Compliance And Governance For Not For Profit Board Members

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Presentation Before the North Shore Senior Center on Monday, June 21, 2010

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  • March 25, 2010 6:30pm-8:30pm
  • GOAL: To provide an overview of financial policies, controls, and reports. This is not a workshop to turn you into a finance professional. We will trade comments. Feel free to ask questions at any time.
  • The ultimate authority for managing the affairs of the organization is vested in the Board of Directors. Because the law grants Directors such authority, the law also imposes on Directors an obligation to act in the best interests of the organization.
  • Duty of Care = Duty to be Informed Directors must attend Board meetings. Directors who do not attend meetings are nevertheless bound by actions taken at those meetings and may be held responsible if any such actions are deemed negligent. The act of failing to attend Board meetings may itself be deemed to be negligent behavior. While the Board makes the important policy decisions that guide and determine the activities of the organization, the Board must rely on others (e.g., management, accountants, attorneys, etc.) to carry out the decisions. Such delegation is necessary and legal. A Board must monitor those to whom it has delegated authority to make sure such persons are acting responsibly. Delegation does not relieve a Board of liability.
  • The best interests of the organization must prevail over any individual interest of the Director, his/her employer, and his/her family and associates. We will discuss implementing a Conflict of Interest policy a bit later.
  • Included as a question on Form 990 This is in conjunction with the Duty of Loyalty discussed earlier See sample policy from Donors Forum of Chicago Generally includes: Disclosure of potential conflicts Recusal of conflicted member from deliberations and voting on the transaction
  • A Board must assure themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the Board timely and accurate information sufficient to allow management and the Board to reach informed decisions. What committees does your organization have? Typical Committee Structures Finance Committee – Primarily responsible for reviewing the overall finances and approving the budget of the organization Investment Committee – Primarily responsible for reviewing investment performance and long-range capital projects Audit Committee - Primarily responsible for engaging the independent CPA firm, reviewing audited financial statements, management recommendation letter, etc. Reference to the AICPA’s “Audit Committee Toolkit” and Grant Thornton’s “Audit Committee Handbook” An organization may be small enough that separate committees may not make sense Choose whichever committee structure works best for your organization Role of the Treasurer Review staff work (e.g., reconciliations and internal financial statements) on a regular basis (e.g., monthly or quarterly). Role will depend on the size/staff of the organization Role of the Staff Carry out the day-to-day work, prepare bank reconciliations, prepare checks, make deposits, prepare financial statements, etc.
  • Credit to Michael Peregrine of McDermott Will & Emery… Revenue/Expense Management The Board should work closely with management to assure that the organization a) maintains adequate cash reserves and liquid investments to help protect operations from a sharp or unexpected decrease in revenues, b) is being operated in a cost-efficient manner, and c) considers sensitive expense reduction options when necessary (e.g., reductions in workforce, salaries, etc.). Strategic Flexibility The Board should be prepared to consider alternative strategic options through which the organization’s mission can continue. Items to consider may include: change of management control, partnering with similar organizations, and continuing to evaluate options with expert advice and counsel. Compliance With Debt Covenants Debt covenants under bond indentures and commercial loan documents may act as an “early warning” sign that an organization’s financial performance may be declining. The Board should work closely with management to understand an organization’s debt covenants, monitor compliance continuously, and assure prompt disclosure of any violations and other material adverse events.
  • What is an accounting cycle? Cash Receipts Cash or check in mail received at receptionist or at special event > mail opened > deposit prepared > deposit made > receipt recorded in GL Cash Disbursements Initiate and approve purchase > invoice received in mail > invoice approved > expense recorded in GL > check prepared > check signed > check mailed Payroll Master file info prepared > timesheet prepared > timesheet approved > payroll run prepared > payroll run approved > payroll checks or direct deposit transfers prepared > checks disbursed or transfers made > reconciliation to GL
  • Why are internal controls a good thing? Helps to prevent or detect errors and fraud Make sure Internal Controls are being applied to all accounting cycles Overriding control procedure - separation of duties and board oversight (especially when an organization has limited staff to completely segregate duties) Examples of Controls / Best Practices Cash Receipts – checks should be stamped “for deposit only”; receipts posted to GL by someone other than those opening mail and handling receipts; daily deposits; surety/bonding insurance Cash Disbursements – pre-numbered checks; signing of blank checks prohibited; bank statements to be sent directly to the Board Treasurer; responsible official to review bank reconciliation prepared by accountant; disbursements posted to GL by someone other than person preparing checks, approving invoices, and signing checks; use of positive pay or reverse positive pay Mention any recent examples regarding NFP fraud in the headlines
  • Board should ask staff to formulate and implement Internal Controls, as necessary.
