IL-NET TA

Can I pay a board member for work completed?

Question from a new Executive Director: Between the death of the prior director and the date I started, my center had a board member who really stepped up and made sure things ran smoothly. Now the board is discussing how she should be paid. Is it okay to do that this late in the game? She finished her work several month ago.

Answer: The matter of payment to a board member, especially retroactively, is complicated. The work you describe took place over two separate federal fiscal years. It is too late to charge that back to last year’s grant, and it may not be allowable (more about that in a second) so the first question is: What do you want to do and do you have discretionary funds to do it? Whether you pay a contracted amount or purchase a gift to say “thanks” you probably are best off to use discretionary funds. Especially if you use federal funds, though, consider these other issues:

Does your state allows this practice? Some states forbid compensation for non-profit board members, even for providing a service.
Board members are not expected to benefit personally from their affiliation with the non-profit organization. On the other hand, you had a board member who stepped up in a crisis and spent much more time than a board member typically would, in order to assist the organization after the death of the founder and executive director. S/he should not suffer financially for providing a very critical support.
Did you follow your own policies regarding the procurement of a contract and the procurement of board member specifically? Did you handle according to procurement regulations for federal funds if you are using grant dollars? Since the board had a sudden vacancy in leadership, they had the right to bring someone in to handle the situation immediately and perhaps until an executive director could be hired. In that emergency, you should be fine with this use of funds at least immediately after the event.
Was this decision documented in board minutes? If not, it might be wise for someone to detail how the decision was made and keep that for the record. It is not typically acceptable business practice to decide on compensation after the fact. Hopefully there was discussion up front regarding a contract, the rate of pay, the maximum to be paid and so forth. If not, an actual contract payment is more difficult to justify.
The next question is whether the proper safeguards against conflict of interest with a board member were taken. Typically this would include checking prices with two other consultants to assure that the amount charged is “reasonable”. We also recommend that the board member either resign from the board or take a leave of absence from the board while providing a service to the organization. (I know it is too late for your situation, but consider this policy in the future.) This assures the board’s ability to oversee the contract without the apparent or actual conflict of interest with the person still on the board.
Should a non-profit board member ever be paid for a service (as opposed to reimbursed for an actual expense)? Generally they are not compensated for serving on the board, but might receive compensation for work done for the organization. The payment typically would be outlined in a contract and must be reported to the IRS on a form 1099-MISC if it exceeds $600 in the year.
Your bylaws should be reviewed, as they may prohibit or limit compensation for board members. (Or they could be silent on the subject.)
You will also want to check with your Secretary of State’s office to make sure that a non-profit board member receiving compensation for service in your state doesn’t lose immunity in lawsuits.

The non-profit board member has a duty to preserve the public trust. If you feel anyone in the public will protest the payment to the board member you must tread carefully. Addressing these points will assist you in that process.

Disability Determination and Consumer Control

Consumer control is an important foundational philosophy of Independent Living. Centers are required to have more than 50% board members who are people with significant disabilities, and more than 50% staff, and managers, who have disabilities. SILCs must have more than 50% people with disabilities of the full council and of the voting membership who don’t work for a center or the state.

The only requirement of proof of significant disability within Parts B and C is the individual’s affirmation that they have such a disability. Typically this is on an intake form, and they check the box “I have a significant disability”, or the staff person can mark it in the electronic record.

The same is true for the board members and staff who are counted to determine consumer control for the Centers. No medical proof is requested or required. You ask them, perhaps on a board application or in an interview (which is legal since they are not employees) it they have a significant disability.

I suggest, though, that if you feel you have to talk people in to admitting a disability, you are not honoring the IL philosophy of consumer control. The disability community — those of us who openly acknowledge a disability, whether it is visible or not — should be in charge of centers and SILCs. Consumer control — the word control was very intentional in the Rehabilitation Act and should be intentional in your policies and practices. Consumer control isn’t a number. It is a way of thinking that should be evident in consumer services as well as in the board room.

Can we buy T-shirts with our grant and sell them?

Question:
Do you know of any rule or federal law that prohibits us at the State level (SILC) from selling T-shirts or doing any other type of fundraising or collecting donations to our organization. Our funding is minuscule and we are all volunteers. Your help is appreciated.

Answer: The Rehabilitation Act, Title VII, is the law that establishes the SILC and sets out its duties (required) and its authorities (allowed if included in your State Plan for Independent Living (SPIL)).

Man in black T-shirt pointing to his chest.

Section 705 of the Rehab Act includes this language: (2) AUTHORITIES.—The Council may, consistent with the State plan described in section 704, unless prohibited by State law— … (B) conduct resource development activities to support the activities described in this subsection or to support the provision of independent living services by centers for independent living

This means that you are allowed, but not required, to conduct resource development activities that assist the SILC in their duties or that assist the CILs IF the plan for resource development is part of your SPIL.

There are also regulations that apply to whether or not an expense is allowed with federal funds. 75 CFR 403 states that the cost must be necessary and reasonable for the performance of the Federal Award. Then beginning in 75.420 the regulations give a number of examples of costs that are not typically allowed. These include advertising and public relations (§75.421), so T-shirts are not typically allowed. If you purchase them with non-federal funds, of course you can do whatever you want, but you cannot pay for most promotional items with federal dollars. If you want to sell them as a fund raiser it is even more important that funds other than your grant pay for the purchase, and that your proceeds are only the profit you make on the shirts, not the full income.

There is an interesting exception that may apply. You are allowed to purchase whatever you need to perform the goals in your SPIL. If you have a goal in your SPIL related to outreach to youth, for example, you may be able to justify buying T-shirts or other promotional items to reach out to them and assist them in connecting with the IL Network in your state.

One more thing that may or may not apply. You notice the regulation quoted above says you may “conduct resource development activities”. It does NOT say fund raising, and in fact, fund raising is strictly prohibited with federal funds (§75.442). Be very careful that you never say your are “fund raising” with federal dollars. We don’t have a definition for resource development so it is up to each entity to determine what resources in your state can develope and how you want to do that. If it is included in you SPIL you should be able to develop resources.

*CFR =Code of Federal Regulations

How do I teach consumer control to staff?

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Question: I’m particularly focused on boundaries and personal choice as reminder to existing peers in their work with consumers. As happens with many of us in any human service in our desire to “help,” I’ve had a couple situations in which peer advocates have done far more for consumers than they should have. I figured a refresher training on boundaries, etc. would be good, What other resources might work for us?

I like to start with some philosophy, because the Rehabilitation Act, the first paragraph of Title VII begins with that. It reads: The purpose of title VII of the Act is to promote a philosophy of independent living (IL), including a philosophy of consumer control, peer support, self-help, self-determination, equal access, and individual and system advocacy, in order to maximize the leadership, empowerment, independence, and productivity of individuals with disabilities, and to promote the integration and full inclusion of individuals with disabilities into the mainstream of American society…

That language – a philosophy of consumer control, self-help, self-determination … in order to maximize leadership, empowerment, independence and productivity – state our goal clearly in terms that emphasize the individual’s control of their life and decisions.

We also have a four-part series of videos around the history and how that philosophy came to be. Each is about 20 minutes and works well as part of a staff meeting. You can find these at https://www.ilru.org/il-history-and-philosophy-orientation-for-il-staff

As you move from philosophy to action, an Introduction to Consumer Service Records, IL Plans and Service Coordination is always a good foundational piece https://www.ilru.org/introduction-consumer-service-records-independent-living-plans-and-service-coordination-for-cils

Your own written policies and procedures should mirror this philosophy and specifically state that the individual is in charge of their decisions. When it comes to helping staff understand boundaries, no tool is greater than their own experience as people with disabilities. You might help them think about scenarios in their own lives, or give sample situations for discussion and learning.

Those things should get you started. Reach out again when you are ready for more.

What should you do when you discover waste, fraud or abuse of funds?

Businessman, handcuffed hands behind his back, holding $100 bills.

Embezzlement is a very specific type of fraud, and most cases involve taking money from an employer through deceit. Usually the person embezzling is the person who cuts your checks, and often they have developed an elaborate ruse to use the CIL or SILC funds to pay their own bills by altering checks or creating fake vendors or employees. Taking company money for personal use without proper authorization is embezzlement, even if the individual rationalized why the funds should belong to them, or that they were “borrowing”. As recipients of federal funds, embezzlement is a serious issue that can damage your bottom line and the integrity of your center or SILC, and can require that the funds are repaid, either by insurance, through legal steps, or with discretionary funds, back to the funder. If you suspect an employee is stealing from you, you need to handle the matter quickly and carefully. Here are some steps for you to take:

Gather initial evidence: If you suspect an employee is embezzling money or stealing property, the first step is to gather evidence to prove your suspicions. Good internal controls — reconciling the back account, checking payments to credit cards by reviewing detailed receipts, reviewing the vendor list and payroll records for names you don’t know or names that shouldn’t be there — will reveal most embezzlement. Keep a close eye on the books, and make copies of paperwork regarding suspicious transactions. You may want to require inventory of purchases from the office supply, grocery, anywhere that common items can be purchased, to make sure none of the items were snagged by the purchaser before coming into the office. Notice how many credit card bills you are processing, because you may find a new account slipped in without approval and is being used by an employee for personal expenses. There are certain things that are consistent tools used by embezzlers, and your banker or auditor can probably learn fairly quickly if theft has taken place, even before you have a clear idea of how long it has been going on or how much is missing. You want to act quickly enough the employee is not aware of the investigation and can be apprehended.

Seek advice. When you suspect embezzlement, consult with the people who can assist you in a resolution. Those include:

Your attorney. You will want legal guidance as you navigate a complex response to a complex employment situation.
Your board. The board of directors has a fiduciary responsibility related to your funds. They also need to be aware of all legal matters and of matters that may end up with negative press. Don’t let them be caught unaware
Your insurance agent. If you have directors and officers insurance, if your thief was bonded, or have other insurance to protect your organization from theft, his may be your only hope for repayment of the loss for you and your funders.
Local law enforcement. They are probably the ones that will make the initial arrest and coordinate with federal law enforcement. Because federal funds were involved, your case will likely also be handled by the FBI.
Your project officer at the Administration on Community Living/Independent Living Administration. You must report to your primary grantor plus other agencies whose funds to you may have been affected. You should let them know an investigation is in progress, even before you are sure of the full extent of the theft.
A forensic auditor or other auditor to conduct an impartial review and determine the details. To settle the situation you will need to go back several years, and will need to determine not only how much was stolen, but which of your grants were used in this process. You will have to pay your funders back for whatever stolen funds were allocated to specific grants. This repayment cannot be made with federal funds.

Complete a thorough financial review with findings. Start with a review that goes back three years, hoping that the auditor can pinpoint when the theft started. The review will need to include some specific information, including what funder(s) was the victim of the theft with you. While this is costly, it will be required at some point.

Press charges. It is tempting to try to hide the theft. You feel foolish that you were taken advantage of, and hurt and angry that it was by someone you know. You know your Center or SILC’s reputation will take a hit. However, you and your board have a responsibility to the public to assure that justice is done. Press charges and inform your funders so that they can follow up with their legal responsibilities as well. Embezzlement is a crime; and while a case can take several years to prosecute in court — and you may never get the money back, even with a restitution order, choosing to press charges can send a message that you’re serious about theft and help you get closure to a difficult situation.

Strengthen your written policies and procedures. Identify where your practices were week enough to allow the fraud, and tighten up those controls. While it can be difficult to prevent all employee theft, by establishing a training program that clearly outlines a zero-tolerance policy for employee theft, you may deter a potential embezzler. The policy should detail the steps that you’ll take if you discover theft, including prosecution. Having this written policy in place — and a signed declaration of understanding by the employee — gives you a road map for action when there is a problem and removes some of the emotional aspects of the decision.

Eight practices to prevent fraud and theft

Business man pulling a big green dollar sign concept on background

From time to time you hear about theft within non-profit organizations. Usually the organization did not have sufficient internal controls to prevent or catch the situation, and sometimes the thief gets by with it for years. Here are eight practices that will discourage theft, or will catch the thief in the act.

