2013-02-14 Educating Boards

Educating & Presenting Financial Information to

Board Members

Bob Bloom February 14, 2013

RAFFA Learning Community

Thrive. Grow. Achieve.

OVERVIEW

• Introductions

• Fiduciary Responsibilities (10)

• Financial Oversight Responsibilities (10)

• Reporting Standards Of Nonprofit Organizations (10)

• Roles Of The Board, CEO And CFO (10)

• Reporting To Your Board (45)

• The Audit and the 990 (10)

• Q&A (10)

1

FIDUCIARY RESPONSIBILITIES

Legal and Compliance Requirements

• Nonprofit Organizations (NPOs) must have a governing body overseeing affairs of organization

• All states require NPOs incorporated in their state to have a board of directors

• IRS Form 990 contains a series of questions concerning the board and its governance practice

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Core Concepts

• Bears the primary responsibilities for ensuring that organizations fulfills it obligations to the law, its members, it donors, its staff and the public

• Mission, strategic directions and broad policies are set by the board in conjunction with the CEO and senior staff

• Must protect the assets of the organization and provide oversight to ensure its financial, human and material resources are used appropriately to further the organization’s mission

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• Board Member Responsibilities:

– Display loyalty and exercise prudence

– Act in good faith and be responsible

– Keep informed in order to make appropriate decisions

– Monitor the organization’s financial health

– Ensure the appropriate checks and balances are in place

– Monitor the organization’s risk management

– Avoid micro-management- be governors, not managers

4

FINANCIAL OVERSIGHT RESPONSIBILITIES

• Sound financial management is among the most important responsibilities of the board

• Financial Oversight responsibilities: – Review and approve annual budget – Review timely financial reports at least

quarterly – Monitor actual financial results against

approved budget – Oversee annual audit process and review

audited financial statements – Review Form 990

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• Ensure current written financial policies exist and staff are adhering to the board approved policies

• Ensure adequate internal controls are in place to deter and detect fraud and misappropriation of assets and financial reports

– Separation of duties – no one person should perform duties of receiving, depositing and spending its funds

– Physical security of assets

– CEO/CFO are responsible for internal controls

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Systems that Protect NPOs

• Internal controls

– Goal = protection of assets and deter fraud

• Accounting policies and procedures

– Accounting manual

– Investment policies

– Reserve/board designated endowment policies

• External audits

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• To assess and improve financial oversight practices:

– How well do we review financial reports and monitor financial performance?

– Are we making relevant comparisons – e.g., performance against budget and prior year’s information?

– Do we need to upgrade the board’s financial expertise?

– Has the organization established a reserve fund and related policies and guidelines?

8

REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS

• In order for Board members to make educated decisions – must be: • Accurate & Complete

– Enable management & board to make informed decisions

• Timely – Keep current on financial status

• In Context – Presented in relationship to the history - Goals &

Programs of your nonprofit • Appropriate

– Include financial information deemed important to management & board

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REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Principle Financial Documents

• Annual audited financial statements

• Monthly/Quarterly unaudited financial statements prepared by staff, in accordance with GAAP, or cash basis

• Annual Budget

• Other ad hoc or unique financial reports

– Budget vs. actual reports (vs. prior year to date)

– Cash flow projections – Departmental financial statements

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REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Other Important Financial Reports

• IRS Form 990

• Major Financial Commitments

– Loans, Purchases, Acquisitions

• Investment Statements & Policies

• Reserve Policies

– Operating – Capital – Program initiatives

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ROLES - EFFECTIVE BOARD LEADERSHIP

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• A shared understanding of the organization’s mission and vision

• A clear sense of roles and responsibilities

• Trust

ROLES - SHARED MISSION

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• Establish guiding principles, policies and mission for the organization

• Regular review of the strategic plan and mission (keep them fresh and relevant)

