An introduction to Board members to understand accounting concepts that are unique to nonprofit organizations so that they can better exercise their fiduciary responsibilities.

1. Nonprofit Finances: Its Mysteries Revealed
A Primer for Board Members
Alfonso Perillo
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4. Nonprofit Finances: Its
Mysteries Revealed
A primer for Board Members
Alfonso Perillo, CPA, CFE
Partner, Nonprofit Division
Edelstein & Company LLP

5. Board Oversight is Critical
 The nonprofit is responsible for its internal
controls
 The outside accountant’s responsibility is
limited to ensuring that the financial
statements are fairly stated
 There is no substitute for good governance
© Edelstein & Company LLP,
Boston, Massachusetts

6. Typical Financial Documents
Received by Board Member
 Audited financial statements
 Budgets
 Budget–to-actual reports
 Form 990
© Edelstein & Company LLP,
Boston, Massachusetts

7. Numbers Are Important and They Tell a
Story
 Numbers can be manipulated
 Watch for discrepancies
 Budget to actual – accrual and cash
 Compare reports (audited financial statements
to internally prepared statements)
 Are answers to questions asked plausible?
 Have the auditors present to the board or a
subgroup of the board (audit or finance
committee)
© Edelstein & Company LLP,
Boston, Massachusetts

8. The Balance Sheet (Statement
of Financial Position)
Assets = Asset = provides a
future benefit
Liabilities + Liability = represents
a future obligation
Net Assets (Equity) Net assets =
cumulative
earnings
© Edelstein & Company LLP,
Boston, Massachusetts

9. The Financial Statements
 Statement of financial position: Represents the organization’s
assets and liabilities at a point in time.
 Usually at the end of the nonprofit’s year end, but can be quarterly or monthly
 Statement of Activities: Represents financial activity for a period.
 Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this
can be presented on a quarterly or monthly basis.
 Inflows are revenues, outflows are expenses
 Changes in net assets (net income) represent the difference between revenues
and expenses.
 Statement of Cash Flows: Represents cash inflows and outflows for
a period.
 Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this
can be presented on a quarterly or monthly basis.
© Edelstein & Company LLP,
Boston, Massachusetts

10. Accrual v. Cash Basis of
Accounting
Cash Accrual
 Revenue recorded when  Revenue recorded when
received earned and is realized or
realizable
 Expense recorded when  Expense recorded when
paid the obligation is incurred
and in the same period in
which related revenue is
recognized (matching
principle)
 Not GAAP  GAAP
© Edelstein & Company LLP,
Boston, Massachusetts

11. Strange Timing Differences
 Accrued revenue: before cash is received [Accounts receivable;
pledges receivable; grants receivable]
 Accrued expenses: before cash is paid
 Deferred revenue: cash is received before earnings process is
complete [Deferred tuition, advances]
 Deferred expense: cash is paid before the obligation is incurred
[Prepaid expenses,]
© Edelstein & Company LLP,
Boston, Massachusetts

12. Funky Things You Need to Know
About Nonprofit Accounting
2010 2011 Revenue or
Expense Recorded
in:
Accounts receivable; Service provided or Cash received 2010
pledges receivable; commitment from
grants payable donor
Accrued expenses; Service provided by Cash paid 2010
accounts payable vendor; obligation
incurred
Deferred revenue; Cash received Service provided by 2011
deferred tuition before the earnings the nonprofit
process is complete;
before the term
starts
Prepaid expenses Payment made for Service received by 2011
(deferred expenses) future year expense the vendor
© Edelstein & Company LLP,
Boston, Massachusetts

13. Funky Things You Need to Know
About Nonprofit Accounting
 Contributions are recorded when a promise to
make a donation is made by a donor
 In-kind gifts of specialized services are recorded
in the period the service is received
 Gifts can be for restricted purposes
 Natural versus functional classification
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Boston, Massachusetts

14. Statement of Financial Position:
Example
GOOD WORKS, Inc.
Statement of Financial Position
December 31, 2010
Assets
Cash $ 120,775
Unconditional promises to give 25,000
Prepaid expenses 3,600
Furniture and equipment 3,225
Security deposit 1,500
Total assets 154,100
Liabilities and net assets
Liabilities
Accounts payable 7,500
Accrued expenses and other liabilities 5,800
13,300
Net assets:
Unrestricted 40,800
Temporarily restricted 95,000
Permanently restricted 5,000
Total net assets 140,800
Total liabilities and net assets $ 154,100
© Edelstein & Company LLP,
Boston, Massachusetts