  • See sample financial statements Caveat – This is just an overview
  • Financial Controls Earlier, we discussed the Duty of Care which equates to the Duty to be Informed One of the Board’s responsibilities in this area is to oversee the organization’s financial affairs, including making sure the organization has adequate internal accounting systems and controls. The Board should approve the organization’s annual budget. Board members should expect the staff to produce timely and accurate internal financial statements and other financial reports, such as actual-to-budget reports with variances explained, on an ongoing basis. It is essential that you, as Board members, understand the financial statements of your organization and the ability to recognize a “red flag” when you see one. Safeguarding Assets The Board should oversee the effective use of the organization’s resources to ensure the organization’s assets are not misapplied or wasted. Internal policies and controls should be adopted and large and unusual transactions should be reviewed to ensure that the organization’s assets are not being misapplied or wasted. In regards to investment matters, Directors are not expected or legally required to be experts in investment matters. Retention and reliance on advisors with good reputations is considered the exercise of prudence. However, Directors are not relieved of their fiduciary obligations when delegating responsibility to others. Does your organization have a written investment policy? Variance Analysis May include reviewing actual-to-budget and current-to-prior period results Significant differences should be investigated to answer: Why the variance occurred, and What revisions to the organization’s budget or plans need to be made, if any. May indicate “red flags” as well as opportunities to take appropriate action to get things “back on track”
  • The Board oversees the management team and external auditors. The Board should ensure: Adequate internal controls and best practices Accurate records and meeting of reporting requirements Proper authorization of activities and expenditures Existence of assets Current tax-exempt status and identification of activities that may endanger it All tax and information filings (e.g., payroll, sales, 990s, other) are filed properly and timely
  • Good practice to have a policy to ensure compliance with the law Included as a question on Form 990 See sample policy from Donors Forum of Chicago
  • Good practice to have a policy to ensure compliance with the law Included as a question on Form 990 See sample policy from Donors Forum of Chicago Applies to Board and staff members The policy should define the responsibility of when and to whom to report suspected misconduct May include a 24 hour anonymous hotline ACFE – Q: What is the #1 method that fraud was discovered? A: Tips
  • Tax and Reporting IRS Form 990 is due annually on the 15 th day of the 5 th month; up to two 3 month extensions Illinois Attorney General Form AG990-IL is due annually for 501c3 organizations 6 months after year-end; first extension of 60 days with a second extension of 2 ½ months for cause (must include draft and signed copy of Form AG990-IL, draft Form 990, draft audited financial statements, $15 fee, and copy of IRS-approved extensions) Payroll tax reporting The Board should make sure that management is properly withholding and remitting payroll taxes as well as employee and employer contributions to retirement plans The organization may be using a third-party payroll service Board members may be held personally liable for non-payment of taxes See CPAsPI Tax and Reporting Guide to Illinois Not-For-Profit Charitable Organizations
  • Compliance And Governance For Not For Profit Board Members

    1. 1. Compliance and Governance Responsibilities of Not-for-Profit Board Members Instructors: John E. Adams CPA, Partner, Adams & Co. Certified Public Accountants and Consultants
    2. 2. Topics <ul><li>Fiscal Oversight </li></ul><ul><li>Accounting Systems and Controls </li></ul><ul><li>Financial Statements </li></ul><ul><li>The Audit </li></ul><ul><li>Compliance with Regulations for Not-for-Profit Organizations </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    3. 3. Fiscal Oversight <ul><li>A Not-for-Profit Board Member’s Fiduciary Responsibilities </li></ul><ul><li>Be Active (Duty of Care) </li></ul><ul><li>Receive no material profit (Duty of Loyalty) </li></ul><ul><li>Avoid conflicts of interest (Duty of Loyalty) </li></ul><ul><li>Exercise judgment in overseeing the organizations affairs (Duty of Care) </li></ul><ul><li>Comply with applicable governmental regulations (Duty of Obedience) </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    4. 4. Fiscal Oversight Duty of Care <ul><li>“ Reasonable and prudent person” standard. </li></ul><ul><li>Exercise reasonable diligence and due care in conducting corporate business. </li></ul><ul><li>Directors and officers must be informed about the activities and finances of the organization and govern in a reasonable manner. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    5. 5. Fiscal Oversight Duty of Loyalty <ul><li>Prohibits directors and officers from using their position of trust for personal advantage at the expense of the organization. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    6. 6. Fiscal Oversight Conflict of Interest Policy <ul><li>The purpose is to protect the organization’s interests and its tax-exempt status when it is contemplating entering into a transaction or arrangement that might unfairly benefit an individual’s private interest. This policy is intended to supplement, but not replace, any applicable state laws governing conflicts of interest applicable to nonprofit and charitable corporations. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    7. 7. Fiscal Oversight Duty of Obedience <ul><li>Directors have a duty to follow the organization’s global governing documents (such as Articles of Incorporation and Bylaws) to carry out the organization’s mission and to ensure that funds are used for lawful purposes. </li></ul><ul><li>Directors must also comply with state and federal laws relating to the organization. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    8. 8. Fiscal Oversight <ul><li>Typical Committee Structures </li></ul><ul><li>Role of the Treasurer </li></ul><ul><li>Role of Staff </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    9. 