(Best) Fiscal Practices Stephen Kattell, MBA, CPA Kattell and Company, P.L. Serving the Nonprofit Community
Summit Objectives To provide education, resources, and tools to nonprofit staff and board members on a specific topic in order to further their missions.
Fiscal Practices and MissionSound fiscal practices NEVER ensure that an organization will achieve its mission. HOWEVER Deficient fiscal practices OFTEN prevent organizations from achieving their mission.
Fiscal Practices and Mission BUT, NOT ALWAYSSome nonprofits achieve mission without sound fiscal practices – Sometimes just lucky – Usually much more costly DO YOU WANT TO LEAVE ACHIEVEMENT OF YOUR MISSION TO CHANCE? Do You Feel Lucky?
Responsibility Responsibility can be delegated but not abdicated.
Responsibility (according to steve) Board of Directors Board Treasurer/Committees Chief Executive Officer – Executive Director Chief Financial Officer – Accountant – Bookkeeper – Finance director – Controller Contractors – Bookkeeper – Payroll Company – Auditor – Attorney Volunteers
Board of Directors Set a budget. Monitor status of budget by comparison to regular financial information. – Balance Sheet – Profit and Loss Statement Include budget to actual comparison – Balance Sheet and P&L should “articulate”. – Generated from the accounting software. Use care of a prudent person.
Board of Directors Let these do the leg work and report to the full board: – Treasurer – Finance Committee – Audit Committee – Investment Committee The more financial experience the better.
Board of Directors Leg work includes: – Liaisons between board and staff with respect to all fiscal matters – Meetings with the CEO and CFO to review budgets and reports and recommend changes – Reviewing and making recommendations regarding internal controls – Reviewing and making recommendations regarding policies and procedures
Chief Executive Officer You can have great passion for the mission and programs, but you must also have a working knowledge of the finances: – Where’s the cash? – How does each action, decision, or program affect the cash? CEO supervises the CFO. Some CEOs are better suited to be the CPO or DD because they just don’t get it when it comes to the finances.
Internal Controls That set of policies, programs, practices, procedures… that provide assurance that you will achieve your objective. Fiscal objectives – Assets are safeguarded – Financial information is accurate and reliable – Transactions are authorized For smaller nonprofits – CASH is KING.
Internal Controls Perspective…… the Fraud Triangle Incentives and pressures Bad habits – drugs, alcohol, gambling, spending Bad breaks – divorce, medical problems Solution – Robust HR Department Opportunities Lack of internal controls In most cases of theft of cash, obvious controls were missing. Attitudes/Rationalizations Low moral from layoffs Perceived inequities in hiring, pay, bonuses, promotions Solution – Establish a culture of high ethical standards and integrity
Cash is King Get the cash in your hands. – Ask for donations. If pledged, follow up on payments – Bill for goods and services delivered Follow up and collect on accounts receivable Don’t let the cash out of your hands. – The person responsible for paying the bills should be the cheapest person in the organization. – This person should not worry about being the most popular. No Miss Congeniality awards here!
Internal Controls – Money In Principles: – How do you know all of the money that should be deposited into the bank actually makes it to the bank? – Rule of thumb. The fewer the number of people who touch the money before it goes into the bank, the fewer controls you need.
Internal Controls – Money In General – Pass out “For Deposit Only” stamps like candy. – Segregate Duties – establish healthy competition between functions. Revenues – Segregate duties: Program personnel want to report maximum revenues. – Processes to ensure invoicing and recording for all goods and services delivered. – Processes to follow up on collections. Contributions – Segregate duties: Development people want to report maximum contributions. – Reconcile donor database with accounting records. – Who sends out donor acknowledgements and on what basis? Grants – Try not to leave money on the table. – Reconcile grant billings to expenses in the GL.
Internal Controls – Money Out How do you know that all money taken out of the bank (or investment accounts) was for a legitimate and authorized purpose? checks written EFTs on-line bill pay automatic deductions fees Fraud Rule of Thumb. Most organizations typically need to worry about just one person, the CFO.
Internal Controls – Money Out Controls over CFO – If the CFO stole money, who would detect it? – 2 signatures on checks - MEANINGLESS. – Someone other than CFO needs to review bank statements. – Larger organizations need more complex processes.
Internal Controls – Money Out Over-Payments – Payables Clerk should be the cheapest person in the organization. – Compare to contract or agreement. – Compare to last month’s invoice. – Compare to last year’s invoice. – Compare to purchase order. – Compare to receiving report or packing list approved by the person who actually received the goods. Most common over-payments – sales tax. – Company credit cards/debit cards are acceptable when properly controlled.