• Establish metrics for success

ROLES – GOVERN MORE/MANAGE LESS

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More On 1. Policy issues 2. Components of

corporate strategy 3. Relationship

between budgets and priorities

4. Being a strategic asset

5. Governing the organization

Less On 1. Policy language 2. Specifications of a

particular program or service

3. Terms and conditions of services or contracts

4. An operational overseer and evaluator

5. Monitoring the management

ROLES

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• Budgeting: preparation, proposal, approval? • Meetings: setting agenda, facilitates the meeting? • Committee work: structure, oversees, support? • Board development: lead role, define need, supporting

programs? • Board evaluation: set metrics, require evaluation, create

and facilitate process? • Staff evaluations: hire, evaluate, compensate CEO, all

others? • Pr, communications: promote the organization, official

spokesperson? • Fundraising: guide board, develop policies, support

efforts, coordinates all efforts?

GOVERNING BOARD RESPONSIBILITIES

• Has overall responsibility for determining organization mission, and policy setting

• Hires and evaluates the executive • Ensures that adequate resources are available • Approves budget; monitors financial results • Sets investment policy; monitors results • Set operating policies; monitors progress; evaluates

outcomes • Responds to executive’s information • Monitors compliance • Establishes strong internal control environment;

monitors adequacy of controls (auditor involved); follows up implementation of recommendations

16

EXECUTIVE OFFICER RESPONSIBILITIES

• Executive Board policy, including detail planning, establishes measurement standards

• Hires, monitors, and evaluates staff & volunteers (including finance); delegates as appropriate

• Uses resources as directed by Board; participates in resource development

• Creates budget to implement Board policy; provides adequate and timely financial information to Board

• Manages investments and other assets as directed (may delegate to some extent); safeguards assets (including adequate insurance)

• Implements operating policies • Keeps Board informed, especially when problems impend • Ensures compliance with laws & regulations (including tax,

donor restrictions, OMB) • Operates strong internal control system; administers ethical

standards; implements auditor recommendations 17

FINANCIAL OFFICER RESPONSIBILITIES

• Is aware of organization mission and policies • Hires and monitors financial staff • Assists Executive as requested • Assists Executive in creation of budget; monitors

progress; alerts Executive to impending problems • Keeps detailed investment records; monitors

performance • Assists Executive as requested; keeps financial

records • Keeps Executive informed (also Board, as

requested by Executive) • Monitors compliance with laws and regulations • Designs and operates internal control system;

implements auditor recommendations

18

PITFALLS OR OPPORTUNITIES

• Chose members for values and skills rather than friendship or connections

• Avoid conflicts and personal agendas • Perform self assessments • Reward motivation; recognized enthusiasm

and outstanding performance

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IDEAS FOR PRODUCTIVE MEETINGS

• Mission-based meetings • Have the right presiding officer • Frequency/Cycles • Preparation: Agenda/Consent

Agenda/Reports • Minutes • Evaluation/Feedback • ENJOY!

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REPORTING TO YOUR BOARD

Basic Financial Statements: Reporting on Business Activities

Beginning of the Year End of the Year January 1 December 31

Statement of Financial Position At a Point in Time

Statement of Activities For a Period of Time

Statement of Cash Flows For a Period of Time

Statement of Financial Position At a Point in Time

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Beginning of the Fiscal Year (July 1)

End of the Fiscal Year (June 30)


Statement of Financial Position • AKA - Balance Sheet

• Snapshot as of a specific date

• Summaries of organization’s resources, obligations and net worth

• Three components:

– Assets = resources – Liabilities = obligations/debt – Net Assets = net worth (from inception to date)

• Typically arranged in order of liquidity

– Current: 1 year or less – Long-term: greater than 1 year

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Statement of Financial Position - Assets

• Cash and cash equivalents

– Sufficient to meet current obligations? – Inadequate or excessive? – Increasing or decreasing?

• Accounts receivable

– Composition? – Age? – Allowance for doubtful accounts?

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Statement of Financial Position - Assets

• Promises to Give / Pledges Receivable

– Policies for proper recognition and monitoring of collections?

• Investments

– Portfolio composition consistent with policy? – Rate of return consistent with expectations?

• Fixed assets

– Composition? – Capitalization and depreciation policies?