9. Fiscal Oversight – Current Developments <ul><li>In the current economy, board members should review the following on a regular basis: </li></ul><ul><li>Revenue/Expense Management </li></ul><ul><li>Strategic Flexibility </li></ul><ul><li>Compliance with Debt Covenants </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    10. 10. Accounting Systems and Controls <ul><li>Accounting Cycles </li></ul><ul><li>Internal Controls </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    11. 11. Accounting Systems and Controls Accounting Cycles <ul><li>Cash Receipts </li></ul><ul><li>Cash Disbursements </li></ul><ul><li>Payroll </li></ul><ul><li>Other </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    12. 12. Accounting Systems and Controls Internal Controls <ul><li>Internal controls are procedures designed to provide reasonable assurance that transactions are properly authorized, that assets are safeguarded against unauthorized and improper use and that transactions are properly recorded and reported. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    13. 13. Accounting Systems and Controls Internal Controls <ul><li>Questions to Ask: </li></ul><ul><li>Do we have internal controls in place over all significant accounting cycles? </li></ul><ul><li>Are they written? </li></ul><ul><li>Are they being followed? </li></ul><ul><li>Are they being reviewed? </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    14. 14. Financial Statements <ul><li>Snapshot of the different not-for-profit financial statements – the basics and how they are linked to one another </li></ul><ul><li>What to expect from your organization with financial reports </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    15. 15. Financial Statements - What to expect from your organization <ul><li>Periodic financial reports </li></ul><ul><li>Internal/interim statements </li></ul><ul><li>Annual budgets </li></ul><ul><li>Variance analysis – actual to budget </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    16. 16. The Audit <ul><li>Audit Requirement : </li></ul><ul><li>Charitable organizations with $300,000 or more in cash receipts are required by the Illinois Attorney General’s Office to have an audit annually. </li></ul><ul><li>Some smaller organizations are required to have an audit by their funding agency. For example, many foundations have audit requirements. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    17. 17. The Board Oversees the Audit <ul><li>Relationship of the auditor is with the Board -- Board members have oversight of the management team and the external auditors. </li></ul><ul><li>The Board members, staff management team, and auditors work together to make sure the not-for-profit organization is fulfilling its mission, following best practices, and meeting their reporting requirements. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    18. 18. The Audit – Board and Staff Roles <ul><li>While every organization works differently: </li></ul><ul><li>Board’s role (or Audit/Finance Committee) – Hires the auditor, evaluate their performance, and meets at the beginning and the end of the audit with the auditor. </li></ul><ul><li>Staff role – Make sure financial records are complete and properly maintained and that all accounts are reconciled. They should prepare the analyses the auditors ask for, be available to meet with the auditors as needed, and provide whatever information is requested to the auditor. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    19. 19. The Audit <ul><li>When the Board receives the audited financial </li></ul><ul><li>statements, board members should: </li></ul><ul><li>Read and understand the financial statements, including footnotes </li></ul><ul><li>Meet with auditors </li></ul><ul><li>Ask questions of management or the auditors about things you don’t understand </li></ul><ul><li>Good practice for the Board to have an executive session with the auditors and without staff present </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    20. 20. Compliance with Regulations for Not-for-Profit Organizations <ul><li>Document Retention </li></ul><ul><li>Sarbanes-Oxley Act includes provisions which make it a crime to alter, conceal, cover up, falsify or make a false entry in any record, document, or tangible object with the intent to impede, obstruct or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or in any Chapter 11 bankruptcy. Violations are subject to fines and prison terms of up to 20 years. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    21. 21. Compliance with Regulations for Not-for-Profit Organizations <ul><li>Whistleblower </li></ul><ul><li>Sarbanes-Oxley Act protects whistleblowers. This section makes it a crime to knowingly, with the intent to retaliate, take any action harmful to any person, including interference with the employment or livelihood of such person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense. </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    22. 22. Compliance with Regulations for Not-for-Profit Organizations Other Governance Policies <ul><li>Other governance policies and procedures now being asked for on Form 990 include: </li></ul><ul><li>Board Composition </li></ul><ul><li>Compensation Determination and Review </li></ul><ul><li>Expense and Travel Reimbursement </li></ul><ul><li>Board Minutes </li></ul><ul><li>Form 990 Review </li></ul><ul><li>Grant Making </li></ul><ul><li>Joint Venture Agreements </li></ul><ul><li>Relationships With or Between Key Individuals </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    23. 23. Compliance with Regulations for Not-for-Profit Organizations Tax and Reporting Responsibilities <ul><li>Form 990 </li></ul><ul><li>Form AG990-IL </li></ul><ul><li>Payroll Taxes </li></ul><ul><li>See CPAs for the Public Interest Tax and Reporting Guide for Illinois Not-for Profit Charitable Organizations </li></ul>Financial Responsibilities for Not-for-Profit Board Members
    24. 24. Resources <ul><li>CPAs for the Public Interest - www.icpas.org/CPAsPI.htm </li></ul><ul><li>Board Source - www.boardsource.org </li></ul><ul><li>Donors Forum - www.donorsforum.org </li></ul><ul><li>Illinois Attorney General- www.illinoisattorneygeneral.gov/charities/volunteers.html </li></ul><ul><li>IRS – www.irs.gov/charities/index.html </li></ul>Financial Responsibilities for Not-for-Profit Board Members

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