Bookkeeping Basics…Check Your Work! Cash - monthly bank reconciliations. My latest pet peeve – bank reconciliations that don’t reconcile. What’s a bank reconciliation? Bank reconciliations can only have 4 items: – Balance per bank statement – Plus – Deposits in Transit – Minus – Outstanding Checks – Equals – Balance per general ledger
Bookkeeping Basics…Check Your Work! Investments – Agreement to investment statements. – Proper recording of current period income, fees, gains and losses. Receivables and payables. – Agreement to subsidiary schedule. – No bogus entries or balances.
Bookkeeping Basics…Check Your Work! Prepaid expenses. – Some sort of supporting schedule proving the amounts prepaid. Fixed Assets. – Actually on hand. – Depreciation schedule. Long Term Debt. – Balance agrees to monthly statement, if any. – Balance agrees to amortization schedule.
Bookkeeping Basics…Check Your Work! Look at your trial balance. Do you understand every account that is there and do you understand every balance? A more complex organization means more complex accounts and balances. Complex accounts and balances require more skill from top level management.
Management Information Use of classes if highly recommended for – Functional reporting Required by IRS and GAAP – Departmental reporting Accountability – Grant reporting Required by state and federal law Provides evidence that double dipping did not occur. (Note: double dipping is bad.) – Tracking donor restrictions Keeping donors informed – Determining profit and loss from one or more activities.
Audits – Who Needs Them? Independent (external) – CPA “Internal Audits” for smaller organizations can be a nice substitute for an external audit – Set up an “audit committee” who will provide an after the fact review. – Volunteers who know their way around financial records.
Independent Audits Not required by the State of Florida Not required by the IRS Typically required by funding sources. – United Way of North Central Florida requires for budgets of over $500,000. – Federal government requires for expenditures of federal awards of more than $500,000. – Consult other funding or regulatory requirements.
Independent Audits Don’t be penny wise and pound poor. Think twice: How much is the cost of an audit compared to the large donor who didn’t give you a second thought? There are actually benefits of an audit – Sometimes quantifiable. – Usually less tangible. – Not always cost justified.
Audit Alternatives Reviews – United Way requires reviews for organizations under $500,000. – Provides limited assurance based on limited procedures. Compilations – Provides no assurance.
And Now for My Soapbox There are those that suggest that auditor rotation is a best practice. It is not a best practice. Studies show it’s not even a good practice. Mandatory rotation “dumbs down” the process. The best practice is to evaluate your auditor every year and to make any future engagement contingent on the quality of the latest engagement.
Internal Revenue Service Primary source of laws and regulations governing the activities of tax-exempt organizations (TEOs) Generally prohibiting: – Private benefit – Private inurement – Political activities Limiting: – Lobbying Providing for: – Taxation of unrelated business activities
IRS – Compensation Issues Reasonable compensation or excess benefit. What is reasonable? Safe harbor provisions provide a rebuttable presumption of reasonableness. – Independent committee – Comparability data – Contemporaneous documentation
Compensation Issues One of the most common criticisms that is found in an audit… compensation that is not properly reported to the IRS. – Bonuses – Gifts – Awards – Personal use of Vehicles Computers Cell phones.
Compensation Issues Non Taxable Benefits: – Health, Life, Dental Insurance Part of a plan applicable to all employees. Reimbursement for actual health insurance. Seek professional help. – Retirement Plans Can’t just give them money 403(b) 401(k) 457 Others Seek professional help
Form 990 Series Form 990-N – Gross receipts ≤ $50,000. – Filed electronically Form 990-EZ – 2008: Receipts < $1,000,000 and assets < $2,500,000 – 2009: Receipts < $500,000 and assets < $1,250,000 – 2010: Receipts < $200,000 and assets < $500,000 Form 990 – All others. – Extensive.
Form 990 – Governance Policies Form 990. Do ALL members of governing board review Form 990 BEFORE filing? – Describe process for review. Conflict of Interest Policy. Does TEO have a conflict of interest policy? – Annual disclosures? – Regular and consistent monitoring? Describe such monitoring Whistleblower Policy. Written whistleblower policy? Document Retention. Written document retention and destruction policy? Compensation. Did process for determining compensation of CEO, officers and other key employees include safe harbor provisions? – If yes, then describe the process. Joint Venture Arrangements. Local Chapters, Branches, or Affiliates.