2013-02-14 Educating Boards


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For Executive Directors, COOs and CFOs: To better educate the Board of Directors and those charged with governance, and their various committees that deal with financial matters, your organization’s interim and annual financial statements, internal controls and fraud risk, auditor rotation, and other matters. This class will also address the role of the audit committee, the finance committee, and the Board of Directors, and how you might to better manage them.

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2013-02-14 Educating Boards

  1. 1. Educating & Presenting Financial Information to Board Members Bob Bloom February 14, 2013Thrive. Grow. Achieve. RAFFA Learning Community
  2. 2. OVERVIEW• Introductions• Fiduciary Responsibilities (10)• Financial Oversight Responsibilities (10)• Reporting Standards Of Nonprofit Organizations (10)• Roles Of The Board, CEO And CFO (10)• Reporting To Your Board (45)• The Audit and the 990 (10)• Q&A (10) 1
  3. 3. FIDUCIARY RESPONSIBILITIES Legal and Compliance Requirements• Nonprofit Organizations (NPOs) must have a governing body overseeing affairs of organization• All states require NPOs incorporated in their state to have a board of directors• IRS Form 990 contains a series of questions concerning the board and its governance practice 2
  4. 4. FIDUCIARY RESPONSIBILITIES Core Concepts• Bears the primary responsibilities for ensuring that organizations fulfills it obligations to the law, its members, it donors, its staff and the public• Mission, strategic directions and broad policies are set by the board in conjunction with the CEO and senior staff• Must protect the assets of the organization and provide oversight to ensure its financial, human and material resources are used appropriately to further the organization’s mission 3
  5. 5. FIDUCIARY RESPONSIBILITIES• Board Member Responsibilities: – Display loyalty and exercise prudence – Act in good faith and be responsible – Keep informed in order to make appropriate decisions – Monitor the organization’s financial health – Ensure the appropriate checks and balances are in place – Monitor the organization’s risk management – Avoid micro-management- be governors, not managers 4
  6. 6. FINANCIAL OVERSIGHTRESPONSIBILITIES• Sound financial management is among the most important responsibilities of the board• Financial Oversight responsibilities: – Review and approve annual budget – Review timely financial reports at least quarterly – Monitor actual financial results against approved budget – Oversee annual audit process and review audited financial statements – Review Form 990 5
  7. 7. FINANCIAL OVERSIGHTRESPONSIBILITIES• Ensure current written financial policies exist and staff are adhering to the board approved policies• Ensure adequate internal controls are in place to deter and detect fraud and misappropriation of assets and financial reports – Separation of duties – no one person should perform duties of receiving, depositing and spending its funds – Physical security of assets – CEO/CFO are responsible for internal controls 6
  8. 8. FINANCIAL OVERSIGHTRESPONSIBILITIESSystems that Protect NPOs• Internal controls – Goal = protection of assets and deter fraud• Accounting policies and procedures – Accounting manual – Investment policies – Reserve/board designated endowment policies• External audits 7
  9. 9. FINANCIAL OVERSIGHTRESPONSIBILITIES• To assess and improve financial oversight practices: – How well do we review financial reports and monitor financial performance? – Are we making relevant comparisons – e.g., performance against budget and prior year’s information? – Do we need to upgrade the board’s financial expertise? – Has the organization established a reserve fund and related policies and guidelines? 8
  10. 10. REPORTING STANDARDS OF NONPROFITORGANIZATIONS• In order for Board members to make educated decisions – must be: • Accurate & Complete – Enable management & board to make informed decisions • Timely – Keep current on financial status • In Context – Presented in relationship to the history - Goals & Programs of your nonprofit • Appropriate – Include financial information deemed important to management & board 9
  11. 11. REPORTING STANDARDS OF NONPROFITORGANIZATIONSPrinciple Financial Documents• Annual audited financial statements• Monthly/Quarterly unaudited financial statements prepared by staff, in accordance with GAAP, or cash basis• Annual Budget• Other ad hoc or unique financial reports – Budget vs. actual reports (vs. prior year to date) – Cash flow projections – Departmental financial statements 10
  12. 12. REPORTING STANDARDS OF NONPROFITORGANIZATIONSOther Important Financial Reports• IRS Form 990• Major Financial Commitments – Loans, Purchases, Acquisitions• Investment Statements & Policies• Reserve Policies – Operating – Capital – Program initiatives 11
  13. 13. ROLES - EFFECTIVE BOARD LEADERSHIP• A shared understanding of the organization’s mission and vision• A clear sense of roles and responsibilities• Trust 12
  14. 14. ROLES - SHARED MISSION• Establish guiding principles, policies and mission for the organization• Regular review of the strategic plan and mission (keep them fresh and relevant)• Establish metrics for success 13
  15. 15. ROLES – GOVERN MORE/MANAGE LESSMore On Less On1. Policy issues 1. Policy language2. Components of 2. Specifications of a corporate strategy particular program or3. Relationship service between budgets 3. Terms and conditions of and priorities services or contracts4. Being a strategic 4. An operational overseer asset and evaluator5. Governing the 5. Monitoring the organization management 14
  16. 16. ROLES• Budgeting: preparation, proposal, approval?• Meetings: setting agenda, facilitates the meeting?• Committee work: structure, oversees, support?• Board development: lead role, define need, supporting programs?• Board evaluation: set metrics, require evaluation, create and facilitate process?• Staff evaluations: hire, evaluate, compensate CEO, all others?• Pr, communications: promote the organization, official spokesperson?• Fundraising: guide board, develop policies, support efforts, coordinates all efforts? 15
  17. 17. GOVERNING BOARD RESPONSIBILITIES• Has overall responsibility for determining organization mission, and policy setting• Hires and evaluates the executive• Ensures that adequate resources are available• Approves budget; monitors financial results• Sets investment policy; monitors results• Set operating policies; monitors progress; evaluates outcomes• Responds to executive’s information• Monitors compliance• Establishes strong internal control environment; monitors adequacy of controls (auditor involved); follows up implementation of recommendations 16
  18. 18. EXECUTIVE OFFICER RESPONSIBILITIES• Executive Board policy, including detail planning, establishes measurement standards• Hires, monitors, and evaluates staff & volunteers (including finance); delegates as appropriate• Uses resources as directed by Board; participates in resource development• Creates budget to implement Board policy; provides adequate and timely financial information to Board• Manages investments and other assets as directed (may delegate to some extent); safeguards assets (including adequate insurance)• Implements operating policies• Keeps Board informed, especially when problems impend• Ensures compliance with laws & regulations (including tax, donor restrictions, OMB)• Operates strong internal control system; administers ethical standards; implements auditor recommendations 17
  19. 19. FINANCIAL OFFICER RESPONSIBILITIES• Is aware of organization mission and policies• Hires and monitors financial staff• Assists Executive as requested• Assists Executive in creation of budget; monitors progress; alerts Executive to impending problems• Keeps detailed investment records; monitors performance• Assists Executive as requested; keeps financial records• Keeps Executive informed (also Board, as requested by Executive)• Monitors compliance with laws and regulations• Designs and operates internal control system; implements auditor recommendations 18
  20. 20. PITFALLS OR OPPORTUNITIES• Chose members for values and skills rather than friendship or connections• Avoid conflicts and personal agendas• Perform self assessments• Reward motivation; recognized enthusiasm and outstanding performance 19
  21. 21. IDEAS FOR PRODUCTIVE MEETINGS• Mission-based meetings• Have the right presiding officer• Frequency/Cycles• Preparation: Agenda/Consent Agenda/Reports• Minutes• Evaluation/Feedback• ENJOY! 20
  22. 22. REPORTING TO YOUR BOARD Basic Financial Statements: Reporting on Business Activities Statement of Financial Position Statement of Financial Position At a Point in Time At a Point in Time Statement of Activities For a Period of Time Statement of Cash Flows For a Period of Time Beginning of the Year End of the Year January 1 December 31Beginning of the Fiscal Year End of the Fiscal Year (July 1) (June 30) 21
  23. 23. REPORTING TO YOUR BOARDStatement of Financial Position• AKA - Balance Sheet• Snapshot as of a specific date• Summaries of organization’s resources, obligations and net worth• Three components: – Assets = resources – Liabilities = obligations/debt – Net Assets = net worth (from inception to date)• Typically arranged in order of liquidity – Current: 1 year or less – Long-term: greater than 1 year 22
