[GNC] BotanyBayGardens nonprofit example, and why GnuCash does not suffice

[doncram]

Many funny comments here about the sorry volunteer Treasurer's plight, who
is never going to get out of it.  With Flywire's perhaps the most hilarious
to me ("Been there as Treasurer, club meeting when I was away, members
collected meeting fees then paid venue for meals out of money collected.... .
It's worse when 12 months after you've left town you're still the
Treasurer because
there have been no volunteers.")!  Michael Novack: "We finally got  younger
person for Treasurer instead of the Board every year passing a special
measure to keep me on beyond the maximum term in the bylaws...."  Will: " One
of my longstanding complaints has been that no one ever looks at any of the
finances except me. "
It seems to me, though, that we can do a lot to make it easier for others
to be involved constructively in real review, and hopefully to become
comfortable and competent themselves.  And, once you consider what good
practices can be set up, then it seems to me that the responsible treasurer
really should be adopting them (and if they're not, why not?).  Here is
another long post, now with me trying to summarize discussion and/or state
some new ideas on what some best practices should be.
1. The treasurer is often the only person processing financial info, and
usually is completely unreviewed in most small nonprofits.  Few persons,
except perhaps previous treasurers (who should be valued and kept around on
the board or otherwise, if possible) understand much at all.  It does have
to be acknowledged that achieving separation of responsibilities, as
recommended by textbooks and by some good governance organizations, is hard
if not impossible to set up, if only one or a few are properly involved.
This is a problem for the treasurer, because no one is being prepared to
take over (so it is hard to get out, as has been observed), and because the
treasurer is at some risk of being suspected of self-dealing or fraud.  It
is a problem for the organization, because there is a nonzero probability
that real fraud will occur, either of the minor type where small sums of
cash get misdirected (perhaps borrowed with intention to return, but then
forgotten), or of the major type where it turns out an entire endowment is
wiped out by the unsupervised person who spent it all on gambling over many
years.  Either way, potential donors may have a whiff of the possibilities,
of not-quite-professional-seeming-practices, and may be wary of giving,
even if nothing untoward is actually going on.
2. Formal audits of books, by a professional accountant, would be costly
and are not likely to be worthwhile.  However, a lesser review,
corresponding to the internal audit processes of many large organizations
can be done at little cost.  The treasurer should work in ways that make it
possible, at least potentially, for the records to be internally audited,
and I think they should actively try to facilitate some amount of internal
auditing.  Interestingly, some national church organizations, including the
Methodist church in the U.S., promote an internal audit process for local
churches, in which committee performs a structured review.  They
independently verify that the assets claimed on the books do exist.  They
perform an audit sampling process, by picking some number of church members
which they contact to check what those members donated during the year, and
comparing that to what is recorded for them.  Which is hugely important, I
would think, in ensuring that the person(s) handling the incoming funds
will not redirect any of them.  The church organization's manual is very
interesting in its presentation, pretty much arguing that "trust but
verify" is the godly way to operate, and that the review process does not
mean the church leader(s) are being disrespected.  I personally am trying
to facilitate such a review, involving past treasurers, in a nonprofit
organization, but I can't claim success yet.
3. Cash is especially important, and there are better and worse ways to
handle it.  And better and worse ways to handle non-cash expenditures too.
3a) "Undeposited funds" should not be allowed, basically, is the consensus
with which I agree.  Someone pointed out that immediately getting to a bank
with "coin" from a fund-raising event might be difficult for a
rural/remotely located organization, but still it seems the cash receipts
should be kept together (not drawn from in any way) and deposited as soon
as possible.  For one nonprofit's evening fundraising events, I have been
focussing on getting a good count of cash done by the volunteers serving as
cashiers, and having them attest to the count by their signature on a
form.  Then the treasurer would take the cash and deposit it to the bank
the next day, and hypothetically the persons knowing what the deposit
amount should be, could verify that the treasurer deposited the right
amount.  But in fact it is not realistic for the volunteer temporary
cashiers to ever learn about what the deposit amount was.  Better would be
for the count to be done, with the treasurer signing off on the count too,
and for one of the volunteers to make a night deposit of the cash (which
turns out can be done here, without them having to access the bank
account).  And the treasurer will jolly well confirm that the right amount
was deposited.