15. Statement of Activities: An Example
GOOD WORKS, Inc.
Statement of Activities
For the Year Ended December 31, 2010
Temporarily Permanently
Unrestricted Restricted Restricted Total
Support and revenue:
Contributions $ 200,000 $ 150,000 $ 5,000 $ 355,000
Program service 50,000 - - 50,000
In-kind contributions 12,000 - 12,000
Membership dues 13,500 - - 13,500
Interest income 1,300 - - 1,300
Net assets released from restrictions 95,000 (95,000) - -
Total support and revenue 371,800 55,000 5,000 431,800
Expenses:
Program services:
Education services 240,000 - - 240,000
Support services 79,000 - - 79,000
Advocacy 66,000 - - 66,000
Total program services 385,000 - - 385,000
Management and general 39,000 - - 39,000
Fundraising 50,000 - - 50,000
Total expenses 474,000 - - 474,000
Change in net assets (102,200) 55,000 5,000 (42,200)
Net assets - beginning of year 143,000 40,000 - 183,000
Net assets - end of year $ 40,800 $ 95,000 $ 5,000 $ 140,800
© Edelstein & Company LLP,
Boston, Massachusetts

16. Quick Ratio
Cash + Unconditional promises (accounts receivable) /
Current liabilities
Cash 120,775
Unconditional promises to give 25,000
145,775
Accounts payable 7,500
Accrued expenses and other liabilities 5,800
13,300
145,775
Divided by
13,300
Equals
11 :1
© Edelstein & Company LLP,
Boston, Massachusetts

17. Months of Cash Reserves
Cash / Average Monthly Expenses
Total expenses 474,000
Less: in-kind (12,000)
462,000
Divide by 12
Average monthly expenses 38,500
Cash 120,775
Cash divided by average monthly expenses 3:1
© Edelstein & Company LLP,
Boston, Massachusetts

18. Efficiency Ratio
Program expenses / Total expenses
Program services 385,000
Divided by
Total expenses 474,000
81%
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Boston, Massachusetts

19. Being Properly Registered To
Fundraise
 Certificate of Solicitation
 Gaming Activities
 Raffles
 Gaming and Bingo
 Poker Tournaments
© Edelstein & Company LLP,
Boston, Massachusetts

20. Watch the Language You Use to
Solicit Funds
 Don’t inadvertently create a restriction by
the language used
 It is hard enough getting unrestricted
support
 Language like “Funds raised will be used
to support Good Works Inc.’s programs”
can create a restriction
© Edelstein & Company LLP,
Boston, Massachusetts

21. Internal Controls
The process by which information and authority flows across an organization so that it can
accomplish its goals
Tone at the
Top
Internal Control Policies
and Procedures
Policies and Procedures
are Followed
Nonprofit Achieves
Its Mission
© Edelstein & Company LLP,
Boston, Massachusetts

22. Segregation of Duties
Those having responsibility for handling assets are not responsible for
recording the assets in the accounting system
There is a wall between the receiving of asset function and the task of
recording the transaction in the accounting system
© Edelstein & Company LLP,
Boston, Massachusetts

23. Fraud is Concealed
 Most common fraud schemes
 Fictitious vendor: a billing scheme
 Check tampering: process of altering checks
 Skimming: taking money before it is recorded
 The myth of the trusted employee
Source: Association of Certified Fraud Examiners, 2010 Report to the Nations on Occupational Fraud and Abuse
© Edelstein & Company LLP,
Boston, Massachusetts

24. The Fraud Triangle
OPPORTUNITY
RATIONALIZATION PRESSURE
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Boston, Massachusetts

25. Simple Fraud Prevention
Techniques
The appearance of oversight is a deterrent
Other simple techniques
 Someone independent of the accounting process (like
the treasurer) receives duplicate copies of the bank
statements
 Limit access to the accounting software by providing
read only rights
 Have two check signers for checks deposited over a
certain amount
© Edelstein & Company LLP,
Boston, Massachusetts

26. Contact Information
Alfonso Perillo, CPA, CFE
aperillo@edelsteincpa.com
© Edelstein & Company LLP,
Boston, Massachusetts

27. Find listings for our current season
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