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.

1. Educating & Presenting
Financial Information to
Board Members
Bob Bloom
February 14, 2013
Thrive. Grow. Achieve.
RAFFA Learning Community

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. 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. 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. 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. FINANCIAL OVERSIGHT
RESPONSIBILITIES
• 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. FINANCIAL OVERSIGHT
RESPONSIBILITIES
• 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. FINANCIAL OVERSIGHT
RESPONSIBILITIES
Systems 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. FINANCIAL OVERSIGHT
RESPONSIBILITIES
• 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. REPORTING STANDARDS OF NONPROFIT
ORGANIZATIONS
• 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. REPORTING STANDARDS OF NONPROFIT
ORGANIZATIONS
Principle 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. REPORTING STANDARDS OF NONPROFIT
ORGANIZATIONS
Other Important Financial Reports
• IRS Form 990
• Major Financial Commitments
– Loans, Purchases, Acquisitions
• Investment Statements & Policies
• Reserve Policies
– Operating
– Capital
– Program initiatives
11

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. 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. ROLES – GOVERN MORE/MANAGE LESS
More On Less On
1. Policy issues 1. