Board Fiduciary Duty Relating to the Annual Audit and Form 990


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Joyce Dulworth, CPA and tax partner with BKD LLP, along with Michael Earls, CPA, presented this topic during the 2013 Ball State Foundation PAC Seminar.

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Board Fiduciary Duty Relating to the Annual Audit and Form 990

  1. 1. experience direction // CPAs & ADVISORS FIDUCIARY RESPONSIBILITY IN NOT- FOR-PROFIT BOARDS PHILANTHROPY ADVISORY COUNCIL Presented by Joyce Dulworth, Partner, BKD, LLP Michael Earls, Manager, BKD, LLP June 27, 2013
  2. 2. CHANGING LANDSCAPE FOR NOT-FOR- PROFITS Greater scrutiny being placed on not-for-profits—particularly public charities [501(c)(3) organizations] Response to high-profile scandals in the not-for-profit world Continued trickle down effect of Sarbanes-Oxley What does this mean? Role of Board and Audit/Finance Committees is crucial for good governance and evolving Expectation gap between the general public (including donors, watchdog groups and regulatory authorities) and the members of these bodies regarding the scope of their fiduciary duties is narrowing 2
  3. 3. CHANGING LANDSCAPE FOR NOT-FOR- PROFITS Where is this greater scrutiny coming from? Congress (Senate Finance Committee) IRS (Form 990) State Attorney Generals Watchdog groups Donors 3
  4. 4. FINANCIAL OVERSIGHT ROLE OF BOARDS AND AUDIT COMMITTEES Important to remember there are no current mandates other than fiduciary duty to donors, members, beneficiaries, etc. Efforts of the Board and Audit Committee are meant to supplement the assessments of others 4
  5. 5. FIDUCIARY DUTY Whatever their mission or size, all organizations should establish appropriate policies and procedures so that: Boards and Officers understand their fiduciary responsibilities Purposes of the organization are carried out Assets are managed properly Organization operates for the public good Failure to meet these obligations is a breach of fiduciary duty and can result in financial and other liability for the Board and/or its Officers 5
  6. 6. FIDUCIARY DUTY Who is responsible? Board of Directors, Finance/Audit Committees and Management share fiduciary responsibility Board of Directors and Finance/Audit Committees also share the duties of Care, Loyalty and Obedience 6
  7. 7. FIDUCIARY DUTY Care—requires that you act with the care that a reasonably prudent person in a similar position would use under similar circumstances, i.e., must act in an informed manner Loyalty—requires that you place the interests of the organization over your own personal interests and refrain from using your position of trust to further your own personal gain, i.e., must act in good faith Obedience—requires that you perform your duties in accordance with applicable statutes and with the organization’s bylaws and policies, i.e., must effectively carry out the purposes of the organization 7
  8. 8. FIDUCIARY DUTY Primary responsibility of the Board of Directors and Management is to ensure that the organization is accountable for its programs and finances to contributors, members and government regulators 8
  9. 9. FIDUCIARY DUTY Accountability requires that the organization: Comply with all applicable laws and regulations Adhere to the organization’s mission Create and adhere to conflict of interest, ethics, personnel and accounting policies The development and maintenance of internal controls will help to ensure accountability 9
  10. 10. FIDUCIARY DUTY Accountability requires that the organization: Protect the rights of members and donors Prepare and file its annual financial report with the IRS and appropriate state regulatory authorities and make the report available to all members of the Board and any member of the public who requests it The development and maintenance of internal controls will help to ensure accountability 10
  11. 11. INTERNAL CONTROLS WHAT ARE THEY AND HOW DO THEY HELP? How do they help? Increase likelihood that . . . Financial information is reliable so Management and the Board can depend on accuracy and make sound decisions Assets and records of organization are not stolen, misused or accidentally destroyed Organization’s policies are followed Laws and regulations are followed 11
  12. 12. FIDUCIARY DUTY Board of Directors and Management share responsibility for setting a tone of trust and accountability by: Reviewing or establishing written policies for: Code of Ethics Conflicts of interest Managing investments Purchasing practices Expense reporting, etc. Creating a safe environment to address governance issues 12
  13. 13. FIDUCIARY DUTY What else can be done? Practice risk management Establish appropriate internal controls 13
  14. 14. INTERNAL CONTROLS WHAT ARE THEY AND HOW DO THEY HELP? What are they? Systems of policies and procedures that promote and protect sound management practices—both general and financial Provide the organization with the ability to record, process, summarize and report financial data consistent with assertions of management in the financial statements Every organization is different; therefore, nature and extent of control environment will vary As organizations evolve, so should their system of controls 14
  15. 15. INTERNAL CONTROLS PREVENTING FRAUD & ABUSE Establishing adequate internal control procedures is the best deterrent to internal fraud and embezzlement Cost/benefit decisions must be made Risk assessment and tolerance levels of Management must be different than those of auditors, i.e., what is material to a donor or a member vs. other users of financial statements? Perfection not expected—no system of controls can prevent collusion 15
  16. 16. INTERNAL CONTROLS WHAT OTHER STEPS ARE IMPORTANT IN PREVENTING FRAUD? Next to controls, most effective strategy is to create an environment “hostile” to fraud Define acceptable and unacceptable activities— provide in writing to staff and volunteers Provide procedures to report suspected fraud— provide in writing to staff and volunteers Fully investigate suspected fraud Treat offenders in a consistent manner 16
  17. 17. FINANCIAL OVERSIGHT ROLE OF THE BOARD OF DIRECTORS Board is ultimately responsible for: Establishing and maintaining effective internal controls over financial reporting Setting the proper tone Creating and maintaining a culture of honesty and high ethical standards Establishing appropriate controls to prevent, deter and detect fraud and illegal acts 17
  18. 18. IRS CHANGES TO FORM 990 Significant redesign of Form 990 Designed to enhance transparency and provide IRS and public with a realistic picture of the organization Portion of the form requires governance information 18
  19. 19. BOARD CONSIDERATIONS WITH THE FORM 990 Board should review its existing governance policies and consider: Conflict of interest policy Whistleblower policy Document destruction and retention policy Investment policy including risks associated with alternative investments Policy requiring safeguarding exempt status with respect to transactions and arrangements with related organizations and individuals Necessity and makeup of an audit or finance committee 19
  20. 20. BOARD CONSIDERATIONS WITH THE FORM 990 The federal tax Form 990 is a public document which is a useful tool to donors, regulators and others. Other significant changes/questions for the Form 990: Disclosure of relationships with board members and between board members (ODTKE) Any review by a governing body or delegated body? Disclosure of process for review of executive compensation 20
  21. 21. OTHER RISK CONSIDERATIONS Benchmarking Compare to peer groups Monitor trends Red flags Compensation practices Rebuttable presumption test Selecting comparables Documentation Independent voting members Percentage based on IRS definition of independence Media communication Preparation?
  22. 22. experience direction // CPAs & ADVISORS QUESTIONS