3b) Any incoming monies to a donation box should likewise also probably be
handled by 2 persons.  But I don't currently see how to really enforce
this, if there is just one key to the box, because the box would have to
require two keys (like a safety deposit box in a bank has), in order to
enforce that two persons are present every time it is opened.  Maybe if the
box is covered by a security camera, then someone could be responsible for
checking that the box is never opened by just one person though (or at
least set up some risk for the person being caught).  Similar to discussion
about requiring 2 signatures on certain or all checks, where even if the
bank doesn't enforce 2 signatures, it can be internally checked.
3c) A genuine very small petty cash pot _might_ possibly be useful or
needed for some organizations where it really is impossible to pay for
small things by credit or debit or check or bank transfer.  If petty cash
exists, then physical controls such as lock on the cash box and having a
petty cash journal and maybe having multiple persons sign off on each usage
of cash must be considered, to avoid likely dissipation of cash.
3d) Payments out for expenses should be done by debit or credit or bank
transfer that leaves a path, and backed up by receipts.  Or paid out in a
reimbursement check to a member, upon documentation by receipt.  With the
receipts filed sensibly so that auditing can be done to ensure that
expenditures were really for benefit of the organization.  For one
organization, it seems that filing hard-copy receipts into file folders by
vendor makes the receipts retrievable and helps otherwise when considering
anything about a given vendor.  As opposed to filing by month.  If
invoices/receipts come in e-form, not hard-copy, then filing into
directories/e-files by vendor should be okay to support auditing and other
use, I would think.
3e) Not brought up in GnuCash discussion, but applies for BotanyBayGarden:
If the organization has accounts at some vendors, where certain members may
make purchases on account, then there can be an issue that receipts might
not be provided back to the treasurer.  Or not in a timely manner or not
with proper identification of what type of functional expense and what job
the charge is to be put against.  Now, more vendors like hardware stores
that serve BotanyBayGarden are implementing receipt management systems to
serve larger customers such as construction contractors, where many
individual employees might run out to get something needed, and be able to
get it charged to the right job.  So the treasurer might now be set up to
receive an emailed copy, with signature, of the receipt given in hard-copy
to the member making the purchase on account.  So the treasurer can crack
down and regain control!
3f) Not brought up yet:  The treasurer of a tax-exempt nonprofit (e.g. a
501c3 nonprofit in the U.S.) should address themself to ensuring sales
taxes are not paid unnecessarily, which involves setting up new vendors
properly with whichever form of documentation of tax-exemption that they
require.  Not necessarily worth doing, for a one-time vendor.
3g) Not followed up from my original post:  The assignment of expenses to
specific jobs is important, and needs to be done fully and accurately.
Whichever person is responsible for a given job (e.g. a person managing the
spending of a specific grant to a nonprofit, or a job manager in a
construction company, etc.) will naturally want to see what is being
charged to their job, either in direct expenses (specific purchases,
specific hours of labor) or in indirect expenses (allocation of overhead
charges).  It may be proper for them to question the rate of overhead costs
that might be applied to their job, and they certainly will be verifying
that direct expenses are correct.  The use of job costing is part of
decentralizing management, of allowing more persons to be constructively
involved and sharing responsibility, as well as benefiting them with useful
information.
3h) It ought to be possible for an internal audit committee to select any
small area to review, or any small audit sample, and to verify that it was
done properly.  Especially all cash withdrawals from the bank accounts.
And all collections of cash proceeds from fundraising or sales, being
deposited.
4. Rotation of Treasurer is really important i think.  A treasurer does
need to commit to several years volunteering, probably, i.e. to a longer
term than other board members, because there is such a learning curve (at
least if the job has not been streamlined to become easy).  But the best
sign that an organization is financially proper is that there has been
turnover of the CFO or treasurer or whatever, and/or that they take
vacations.  Books about Fraud Detection are all over that.  A person who
hangs on to such a job forever, who never goes on vacation, can cover up.