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Statement of Financial Position - Liabilities

• Accounts payable and accrued expenses

– Invoices received for goods and services not yet paid – Proper cut-off – completed, included as expenses as of the

current period

• Deferred revenue (Not TRNA)

– Future obligations to members – Included in cash balance – Typically recognize 1/12 of dues for each month as revenue

• Debt

– Purpose, terms, policies and covenants – In compliance with any covenants?

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Statement of Financial Position - Net Assets

• 3 classes of net assets:

– Unrestricted – available for general operations • Board designated • Undesignated

– Temporarily restricted – donor restriction for specific purpose or time period

– Permanently restricted – donor restriction that never expires

• Compliance with restrictions?

• If net assets are in a deficit situation, is this a “going concern” issue?

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REPORTING TO YOUR BOARD GAAP VS. CASH

• No Donor - Imposed Restrictions – Unrestricted Support

GAAP: Recognize revenue when received or promised

• Donor - Imposed Restrictions – Temporary – Donor-specified use is satisfied by fulfillment of

purpose or passage of time – Permanent – Donor imposed restriction cannot be removed by the

NPO

GAAP: Recognize revenue when received or promised

• Donor - Imposed Conditions – Specifies a future or uncertain event – Contribution depends on overcoming a barrier

GAAP: Recognize revenue as condition is met vs. NON-GAAP: CASH: When received

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REPORTING TO YOUR BOARD Statement of Activities: The Basic Formula

See sample financial statement handout – page 3

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$4,309,800 - $4,849,300 = $(539,500)

Revenue and

Support

_ Expenses Program Services Mgm’t and General

Fundraising

= Increase or

(Decrease) in Net Assets

REPORTING TO YOUR BOARD What Do These Reports Mean?

Statement of Activities

• AKA - Income Statement

• Financial information over a period of time

• Summarizes sources of funds (revenue), uses of funds (expenses) and net income or loss (change in net assets)

• Expenses are classified by function into programmatic and supporting (management and general / fundraising)

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Statement of Activities

• Revenue and expenses – Increase or decrease? – How do results compare to budget and prior year

amounts? – Expenses - percentage of program expenses

compared to supporting services (no more than 25%)?

• Change in net assets

– Net income (surplus) or net loss (deficit)? – If a net loss, is it a real deficit or timing issue? – What is causing the net loss?

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Statement of Cash Flows

• Summarizes sources and uses of cash into three categories:

– Operating Activities - day to day general operations – Investing Activities - purchases/sales of capital assets,

investments, etc. – Financing Activities - proceed from loans, line of credit

• This Statement Can Give the Reader Information on Historic Cash Flow (as opposed to the accrual basis which is required for GAAP financial statements)

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Statement of Functional Expenses • Provides analysis of non-profit’s service efforts, including

total costs and allocation of resources • More detailed line items of expenditures • Separates program from supporting services • Multiple program services may be reported • Supporting services = Management and General

expenses as well as Fundraising • How are various expense items allocated between

programs, M&G and fundraising? • Does resource allocation appear to be reasonable based

on – Nature of program? – Revenue generated from program?

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Footnotes to Financial Statements

• Summarizes:

– Organizational structure, mission and sources of funding – Significant Accounting Policies effecting the presentation

of financial statements – Explanations of key items on the Statement of Financial

Position and Statement of Activities – Concentrations of business credit risk, commitments,

contingencies, related party transactions

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Supplemental Schedules

• Not required part of basic financial statements

• Additional schedules that support key items

• Examples include:

– Schedule of functional expense summaries by category by location

– Consolidation schedules of a parent and affiliated organizations

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Cash Flow Projection

• Monthly changes in cash for operations

• Receipts – Grants – Contributions – Membership fees

• Disbursements – Salary – Rent – Operating expenses – Debt service – Capital expenditures

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• Operating revenue and expenses (vs. budget) – Unrestricted revenue – Plus: Release from restricted net assets to

unrestricted net assets – Detailed expenses (in comparison to budget)

• Departmental revenue and expenses – Details by Department (or Groups) for Budget

Purposes • Revenues by department • Expenses by department

– Direct expenses – Indirect allocated expenses – Allocation of depreciation

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• PROJECTIONS – 1, 3 OR 5 YEAR PLANS – Enrollments / memberships / registrants / students /

performances – Contracts, proposals, pipeline, booked business in future – Contributions / capital campaign / annual funds

• METRICS – Current ratio, investment returns , investment policy,

spending – Program % of total expenses – Enrollments / memberships / registrants / students /

performances / average cc contribution / average contribution

– Employees – Square footage – Departments

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Keep it simple

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ENRON!

