McKonly & Asbury Webinar - Mission Critical: A Practical Update of Nonprofit Accounting, Tax, and Governance Hot Topics

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We continued our Celebrating 40 Years of Excellence! Webinar Series with a webinar entitled “Mission Critical: A Practical Update of Nonprofit Accounting, Tax, and Governance Hot Topics” presented by …

We continued our Celebrating 40 Years of Excellence! Webinar Series with a webinar entitled “Mission Critical: A Practical Update of Nonprofit Accounting, Tax, and Governance Hot Topics” presented by Jim Shellenberger, Senior Manager with McKonly & Asbury. Thank you to everyone that attended.

The nonprofit sector continues to play a large and vital role in our economy, and it is imperative for anyone that is involved with a nonprofit organization to obtain a clear understanding of relevant legislative, regulatory, and industry best practices. This webinar provided updates in the areas of nonprofit accounting and tax technical pronouncements, and in addition, we reviewed key governance topics and best practices. The webinar was geared to employees and executives of nonprofit organizations, and also for individuals and companies that serve nonprofit organizations and those that volunteer their time as board members.

Check out our Upcoming Events page for news and updates on our future seminars and webinars at

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  • 72,000 non profit organizations in the state of PA55,000+ file form 990 with the IRS52,000 Public Charities4,500 FoundationsTotal revenues – 112.6 BillionTotal assets – 380.2 Billion634,000 employees21.1 Billion in wages
  • Goals for these changes included making auditor objectives and requirements clearer, making the standards easier to read, understand, and apply, and moving towards convergence with the International Standards on Auditing.Auditors are still required to communicate in writing all material weaknesses and significant deficiencies to those charged with governance. However, the new standard requires that other deficiencies in internal control should be communicated to management if they are deemed to be of sufficient importance to merit management’s attention. This is a very low threshold, and in some instances, could result in numerous additional communications of deficiencies from auditors.
  • I like to think about it as a “code of ethics” Helps to answer the “what’s right, and what’s wrong” questions AND defines the organization’s values. Core Values: Collaboration Integrity StewardshipM&A code of conduct (or Purpose): To Develop our Colleagues, Serve Our Clients, and Enhance our Communities….. Present to board during orientation, and during new employee hiring Refer to the code of ethics during meetings, presentations, etc. Make it a “living” document. M&A employees have business cards to carry around.
  • Require periodic disclosure of POTENTIAL conflicts of interestBest interests of the nonprofit organization should be first! Examples:A relative or close friend reports to a supervisor who affects their job responsibilities, pay, and promotionBoard member has ownership of a business that does business with the nonprofit organizationAccepting gifts from vendors Employees that engage in activities outside of the organization that distract their ability to perform their assigned role. 990 refers to “Officers, Directors, Trustees AND key employeesSome boards will read the conflict of interest policy (or summary of) before each board meeting. Board member can withdraw from certain votes/decisions990 asks to describe how the organization consistently monitor and enforce compliance and if ANNUAL disclosure has been made.
  • Want to allow EVERYONE associated with the organization to come forward without fear of retaliation.Make it written…don’t assume all employees know what to do.Good policy with outline safeguards that are taken:Zero tolerance for harassament of someone reportingConfidentialityAnonymous AllegationsBad Faith Allegations Will provide procedures for reportingWill document how concerns will be addressed
  • Document significant operational and accounting processes. Processes include activities and procedures involved in repeatable operational or accounting transactions or events, such as hiring new employees, soliciting new donors,, paying invoices, processing payroll, taking physical inventory, preparing journal entries, etc. Accounting processes, in particular, are procedures to initiate, authorize, record, process, and report transactions and involve activities such as the following: • Capturing, sorting, and merging data. • Making calculations. • Updating transactions and master files. • Generating transactions. • Summarizing and displaying or reporting data. • Correcting and reprocessing previously rejected transactions • Correcting erroneous transactions through adjusting journal entries. Documentation may include policy manuals, process models, flowcharts, job descriptions, documents, and forms, and can be in paper form, electronic files, or other media
  • An organization should have document retention policies that comply with applicable laws and are implemented in a manner that does not result in the destruction of documents that may be relevant to an actual or anticipated legal proceeding or governmental investigation.”the requirements for records kept electronically are the exactly the same as paper records. Documentation for retention may include any electronic file or memo including emails, tax software files, general ledger files, “.pdf” files or any other form of information that is created and/or stored electronically.Jim’s rule: Would the document be cited as resource material in your organization's autobiography? If so, keep it permanently. Audit reports, board minutes, annual financial statements, bylaws, licenses etc. Everything else, keep for a minimum of 7 years past the document’s “end date” i.e. contract end date, reconciliation date, etc. Visit M&A website, news blog, for more specific recommendations.