The reason why I trust what the past treasurers did is that they were
willing/happy to turn it over to the next person.  When frauds are
detected, it often turns out that a fraudster had to take a leave for some
reason, and only then did someone else finally enter in close enough to
detect a problem.  Like a housing organization I know of, where 100% of the
coins or tokens taken in by washer/dryer machines in the basements were
taken away by an accounting person, for more than 20 years I think.  The
person put in obscure journal entries seeming to record receipt of the
values, but with debit not to cash (i.e. to the bank account) but rather to
something complicated.  When challenged lightly, they would say it provided
an offset to some obscure health benefits expense purpose or to settling
some historical deficit of a former subsidiary that no one else understood,
but "oops okay I will change that entry", and they'd make a different
opaque entry also not increasing a real cash account.  And they would be
fierce and extremely unpleasant about having being questioned at all.  Only
when they really did have to take a leave for a medical operation or
something, was it possible for someone else to figure out something was
really wrong. And in this case a prosecution was pressed, but indeed some
deal was made in the end where a pretty big sum was recovered but the full
amount taken was never going to be known and the person just got probation
i think.
4a) Anyhow rotation of treasurer has to be considered of high importance,
so you can get out of this and move on to something else!  So reasonably
detailed instructions/documentation of the Treasurer's tasks need to be
developed, to make it more feasible to pass the job on.  And the job needs
to be streamlined to reduce workload for the treasurer, for their own sake
and to make it easier to pass on.  Like by setting up electronic bill
payments rather than writing hard-copy checks.  And by
5. Falsification of records in any way is bad. Okay i goofed in my original
post in trying to explain/describe/defend what I perceived to be likely
real processes around year-end for nonprofits, where I perceived that
backdating some cash receipts or payments to December 31 would be a
sensible way to effectively implement some sensible accruals.  I explained
already that in part I believed this because I can see no nefarious purpose
at all (no volunteer is receiving any financial benefit from financial
results turning out one way or another).  But it is part of "setting the
tone from the top" that no perception of misdirection should be allowed.
In one nonprofit I know, there was/is a strong belief that accounting
should be done on a cash basis, i.e. kept simple (so not using Accounts
Receivable or Accounts Payable) for good reason that the job for future
treasurers should not become more difficult or time-consuming.  However now
I think that it nonetheless should be changed officially to a (mostly)
accrual basis.  It can operate on a cash basis during the year, but after
the end of the year, a few journal entries should be done that set up
appropriate AR and AP for the transactions that really belong to the
previous year.  I think this can be done transparently enough for AR, even
without firing up a complicated invoicing system, by providing a detailed
list of bills included in the AR set up for December 31 by journal entry.
And allowing for the bills to be paid by checks drawing on cash (bank
balance) just as usual, without setting up and posting invoices, so in
effect showing duplication of expense temporarily, but then having the
duplication reversed by a journal entry in the new year.  But by the way,
the proper way to enter journal entries that are closing out a period into
an accounting system, is to date the journal entries to the last day of the
period.  Although the journal entry is actually being implemented after the
relevant facts are known, say on January 15.  The documentation of the
journal entry, perhaps on a hard-copy paper which needs to get 2
signatures, would have the actual January 15 date on it though.  Put that
in your pipe and smoke it, this is not "falsification"!  Setting an ethical
tone from the top is a key first element, per textbooks about Fraud
Detection etc., in organizations' fighting to be effective in general and
specifically in fighting against fraud.
Comments about this collection also welcome.  I do think the discussion to
date and this collection are addressing things not covered well in any
guide/training for nonprofit treasurers, at least not any guidance I am
aware of. I personally would certainly like to collect any compendiums of
guidance that anyone else can refer me to.
--cheers, Don


On Sun, Jul 26, 2020 at 12:48 AM flywire <flywire0 at gmail.com> wrote:

> > Here's what my accounting 101 textbook says about cash receipts:
>
> >> * All cash receipts should be deposited intact in the bank... Cash
> disbursements should not be made from cash receipts but only by check or
> from petty cash.
>
> lol Do the accountants want to handle the books for all community groups?
>
> Been there as Treasurer, club meeting when I was away, members collected
> meeting fees then paid venue for meals out of money collected and $1/member
> was handed over as petty cash. Recorded in books as split with amount
> collected less meal expenses.
>
> Probono Auditor says fairly insistently you've committed fraud. I say get
> stuffed, just pass an opinion on whether books are reasonable or not. In my
> view they'd lost the understanding of what the job was (flame me). It's
> worse when 12 months after you've left town you're still the Treasurer
> because there have been no volunteers.
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