Swartz, Mimi, and Sherron Watkins. Power Failure: The Inside Story of the Collapse of Enron. New York: Doubleday, 2003.

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• Be transparent

• Be consistent from period to period

• Reconcile cash to GAAP

• Check your work before you distribute

• Be a good messenger – send materials out well before the Board meeting, never last minute

• Tell the whole story

• Be direct

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Characteristics of Financially Healthy Nonprofits

• Ready source of cash (good liquidity) • Sufficient resources to ensure stable programming • Good revenue mix (earned income vs. contributions) • Positive net asset balances that continue to grow each

year • If there is a deficit, surplus of prior years cover it • Reasonable “overhead” • Timely reporting (mgm’t and board hold themselves

accountable for financial stability) • Operating reserves or a working plan to establish one • Committed to income-based spending

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Signs of Financial Trouble

• Spends more money than received or earned • Payables are growing faster than operations • Old accounts receivables • Poor cash flow – consistently asking for grant

advances • Poor or late financial reporting • Growing or unreasonable overhead or costs of

fundraising • Restricted net assets are in excess of liquid assets • Mgm’t and Board focus is lack of funds • Net asset balances continue to decrease each year

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THE AUDIT AND THE 990

43

THE AUDIT

• Audit Committee Roles and Responsibilities – The Audit Committee Charter

• Do We Change Auditors? • Partner Rotation • Dealing with New Auditors

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AUDIT COMMITTEE CHARTER

• Purpose • Authority • Composition • Meetings • Responsibilities • Financial Reporting • Internal Controls • Internal Audit • External Audit • Compliance • Reporting Responsibilities • Other Responsibilities

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DO WE CHANGE AUDITORS?

• NPOs change auditors for 3 reasons: – Services – Fees – Policy

• Common misconception – Sarbanes Oxley Does NOT mandate change of Auditors

• How do services break down: – Not enough partner/manager involvement – Too much turnover at ALL levels – Lack of responsiveness to your needs – Not experienced with NPOs

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DO WE CHANGE AUDITORS (continued)

• Not enough Partner/Manager involvement – lack of responsiveness

• Firm is not experienced with NPOs • Firm can not make decisions • Too much turnover • Too many surprises • Fees

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PARTNER ROTATION

• Sarbanes Oxley: §203 requires (for public companies) that the lead audit partner and audit partner responsible for reviewing the audit (concurring partner) to rotate off the audit every five years

• Other partners will be permitted to serve a maximum of seven consecutive years with a two year time out period. Such audit partners include partners of registrant company, parent company and those who lead audit of a subsidiary whose assets and revenue constitute 20% or more of the consolidated total

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CHANGING AUDITORS

• Audit Committee should adopt a policy to evaluate auditor

• Policy could mirror Sarbanes Oxley and mandate partner or manager rotation

• Could evaluate auditors every 5 to 10 years • Could mandate change of auditors every 5

years, or 10 years • Be flexible

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NEW AUDITORS – WHAT WILL BE REQUIRED

• At Preliminary - Risk Assessment – Understanding the entity and environment – General applications IT controls – Process memos or flowcharts:

• Cash receipts cycle • Cash disbursement cycle • Payroll cycle • Investment cycle • Fixed asset cycle • Financial statement preparation and closing cycle

• Walkthroughs of each cycle – sample transactions cradle to grave

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• Control testing of: – Cash receipts – Cash disbursements – Payroll

• At Year End – – Substantiation of Accounts – Evaluation – Analytical and Reasonableness – Disclosure

• Review of Financial Statements and disclosures • SAS 115 • SAS 114

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NEW AUDITORS – WHAT WILL BE REQUIRED (continued)

NEW AUDITORS* – RECOMMENDATIONS

• Be prepared on time – establish a time line • Good communication with auditor

throughout the year • Good communication with Audit Committee • Close your books and prepare interim GAAP

FS, on a monthly/quarterly basis • Keep your key schedules current – Cash,

AR, Investments, fixed assets, AP/AE, other liabilities and net assets.