  • An organization should have a committee that determines the compensation of the chief executive officer and determines or reviews the compensation of other executive officers and their performance.Board should provide for reasonable, but not excessive, compensation Answer the questions “is the compensation appear to be justifiable in view of the organization’s activities and their responsibilities” IRS 3-Step Policy for setting compensation:Review by an independent body (compensation committee, executive committee, etc.)Use of comparability dataDocumentation insurance, a car, housing allowance, or other fringe benefits
  • At a minimum, travel and entertainment documentation should include the date and time of expense, expense amount, person entertained, and business purpose of the expense. Unusual or unexpected charges on credit card statementCharges on credit card statement without related receipt.Require use of corporate card for business travelTip policy Use of per diem
  • When redesigned, purpose was to increase transparency related to the mission, governance, and financial results of all nonprofits. Public document, that is required to be available for public inspection. Note Part VI Section C – disclosure of how this is accomplished. Only select “another’s website” if the organization is voluntary submitting the form to Guidestar, etc. It is used as a compliance tool by outsiders (compensation, political and lobbying activity, unrelated business income). Unreasonable compensation has been a hot topic of late.
  • Unrestricted Temporarily Restricted Permanently restrictedTime and Purpose restrictions Net assets
  • Selection:Procedures completed up front regarding authenticity of recipient. Giving to another nonprofit. Verify exempt status. Not just about federal funds. Reputational riskMonitoring:Ensure that the recipient is using funds for intended purpose. What type of reporting requirements? Follow-up visit? Agreement signed? Internal Controls:Fraud risk area. Look for new vendors.
  • Those organizations that derive their revenue primarily from voluntary contributions from the public for purposes connected with health, welfare or community services. (excludes gov’t entities)Management and general – Costs necessary for the operations of an organization that are not identifiable with a specific program, fundraising or membership activityProgram – Costs that result in the organization fulfilling its missionFundraising – Costs that involve seeking, soliciting or securing contributions (money, securities, materials, facilities, or other assets or time)Allocation:Specific identification – preferred The allocation methodology utilized should be reasonable, consistent and periodically reviewed and challenged. Common allocation metrics include time, square footage, actual usage, percentage of direct costs and number of employees.Common errors found in functional expense reporting include:Reporting all expenses as program expensesNo allocation of personnel costs among categoriesReporting contribution revenue but no fundraising costsNot allocating insurance, occupancy and depreciationCharging all accounting fees to programsForm 990 functional expense reporting inconsistent with audited financial statementsWaiting until the end of the year to allocate costs in preparation for the annual audit, instead of evaluating allocation methodology throughout the yearUse of a fixed percentage to allocate costs rather than on a systematic and rational basis
  • Ability to accept payment or donation anywhere there is a smartphone or wifi connection, such at a fundraising event or meeeting.Consider data breach and security insurance. Need to be extremely careful with credit card information.Initial investment may be signficant.Consider cloud solutions. Social media, text messegning, website design, online stores, paypal
  • “The organization’s governing board should oversee the operations of the organization in such a manner as will assure effective and ethical management.”Operating procedures – Term limits, leadership, agenda, frequency of meetings, detail of minutesStep 1 – Process Critically review how effectively the board oversees organization operations and management.Step 2 – AssumptionsValidate the usefulness of all positions. No “Sacred Cows.”Step 3 – Information Gathering Be sure to gather information from a variety of sources through interviews, surveys, and “walk around management.”Step 4 – Document FindingsEnsure all findings are documented and discuss with management.Step 5 – Future ReviewsEstablish annual review process through a governance committee or by board delegation by the executive board.Regular attendance and participation at Board meetings. Familiarity with major Company initiatives and the Company's mission and governing instruments, such as articles of incorporation and bylaws. Familiarity with significant commitments made in relation to revenue-producing activities. Financial knowledge and ability sufficient to approve budgets; review financial statements and operational reports; and authorize contractual, banking, and financial commitments. The Board as a group should have skills in all the legal, accounting, finance, and personnel areas for which a Board is responsible, even though any one member may not be skilled in every area. The following are some ways in which Board meetings could be made more productive: • Meet regularly, at least quarterly if not monthly. • Give Board members an agenda and supporting information in advance of the meeting so that they have enough time to review them. • Adhere to the agenda and defer to the next meeting matters not on the agenda or not urgent. • Prepare written minutes with enough detail about discussions, decisions, and authorizations, and make them available to Board members before the next meeting. • Solicit active participation in discussions of agenda items from all Board members. Board Training!