Check references and/or require bonding for personnel who have responsibility for the funds of your organization. You don’t want to hire some e with a history of theft.
Require actual receipts be attached to any credit card bill. The bill itself doesn’t include enough detail for you to assure that all the costs were legitimate.
Take inventory of purchases, so when someone runs to the grocery store or office store, they bring the items in and someone else checks them against the receipt so that no one is siphoning off items for their home. When a package of items is received at the office, two people check off the items and store them for later use.
Reconcile the bank statements by actually viewing the checks or images of the checks and comparing them to the check register in the accounting software. Someone other than the accountant should do this — preferably the executive director or the chair of the finance committee, depending on the size of your organization. This prevents changing the payee, shows gaps in the numbering of checks so you can find the missing ones, and reveals any checks that have been signed fraudulently.
Assure that the person who prepares the checks is not allowed to sign the checks, and no payee should be able to sign their own check.
The person who prepares the checks should put the entire packet together for the signer to review, including all costs covered by the check, the detailed receipt(s) and the allocation of the costs to the proper grant or cost objective. Include the envelop for mailing the checks. Then the checks should be mailed by someone other than the person who prepared them. Again, this assures that the payee isn’t changed.
Secure Directors and Officers insurance and listen to what the insurer has to say about good practices.
Conduct an audit – a single audit if your center spent $750,000 of more in federal funds in the year, and a financial statement audit otherwise.

Take a look at your policies and practices. The board members and management staff are stewards of public funds, and you need to preserve the public trust as well as your organization’s future. Make sure you are doing what you can to prevent the misuse of your assets and preserve your organization.

You can find sample financial policies and procedures on our website. For more information about the audit, check out an earlier post.

What are the IRS requirements for my CIL?

Just because your non-profit doesn’t pay federal income tax doesn’t mean you have no dealings with the Internal Revenue Service. You are required to file an annual report to the IRS of your standing as a non-profit. This form is called a Form 990, and it is important for all CILs and those SILCs that are not-for-profit to file correctly and on a timely basis. If you don’t you risk losing your non-profit status and if you don’t have that private, non-profit status, your CIL is no longer eligible to receive your federal grant for Independent Living services.

The form 990 is a public document, so when you complete it remember that you are communicating both with the IRS and with the public. Be sure that the board of directors has reviewed your filing document prior to submission. Best practice usually requires that the board chair signs the document on behalf of the organization. It is not unusual for foundations and other private and public funders to check what you’ve said in your Form 990. Take it seriously.

If your tax-exempt organization has gross receipts of more than $200,000 or assets worth $500,000 you must complete a full Form 990. Smaller non-profits with gross receipts of $50,000 or less have an e-Postcard version called the 990-N. Those that fall between $50,000 and $200,000 can file a 990-EZ. Every center is required to be a private, not-for-profit entity so every center must complete the appropriate form annually.

Your timeline for this form is the 15th day of the 5th month after your fiscal year ends (which may or may not match your state or federal fiscal year). If your organization’s fiscal year ends June 30, your 990 is due November 15. If your fiscal year ends September 30, your 990 is due February 15. If your fiscal year ends December 31, your 990 is due May 15. NOTE: if you lose your exempt status by not filing the 990, according to the IRS there is no appeal process. If a CIL loses exempt status, they are no longer eligible for either Sub-chapter B or Sub-chapter C funds through the Rehabilitation Act. It is possible to reinstate your status, but this lengthy process can include paying income taxes during the period you were out of compliance, and other penalties and fees, including not being able to draw funds from your grants.

Which comes first?

Strips of paper reading How to comply, New compliance rules, How rules affect you,

As Centers and SILCs, we have a number of regulations that we follow, and some take priority over others. So if they don’t say the same thing, which one are we supposed to follow?

White board with large letters stating KNOW THE RULES. This is being underlined by a hand with a pen.

Recently the Independent Living Administration clarified to us that the Assurances for the Designated State Entity (DSE) are now included in the remarks section (6) of the ILS Notice of Award (NoA). The Assurances are adopted when the DSE Administrator accepts the NoA.

The terms and conditions of a NoA and other requirements have the following order of precedence: (1) statute (in our case the Rehabilitation Act); (2) executive order; (3) program regulation found in 45 CFR 1329 (which references some other applicable regulations); (4) administrative regulation found in 45 CFR Part 75; (5) agency policies; and (6) any additional terms and conditions and remarks on the NoA.

A good example of how one of these pieces might contradict another is found in the requirement in the Rehabilitation Act that Centers for Independent Living conduct Resource Development (Section 725 (b)(7). This is juxtaposed with the prohibition on spending federal dollars to fund raise found in 45 CFR Part 75. As you can see, the Rehabilitation Act as the statute takes precedence over the administrative regulation.

