to $218,00o per incident where there were no internal audits. In addition to detecting incidents that have already occurred, audits can deter employees from committing fraud. Given the average savings, some organizations find that internal audits often pay for themselves in fraud reduction savings alone. 4. Conduct surprise audits. Audit programs are especially effective in deterring fraud when surprise audits are performed. Among organizations that conduct surprise audits, the average fraud incident was about $loo, 000 — half the cost of the average fraud incident among companies that don't perform surprise audits. Despite their effectiveness, most government and public administration sector organizations do not conduct surprise audits. While 76 percent of these organizations had an internal audit function, only about 40 percent conducted unannounced audits. Fraud management, continued on page 3 For the busy executives of companies on the move RSM McGladrey Advantage - a monthly e-newsletter full of feature-length articles, reports and Webinars on topics specific to organizations like yours - contains business -wise information you can use to keep ahead of your competitors. Sign up today by visiting www.rsmmcgladrey.com/advantage or calling 888.349.3100. 2 Fundamentals . 1. a, h�4,1 "4C, �'f-��t"�1�. r e t4, In late 2006, the FASB issued a FASB Staff Position (FSP) that extended the reach of the definition of a public entity. FSP FAS 126-1, Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities, amended several existing standards and clarifies the definition of a public entity. So how may this affect you? What exactly are conduit debt securities? The new standard affects entities that have conduit debt securities. A governmental entity can issue conduit debt securities, frequently called municipal bonds or industrial revenue bonds. A conduit debt security is an offering by a governmental entity that is not for its own use, but for the use of the organization that becomes the conduit bond obligor. In these types of transactions, the governmental entity is the issuer of the security, but normally has no subsequent liability or continuing involvement. The organization who receives the proceeds in the transaction is the obligor and must meet the debt service requirements of the bonds. The FSP concludes that organizations with conduit debt securities that are traded in a public market — a domestic or foreign stock exchange or an over-the- counter market, including local or regional markets — meet the definition of a public entity. As a result, the organization must include certain additional disclosures in its financial statements. What are the additional disclosure requirements? The following is a list of the standards and a brief description of the related disclosure requirements: • APB Opinion No. 28, Interim Financial Reporting: requires certain disclosures in interim financial statements if statements are provided to external users. • FASB Statement No. 69, Disclosures about Oil and Gas Producing Activities: requires certain disclosures about oil and gas reserve quantities and capitalized costs related to oil and gas activities. • FASB Statement No. 1o9, Accounting for Income Taxes: requires additional disclosures about the types of temporary differences and a reconciliation of the reported tax expense to the expected tax expense. • FASB Statement No. 126, Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities: requires disclosure about the fair value of financial instruments. • FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits: expands the disclosure requirements for defined benefit pension plans and defined benefit postretirement plans. • FASB Statement No. 141, Business Combinations: requires certain pro forma disclosures about business combinations. • AICPA Audit and Accounting Guides, Not -for -Profit Organizations, and Health Care Organizations: requires those entities to disclose information required by the standards mentioned above. Note: Those that may be more likely to impact your organization are bolded, but all should be considered for applicability. NPFs are specifically scoped out of FASB Statement 131, which means the implementation of FASB 126-1 wouldn't require an NPF to disclose segment information. What is the effective date? The new disclosure requirements of the standard are effective for fiscal periods, including interim periods, beginning Dec.16, 2006. Your first step is to determine if this new standard applies. If it does, use the list above as a starting point to determine its effect on your financial reporting. To help you identify the full scope of the additional disclosure requirements, consult with your audit advisor. Bruce Jorth is a managing director with RSM McGladrey. For more information, contact him at bruce.jorth@rsmi.com www.rsmmcgladrey.com — your single business resource Have accounting, tax or business consulting questions? RSM McGladrey provides tax and business consulting, wealth management, retirement resources, payroll services and corporate finance services to meet domestic and global midsized companies' needs - all in one source. Visit www.rsmmcgladrey.com for more information.. Nat,figator rating? Most donors and would-be donors want to contribute to financially healthy organizations that are good stewards of their resources. But in the past, it was difficult to gauge — without time consuming research — whether specific not -for -profit organizations met these criteria. Now Web sites like Guidestar (www.guidestar.org) and ERI (www.eri-nonprofit-salaries.com) make data from IRS 990 forms available online. As a result, it's easier than ever before to analyze and compare NFP financial reporting information. And organizations that evaluate charities find it simpler to retrieve this information. As donors become more savvy about giving decisions, NFPs need to know who will be evaluating them and what the assessments mean. Charity Navigator (www.charitynavigator.org) uses Form 990 information to analyze charities' financial performance in seven categories. It then makes a benchmark comparison and assigns a score ranging from zero to io in these categories, as well as assigning ratings for organizational efficiency, organizational capacity and overall financial health. A general rating of up to four stars is finally designated for each organization. A charity with a four -star rating from Charity Navigator is likely to include that information in its print and online solicitations. This rating can differentiate organizations within a particular category. And if a well managed charity loses its coveted four -star Charity Navigator rating, it will no longer be able to tout the achievement on its Web site. Managing your rating Public companies are familiar with stakeholder and media scrutiny. Many NFPs aren't. But it's time to think about preemptive measures. If your NFP loses a star or can't claim an impeccable rating, consider providing information to donors about how specific challenges are being addressed. Be clear about your goals and explain what measures you're using to monitor performance. When it comes to managing Web site ratings, every organization should take the following steps. • Review your Form 990 carefully. It's your most public and widely accessible document. Ensure all information is accurate and all questions are answered carefully. If information might prompt users to ask questions, be prepared to answer them. • Determine whether you have a Charity Navigator rating and understand how and why it was assigned. • Review your Guidestar records. Contemplate adding information about your organization and keep it updated. • Review your Web site. Do you adequately describe how you are addressing any challenges? • If you are independently evaluated, consider adding information about the evaluation — adding a commentary if it's helpful to do so. While maintaining a four -star rating may not always be feasible, start by looking for opportunities to improve your NFP's financial health. And be prepared to demonstrate how your organization is planning for future success. Ian Benjamin is a managing director with RSM McGladrey. For more information, contact him at ian.benjamin@rsmi.com Fraud management, continued from page 1 These measures are just a few examples of steps to include in a fraud management program. The most effective programs are designed specifically to fit an individual organization. Depending on factors such as size and industry, other anti -fraud measures should be considered. Controlling fraud is a key management responsibility. While publicly traded companies are required by law to have a fraud management program, government and NFP organizations often overlook such programs. Given the rising cost of fraud and the potential damage to an organization and its reputation, a comprehensive, tailored anti -fraud program is essential. Jodi Swauger is a director with RSM McGladrey. For more information, contact her at jodi.swauger@rsmi.com. The early edition — get desktop delivery of Fundamentals Don't want to wait for your next issue of Fundamentals? Get quicker - and paper -free - access to not -for -profit and governmental entity information by signing up for the electronic version of our award -winning publication. 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