  • By establishing an audit committee, the Board of Directors may achieve an increased understanding of (a) the role of the independent auditors and the nature and limitations of their work and (b) the importance of accounting, financial, and operating controls to the successful management of a business and reliable financial reports. The Company should consider forming an audit committee to assist the Board in discharging its responsibilities to shareholders and others. At least a majority of the committee members should be outside directors with no other connection to the Company. In addition to independent judgment, the committee members should have a working knowledge of financial reports, basic business practices, and, ideally, a familiarity with generally accepted accounting principles and auditing standards. Audit Committee FunctionsAssure independence of Financial Auditors.Review critical accounting policies and internal controls.Oversee accuracy of financial statements and reports.Rotation of Audit Partner and/or Audit FirmsMaintain arms length perspective.
  • Fraud occurs in all types of organizations and nonprofits are no immune. Some believe that smaller organizations, non public organizations, are more susceptible to fraud.The fraud risk assessment can be informal and performed by a management-level individual who has extensive knowledge of the Company that might be used in the assessment. The management-level individual would conduct interviews or lead group discussions with personnel who have extensive knowledge of the Company, its environment (including industry and country-specific characteristics), and its processes. The fraud risk assessment process should consider the Company's vulnerability to misappropriation of assets. When conducting the self-assessment, questions such as the following can be considered: • What individuals in the company have the opportunity to misappropriate assets? These are individuals who have access to assets susceptible to theft and to records that can be falsified or manipulated to conceal the theft. • Are there any known pressures that would motivate employees with the opportunity to misappropriate assets? Pressures may relate to financial stress or dissatisfaction. In assessing whether these pressures may exist, the assessor should consider whether there is any information that indicates potential financial stress or dissatisfaction of employees with access to assets susceptible to misappropriation. • What assets of the company are susceptible to misappropriation?• Are there any known internal control weaknesses that would allow misappropriation of assets to occur and remain undetected?• How could assets be stolen? Assets can be stolen in many ways besides merely removing them from the premises. For example, cash can be stolen by writing checks to fictitious employees or vendors and cashing them for personal use. Inventory or other assets can be stolen through sales to fictitious customers. Assets can also be stolen by unauthorized trading in securities.• How could potential misappropriation of assets be concealed? Because many frauds create accounting anomalies, the perpetrator must hide the fraud by running through an adjustment to another account. Generally, fraud perpetrators may use accounts that are not closely monitored (for example, fixed assets, inventory, and consulting expenses).• What factors might indicate that the company has a culture or environment that would enable management or employees to rationalize committing fraud?Once areas vulnerable to fraud have been identified, a review of the Company's systems, procedures, and existing controls relating to the identified areas should be conducted. The Company should consider what additional controls need to be implemented to reduce the risk of fraud.General• Requiring Periodic Job Rotation and Mandatory Vacations. When an employee stays in the same position for a long period and has few absences, an opportunity exists for that employee to design and commit fraud schemes. Requiring key employees to rotate jobs periodically or to transfer to different job functions is one way to address this fraud risk. Requiring all employees to take an annual vacation, during which time others perform their job functions, also makes it more difficult for an employee who is committing fraud to continue concealing the fraud scheme. • Instituting Surveillance Techniques. Surveillance may be performed by individuals watching employees or by static devices (such as surveillance cameras). Placing employees or locations under surveillance can allow observation of how business is conducted at a particular location and discreet detection of theft. Surveillance can be effective in preventing and detecting theft of cash or easily moveable assets. Surveillance cameras may be used to review tapes over several periods to determine if, how, and when a theft is occurring and to identify the perpetrators. Because surveillance cameras can be used in inappropriate ways, we recommend that the Company first consult a knowledgeable attorney if it chooses to implement a surveillance program. • Preparing and Reviewing Monthly Financial Statements in a Timely Fashion. As previously mentioned, many frauds create accounting anomalies. Thus, one way to detect fraud on a timely basis is to review monthly financial statements and investigate unusual variances. If possible, these statements should include budget, prior period, and year-to-date amounts to help identify variances. Performing the review and investigation on a timely basis helps minimize the extent of potential fraud. • Implementing an Employee Hotline. Tips and complaints from fellow employees or vendors have enabled many companies to discover occurrences of fraud. Anonymous telephone hotlines allow honest employees and vendors who may fear retribution from fraud perpetrators to report unethical behavior without risking exposure. If the Company does not want to establish and maintain a hotline, it can contract with the Association of Certified Fraud Examiners ( or another company to provide this service. Examples of controls to prevent or detect specific types of fraud include the following: • Financial and Operating Performance Reviews. Performance reviews are comparisons of financial information to operating data, such as sales to merchandise shipments. Investigating significant differences from expected results can uncover indications of fraud. • Independent Checks. Independent checks test another employee's work, such as by having a second employee reperform or test an employee's work, using the information technology function to perform automated tests of an employee's work (for instance, comparing sales orders to a list of approved customers) and to report or refuse to process a transaction or entry with exceptions, or requiring employee vacation or rotating employee job functions. • Separation of Duties. Separation of duties is one of the most effective controls to prevent or detect misappropriations of assets. When possible, incompatible duties should be performed by different employees (or the owner/manager). For example, the responsibility for authorizing transactions, recording transactions, and maintaining custody of assets should be assigned to different people in the Company to the extent possible. • Access and Authorization Controls. These controls are designed to ensure that only appropriate employees can enter into transactions or have access to Company assets, documents, and records. Employees cannot steal assets they do not have access to, and they cannot alter documents or records to conceal fraud without access to those items. Examples of these types of controls include password protection of computer files, authorization limits on check signing, dual custody of cash receipts or cash on hand, physical safeguards on assets susceptible to theft (for example, vaults for cash or stocks and security measures for inventory or small assets), and physical controls over Company documents and records (such as storing checks and invoices in locked cabinets).