• Perform a pre-audit • Discuss fees and change orders in advance

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* or with your current auditors

FEDERAL FORM 990 General Filing Requirements

• Form 990-N – Filed when gross receipts are normally less than or equal to $50,000, ‘normally’ defined as three year average.

• Form 990-EZ – Filed if gross receipts are less than $200k and total assets are less than $500k.

• Form 990 – If the former two cannot be filed, this is required unless allowable exclusion apply.

• Form 990-T – Filed if the organization has unrelated business taxable income exceeding $1,000.

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FEDERAL FORM 990 Governance and Related Topics – 501(c)(3) Org.

• Mission

• Organization Documents

• Governing Body

• Governance and Management Policies

• Financial Statements and Form 990 Reporting

• Transparency and Accountability

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http://www.irs.gov/pub/irs-tege/governance_practices.pdf

FEDERAL FORM 990 Governance, Management & Disclosure

• Section A – Governing Body and Management

– Minutes – governing body and committees

• Section B – Policies

– Review by the Board before Filing, and policy

– Written conflict of interest policy

– Written whistleblower policy

– Written document retention and destruction policy

– Process determining compensation

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QUESTIONS & ANSWERS

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APPENDICES

Appendix I – Sample Whistleblower Policy (Raffa) WB Toolkit (AICPA)/WB Firms (Raffa)

Sample Conflict of Interest Policy (excerpt from Board Source)

Appendix II – Tips for Creating and Elements of a Good Document Retention Policy (Unknown)

Appendix III – Best Practices Checklist (Independent Sector) Appendix IV – Checklist for Accountability (Independent

Sector) Appendix V – Executive Summary of the US Senate Finance

Committee Report (The Panel on the Nonprofit Sector) Appendix VI – State Governance Proposals and Bills (National

Council of Nonprofit Associations) Appendix VII – CA Nonprofit Integrity Act (Chronicle of

Philanthropy) Appendix VIII– Parts of Audit Committee Toolkit (Raffa)

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APPENDICES

Appendix IX - Trust is not an internal control, By Olson, Cheryl R, October 1, 2003, Publication: The CPA Journal, Wednesday, October 1 2003

Source: http://www.allbusiness.com/professional-scientific/accounting-tax/1157058-1.html#ixzz1XAHNyuew

Appendix X – Committee of Sponsoring Organizations of the Treadway Commission – Internal Control Integrated Framework, Guidance on Monitoring Internal Control Systems

Appendix XI – Not-for-Profit/Exempt Organizations Blog: Non-Profit Lawyers & Attorneys: Proskauer Rose Law Firm: Tax & Corporate Law for 501c(3) Organizations – Is the Foreign Corrupt Practices Act on your Radar Screen, By Emily Stern, posted August 18, 2010


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© RAFFA, P.C., September 2011 This information may not be reproduced without written permission from

Raffa, P.C., 1899 L Street, NW, Suite 900, Washington, DC 20036 (202) 822-5000

For information for and about nonprofits visit

www.iknow.org

To become or find a nonprofit board member visit

www.boardnetusa.org

CONTACT INFORMATION

A. Robert Bloom Phone: 202-822-5000 Raffa, P.C. Fax: 202-822-0669 1899 L Street, NW, Suite 900 Direct: 202-955-6709 Washington, DC 20036 e-mail: [email protected] Visit our Web Site at: www.raffa.com

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THANK YOU!

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2013-02-14 Educating Boards

Economy & Finance