  24. 24. REPORTING TO YOUR BOARDStatement of Financial Position - Assets• Cash and cash equivalents – Sufficient to meet current obligations? – Inadequate or excessive? – Increasing or decreasing?• Accounts receivable – Composition? – Age? – Allowance for doubtful accounts? 23
  25. 25. REPORTING TO YOUR BOARDStatement of Financial Position - Assets• Promises to Give / Pledges Receivable – Policies for proper recognition and monitoring of collections?• Investments – Portfolio composition consistent with policy? – Rate of return consistent with expectations?• Fixed assets – Composition? – Capitalization and depreciation policies? 24
  26. 26. REPORTING TO YOUR BOARDStatement of Financial Position - Liabilities• Accounts payable and accrued expenses – Invoices received for goods and services not yet paid – Proper cut-off – completed, included as expenses as of the current period• Deferred revenue (Not TRNA) – Future obligations to members – Included in cash balance – Typically recognize 1/12 of dues for each month as revenue• Debt – Purpose, terms, policies and covenants – In compliance with any covenants? 25
  27. 27. REPORTING TO YOUR BOARDStatement of Financial Position - Net Assets• 3 classes of net assets: – Unrestricted – available for general operations • Board designated • Undesignated – Temporarily restricted – donor restriction for specific purpose or time period – Permanently restricted – donor restriction that never expires• Compliance with restrictions?• If net assets are in a deficit situation, is this a “going concern” issue? 26
  28. 28. REPORTING TO YOUR BOARDGAAP VS. CASH• No Donor - Imposed Restrictions – Unrestricted Support GAAP: Recognize revenue when received or promised• Donor - Imposed Restrictions – Temporary – Donor-specified use is satisfied by fulfillment of purpose or passage of time – Permanent – Donor imposed restriction cannot be removed by the NPO GAAP: Recognize revenue when received or promised• Donor - Imposed Conditions – Specifies a future or uncertain event – Contribution depends on overcoming a barrier GAAP: Recognize revenue as condition is met vs. NON-GAAP: CASH: When received 27
  29. 29. REPORTING TO YOUR BOARDStatement of Activities: The Basic FormulaRevenue _ Expenses Increase or andSupport Program Services Mgm’t and General = (Decrease) in Net Assets Fundraising $4,309,800 - $4,849,300 = $(539,500) See sample financial statement handout – page 3 28
  30. 30. REPORTING TO YOUR BOARDWhat Do These Reports Mean?Statement of Activities• AKA - Income Statement• Financial information over a period of time• Summarizes sources of funds (revenue), uses of funds (expenses) and net income or loss (change in net assets)• Expenses are classified by function into programmatic and supporting (management and general / fundraising) 29
  31. 31. REPORTING TO YOUR BOARDStatement of Activities• Revenue and expenses – Increase or decrease? – How do results compare to budget and prior year amounts? – Expenses - percentage of program expenses compared to supporting services (no more than 25%)?• Change in net assets – Net income (surplus) or net loss (deficit)? – If a net loss, is it a real deficit or timing issue? – What is causing the net loss? 30
  32. 32. REPORTING TO YOUR BOARDStatement of Cash Flows• Summarizes sources and uses of cash into three categories: – Operating Activities - day to day general operations – Investing Activities - purchases/sales of capital assets, investments, etc. – Financing Activities - proceed from loans, line of credit• This Statement Can Give the Reader Information on Historic Cash Flow (as opposed to the accrual basis which is required for GAAP financial statements) 31
  33. 33. REPORTING TO YOUR BOARDStatement of Functional Expenses• Provides analysis of non-profit’s service efforts, including total costs and allocation of resources• More detailed line items of expenditures• Separates program from supporting services• Multiple program services may be reported• Supporting services = Management and General expenses as well as Fundraising• How are various expense items allocated between programs, M&G and fundraising?• Does resource allocation appear to be reasonable based on – Nature of program? – Revenue generated from program? 32
  34. 34. REPORTING TO YOUR BOARDFootnotes to Financial Statements• Summarizes: – Organizational structure, mission and sources of funding – Significant Accounting Policies effecting the presentation of financial statements – Explanations of key items on the Statement of Financial Position and Statement of Activities – Concentrations of business credit risk, commitments, contingencies, related party transactions 33
  35. 35. REPORTING TO YOUR BOARDSupplemental Schedules• Not required part of basic financial statements• Additional schedules that support key items• Examples include: – Schedule of functional expense summaries by category by location – Consolidation schedules of a parent and affiliated organizations 34
  36. 36. REPORTING TO YOUR BOARDCash Flow Projection• Monthly changes in cash for operations• Receipts – Grants – Contributions – Membership fees• Disbursements – Salary – Rent – Operating expenses – Debt service – Capital expenditures 35
  37. 37. REPORTING TO YOUR BOARD• Operating revenue and expenses (vs. budget) – Unrestricted revenue – Plus: Release from restricted net assets to unrestricted net assets – Detailed expenses (in comparison to budget)• Departmental revenue and expenses – Details by Department (or Groups) for Budget Purposes • Revenues by department • Expenses by department – Direct expenses – Indirect allocated expenses – Allocation of depreciation 36
  38. 38. REPORTING TO YOUR BOARD• PROJECTIONS – 1, 3 OR 5 YEAR PLANS – Enrollments / memberships / registrants / students / performances – Contracts, proposals, pipeline, booked business in future – Contributions / capital campaign / annual funds• METRICS – Current ratio, investment returns , investment policy, spending – Program % of total expenses – Enrollments / memberships / registrants / students / performances / average cc contribution / average contribution – Employees – Square footage – Departments 37
  39. 39. REPORTING TO YOUR BOARDKeep it simple 38
  40. 40. REPORTING TO YOUR BOARD ENRON!Swartz, Mimi, and Sherron Watkins. Power Failure: The Inside Story of the Collapse of Enron. New York: Doubleday, 2003. 39
  41. 41. REPORTING TO YOUR BOARD• Be transparent• Be consistent from period to period• Reconcile cash to GAAP• Check your work before you distribute• Be a good messenger – send materials out well before the Board meeting, never last minute• Tell the whole story• Be direct 40
  42. 42. REPORTING TO YOUR BOARD Characteristics of Financially Healthy Nonprofits• Ready source of cash (good liquidity)• Sufficient resources to ensure stable programming• Good revenue mix (earned income vs. contributions)• Positive net asset balances that continue to grow each year• If there is a deficit, surplus of prior years cover it• Reasonable “overhead”• Timely reporting (mgm’t and board hold themselves accountable for financial stability)• Operating reserves or a working plan to establish one• Committed to income-based spending 41
  43. 43. REPORTING TO YOUR BOARD Signs of Financial Trouble• Spends more money than received or earned• Payables are growing faster than operations• Old accounts receivables• Poor cash flow – consistently asking for grant advances• Poor or late financial reporting• Growing or unreasonable overhead or costs of fundraising• Restricted net assets are in excess of liquid assets• Mgm’t and Board focus is lack of funds• Net asset balances continue to decrease each year 42
  44. 44. THE AUDIT AND THE 990 43
  45. 45. THE AUDIT• Audit Committee Roles and Responsibilities – The Audit Committee Charter• Do We Change Auditors?• Partner Rotation• Dealing with New Auditors 44
  46. 46. AUDIT COMMITTEE CHARTER• Purpose• Authority• Composition• Meetings• Responsibilities• Financial Reporting• Internal Controls• Internal Audit• External Audit• Compliance• Reporting Responsibilities• Other Responsibilities 45
  47. 47. DO WE CHANGE AUDITORS?• NPOs change auditors for 3 reasons: – Services – Fees – Policy• Common misconception – Sarbanes Oxley Does NOT mandate change of Auditors• How do services break down: – Not enough partner/manager involvement – Too much turnover at ALL levels – Lack of responsiveness to your needs – Not experienced with NPOs 46
  48. 48. DO WE CHANGE AUDITORS(continued)• Not enough Partner/Manager involvement – lack of responsiveness• Firm is not experienced with NPOs• Firm can not make decisions• Too much turnover• Too many surprises• Fees 47
  49. 49. PARTNER ROTATION• Sarbanes Oxley: §203 requires (for public companies) that the lead audit partner and audit partner responsible for reviewing the audit (concurring partner) to rotate off the audit every five years• Other partners will be permitted to serve a maximum of seven consecutive years with a two year time out period. Such audit partners include partners of registrant company, parent company and those who lead audit of a subsidiary whose assets and revenue constitute 20% or more of the consolidated total 48