  • 3. ABOUT ME • Senior Manager in M&A’s Audit Group • 11+ years working with nonprofit organizations • Member of the statewide PICPA nonprofit committee • Nonprofit volunteer
  • 5. AGENDA • Accounting Standards Update • Proposed Changes to Single Audit Guidance • 5 Policies All Nonprofits Should Have in Place • 10 Hot Topics in the Nonprofit World
  • 6. Besides CPE? Multiple Reasons! • This is the nonprofit “Busy Season” • Nonprofits are a huge part of the economy • Accounting rules are not getting any easier • Governance is a great tool to fight fraud, abuse, and bad press WHY DO THIS WEBINAR?
  • 7. DISCLAIMER The information contained in this presentation, both in the slides and expressed by the presenter, is not intended to be complete and comprehensive. To obtain a more detailed understanding of technical literature mentioned, please consult the exposure drafts, final standards and interpretations.
  • 9. CLASSIFICATION OF SALES PROCEEDS OF DONATED FINANCIAL ASSETS ASU 2012-05 issued in October 2012 • Exposure draft previously issued in April 2012 Previously inconsistent treatment between classification on statement of cash flows, often reported as an investing activity.
  • 10. CLASSIFICATION OF SALES PROCEEDS OF DONATED FINANCIAL ASSETS FASB concluded that the donation of financial assets is consistent with a cash contribution, and as such, should be reported as an operating activity when: • Upon receipt by the NFP, the securities are directed for sale, and • The NFP has the ability to avoid significant investment risks and rewards through near immediate conversion to cash If proceeds are restricted (by the donor) to a long-term purpose, then classified as a financing activity.
  • 11. CLASSIFICATION OF SALES PROCEEDS OF DONATED FINANCIAL ASSETS Most organizations already have a conversion policy Effective for fiscal years beginning after 6/15/2013. Early adoption is permitted.
  • 12. SERVICES RECEIVED FROM PERSONNEL OF AN AFFILIATE • ASU 2013-06 issued in April 2013 • Requires all NFPs to apply similar recognition and measurement for services received from an affiliate that directly benefits the recipient organization. • Goal is to increase transparency of transaction and reduce diversity in practice.
  • 13. SERVICES RECEIVED FROM PERSONNEL OF AN AFFILIATE Previously only recognized at fair value if services are regularly performed and the services: • Create or enhance nonfinancial assets, or • Require specialized skills, are provided by individuals possessing those skills, and typically would need to be purchased if not provided by donation Measured at actual cost incurred by the affiliate
  • 14. SERVICES RECEIVED FROM PERSONNEL OF AN AFFILIATE Fair value practicability exception if cost will significantly overstate or understate the value of the service provided. Effective for fiscal years beginning after 6/15/2014. Early adoption permitted.
  • 15. CLARIFIED AUDITING STANDARDS • Effective for periods ending after December 15, 2012. • (Most NFP’s will see this for June 30, 2013 year end) • Change in Standard Independent Auditor’s Report • Additional communications from auditors
  • 17. PROPOSED CHANGES TO SINGLE AUDIT GUIDANCE January 31, 2013 - Office of Management and Budget (OMB) issued proposed changes related to the administration, cost principles, and audit requirements of federal awards. Designed to streamline and improve the way the federal government administers more than $600 billion in grants annually • Eliminate unnecessary and redundant requirements to achieve better outcomes at a lower cost.
  • 18. PROPOSED CHANGES TO SINGLE AUDIT GUIDANCE Key Changes: • Audit Requirement raised from $500,000 a year to $750,000 • Entities that spend less than $750,000 in federal awards in a year would be required to make records available for review or audit by appropriate officials of the federal agency, pass-through entity, and the U.S. Government Accountability Office,
  • 19. PROPOSED CHANGES TO SINGLE AUDIT GUIDANCE Total Number of Audits (2010) • More than $750k: 38,704 (86%) • Less than $750k: 6,115 (14%) Total Federal Dollars (2010) • More than $750k: 99.7% • Less than $750k: 0.3%
  • 20. PROPOSED CHANGES TO SINGLE AUDIT GUIDANCE Key Changes: • Type A/B Threshold revised from $300,000 to $500,000 • High-Risk Type A Program criteria changed • Simplified process for identifying high-risk Type B programs to be tested
  • 21. PROPOSED CHANGES TO SINGLE AUDIT GUIDANCE Key Changes: • Number of types of compliance requirements to be tested in a single audit be reduced from 14 to 6: • Activities allowed or unallowed, and allowable costs/costs principles • Cash management • Eligibility • Reporting • Subrecipient monitoring • Special tests and provisions
  • 22. PROPOSED CHANGES TO SINGLE AUDIT GUIDANCE Key Changes: • Percentage of coverage rule reduced from current 50% (normal) and 25% (low-risk auditee) to 40% (normal) and 20% (low-risk auditee) • Criteria for Low-Risk Auditee Status revised • More data required to be reported in auditor findings • Threshold for reporting questioned costs increased from $10,000 to $25,000 • Combine eight (8) existing OMB circulars into one comprehensive document
  • 24. • Expands on Core Values • Written, and not “stale” • Employees and Board Members • States organization’s values and becomes part of the organization's culture CODE OF CONDUCT
  • 25. Board Members • Push down to employees Monitoring! Don’t look at it just one time • 990 (IRS provides a sample with the Form 1023 CONFLICT OF INTEREST POLICY
  • 26. • Why? • Safeguards • Procedures • Response • Hotline • Committee or designated person responsible • 990 disclosure WHISTLEBLOWER POLICY
  • 27. • If you don’t have one, create one. • If you have one, update it. • Used to train new employees and to prevent downtime in the future • Walkthroughs POLICY AND PROCEDURE MANUAL
  • 28. • Review to ensure proper compliance with state and federal laws • Grant Agreements! • Paper vs Electronic Retention • Storage System • 990 disclosure DOCUMENT RETENTION AND DESTRUCTION POLICY
  • 30. • Executive compensation should be performance based and tied to predetermined goals • IRS 3-Step process • Salary and benefits • Succession Plan for Key Executives 1. EXECUTIVE COMPENSATION
  • 31. • Documentation required! • Receipts - $25+ • Review and Approval • Fraud indicators : • Unusual or unexpected fluctuations, patterns, or amounts • Compare dates to work assignments 2. EXPENSE REIMBURSEMENTS
  • 32. • Critical document • Public document • Not just a restatement of the mission, but program accomplishments (Part III) • Board review and approval 3. IRS FORM 990
  • 33. • Need to identify early… put processes in place. • Donor restrictions dictate proper accounting treatment. • Failure to follow restrictions can cause penalty. 4. RESTRICTED CONTRIBUTIONS
  • 34. • Selection • Read fine print in grant agreements • Monitoring • Internal Controls • Vendor payments 5. RECIPIENTS OF FUNDS
  • 35. • Required statement for voluntary health and welfare organizations • Three categories • Management and General • Program • Fundraising • Allocation • Common Errors 6. FUNCTIONAL EXPENSE ALLOCATION
  • 36. • “Going mobile” • Capital expenditure • Data security risk • Cost / Benefit Analysis 7. MOBILITY
  • 37. • Determine optimal size – Effectiveness • Composition – Expertise and requirements • Encourage Frankness • Board Retreats • Board Report Card • Use Committees • Focus on strategy and risk 8. BOARD OF DIRECTORS
  • 38. • Independent Members • (not always a subset of the Board) • Written Charter (or responsibilities) • Financially literate • Meet and communicate with external auditors 9. AUDIT COMMITTEE
  • 39. • Fraud risk is present. • Performed by senior management or by outside party. • Goal is to determine where risks exists, and if controls are in place to mitigate those risks. 10. FRAUD RISK ASSESSMENT
  • 40. CONTACT Jim Shellenberger, CPA • • 717-761-7910 •