This is not to say that Resource Development and Fund Raising are precisely the same thing, but it is allowed for SILCs and required for CILs to conduct resource development using federal funds. At the very least, you should have a category for the cost of resouce development in your chart of accounts and your own internal definition of these terms to assure you are not paying for fund raising with federal dollars.

Are indirect costs the same as administrative costs?

Question: I am interested in your thoughts on something. I know we’ve always said that the indirect costs are not the same as G&A. However, when we submit the proposal we have to include the statement of functional expenses from the audit which breaks out G&A and also 990 which breaks out the G&A. I assumed they compare the indirect cost proposal to those G&A figures, so I’ve always made sure they match. Is that not the case?

Response: The proper answer is that indirect does not always match general and administrative, but in many cases it will.

Sometimes there are direct costs that are minor and for practicality get combined with indirect (copies as an example).

Sometimes there are indirect costs like accounting or insurance that may be required to a much greater extent, for a specific program, so those are directly allocated.

In the absence of those unusual situations indirect will equal general and administrative

A dozen ways to reduce the risk of theft

It happened again just a few weeks ago. This isn’t the first time a center has been victimized by employee theft. And usually it is the bookkeeper or accountant, someone you trusted. Often they are not small thefts, but larger ones that have been going on for awhile before being detected. So what can you do to prevent or at least find and end such theft?

Most centers depend on their auditors to protect them against theft. However, unless you are spending at least $750,000 in federal funds you are not required to have an annual audit. Even if you do have a review of financial statements, that is not an engagement to investigate fraud. When auditing financial statements, the theft might not be found, depending on the level of sophistication of your financial person.

Remember that the person holding the financial position in the organization has an understanding of the audit process and its inherent limitations. They may be able to divert the center’s assets into their own pocket through several deceptive practices. It is your responsibility as the executive director or a board member, to make sure that your practices limit the possibility of theft. Here are some important practices that will offer protection:

The executive director or board treasurer should receive bank statements directly from the bank and review them. Look at each check. Are some made out to a staff person that don’t seem right? How was the check endorsed? (Some staff create an account for themselves with an innocent-sounding name, but they have to endorse the check to deposit it.) If cancelled checks are not returned by the bank, arrangements can generally be made for online access enabling the key officer to view scanned images. After this review, the bank statements and checks can be given to the accounting department for reconciling to the books. The completed reconciliation should then be returned to the key officer for review and approval.
Review credit card bills including the original receipts. Employees have been known to use cards for their own utility bills, for example. If you see the original receipt you will see the address. If the original receipt isn’t available, request it from the vendor or the credit card company.
Employees have been known to add some of their own items to their cart at the office supply store. Someone different from the person who ran the errand should put away the supplies, checking them off the receipt.
Make sure that someone other than the accountant picks up the mail and opens/directs it. This is where late payment notices are hiding, and where donations may be received and pocketed rather than deposited. If the receptionist or the executive director reviews the mail they can log in the donations and stamp checks for deposit only.
Regularly check payroll. Verify the names. Notice whether the amounts withheld agree with what is sent to IRS. Check the hours. Make sure your withholding is sent on a timely basis. Thefts can occur by siphoning off payroll related funds.
Do not allow the controller or bookkeeper to sign checks.
Occasionally verify the names of all the suppliers.
Do not sign checks which have not been completely filled in.
Require that checks that were cut in error are saved and filed, so that you know if a check is missing. Typically the signature is torn off the check and the original, not the copy, is kept to insure that a missing check can’t be used.
Require employees with accounting functions to take annual vacations and have others perform their duties.
Prepare and carefully review monthly financial statements in detail. Especially look at significant variances from prior year or budget to the current year.
Carry insurance for employees in sensitive positions. Consider fidelity insurance, bonding, and directors and officers insurance to protect the organization.

These steps cannot prevent all fraud, but should allow you to find most of the sources of fraud and take appropriate action. When you have routine policies and practices like these in place, the likelihood of fraud is greatly reduced.

One more note. You are required to report any fraud to your funders immediately. You will want to make sure your board is informed, and that you have turned the investigation over to law enforcement at the local, state and/or federal level for appropriate prosecution of anyone guilty of theft, fraud or abuse of funds.