  50. 50. CHANGING AUDITORS• Audit Committee should adopt a policy to evaluate auditor• Policy could mirror Sarbanes Oxley and mandate partner or manager rotation• Could evaluate auditors every 5 to 10 years• Could mandate change of auditors every 5 years, or 10 years• Be flexible 49
  51. 51. NEW AUDITORS –WHAT WILL BE REQUIRED• At Preliminary - Risk Assessment – Understanding the entity and environment – General applications IT controls – Process memos or flowcharts: • Cash receipts cycle • Cash disbursement cycle • Payroll cycle • Investment cycle • Fixed asset cycle • Financial statement preparation and closing cycle• Walkthroughs of each cycle – sample transactions cradle to grave 50
  52. 52. NEW AUDITORS –WHAT WILL BE REQUIRED (continued)• Control testing of: – Cash receipts – Cash disbursements – Payroll• At Year End – – Substantiation of Accounts – Evaluation – Analytical and Reasonableness – Disclosure• Review of Financial Statements and disclosures• SAS 115• SAS 114 51
  53. 53. NEW AUDITORS* –RECOMMENDATIONS• Be prepared on time – establish a time line• Good communication with auditor throughout the year• Good communication with Audit Committee• Close your books and prepare interim GAAP FS, on a monthly/quarterly basis• Keep your key schedules current – Cash, AR, Investments, fixed assets, AP/AE, other liabilities and net assets.• Perform a pre-audit• Discuss fees and change orders in advance * or with your current auditors 52
  54. 54. FEDERAL FORM 990General Filing Requirements• Form 990-N – Filed when gross receipts are normally less than or equal to $50,000, ‘normally’ defined as three year average.• Form 990-EZ – Filed if gross receipts are less than $200k and total assets are less than $500k.• Form 990 – If the former two cannot be filed, this is required unless allowable exclusion apply.• Form 990-T – Filed if the organization has unrelated business taxable income exceeding $1,000. 53
  55. 55. FEDERAL FORM 990Governance and Related Topics – 501(c)(3) Org.• Mission• Organization Documents• Governing Body• Governance and Management Policies• Financial Statements and Form 990 Reporting• Transparency and Accountability http://www.irs.gov/pub/irs-tege/governance_practices.pdf 54
  56. 56. FEDERAL FORM 990Governance, Management & Disclosure• Section A – Governing Body and Management – Minutes – governing body and committees• Section B – Policies – Review by the Board before Filing, and policy – Written conflict of interest policy – Written whistleblower policy – Written document retention and destruction policy – Process determining compensation 55
  57. 57. QUESTIONS & ANSWERS 56
  58. 58. APPENDICES Appendix I – Sample Whistleblower Policy (Raffa) WB Toolkit (AICPA)/WB Firms (Raffa) Sample Conflict of Interest Policy (excerpt from Board Source) Appendix II – Tips for Creating and Elements of a Good Document Retention Policy (Unknown) Appendix III – Best Practices Checklist (Independent Sector) Appendix IV – Checklist for Accountability (Independent Sector) Appendix V – Executive Summary of the US Senate Finance Committee Report (The Panel on the Nonprofit Sector) Appendix VI – State Governance Proposals and Bills (National Council of Nonprofit Associations) Appendix VII – CA Nonprofit Integrity Act (Chronicle of Philanthropy) Appendix VIII– Parts of Audit Committee Toolkit (Raffa) 24 57
  59. 59. APPENDICES Appendix IX - Trust is not an internal control, By Olson, Cheryl R, October 1, 2003, Publication: The CPA Journal, Wednesday, October 1 2003 Source: http://www.allbusiness.com/professional- scientific/accounting-tax/1157058-1.html#ixzz1XAHNyuew Appendix X – Committee of Sponsoring Organizations of the Treadway Commission – Internal Control Integrated Framework, Guidance on Monitoring Internal Control Systems Appendix XI – Not-for-Profit/Exempt Organizations Blog: Non-Profit Lawyers & Attorneys: Proskauer Rose Law Firm: Tax & Corporate Law for 501c(3) Organizations – Is the Foreign Corrupt Practices Act on your Radar Screen, By Emily Stern, posted August 18, 2010 http://www.irs.gov/pub/irs-tege/governance_practices.pdf 24 58
  60. 60. CONTACT INFORMATIONA. Robert Bloom Phone: 202-822-5000Raffa, P.C. Fax: 202-822-06691899 L Street, NW, Suite 900 Direct: 202-955-6709Washington, DC 20036 e-mail: bbloom@raffa.comVisit our Web Site at: www.raffa.com For information for and To become or find a nonprofit board about nonprofits visit member visit www.iknow.org www.boardnetusa.org © RAFFA, P.C., September 2011 This information may not be reproduced without written permission from Raffa, P.C., 1899 L Street, NW, Suite 900, Washington, DC 20036 (202) 822-5000 59
  61. 61. THANK YOU! 60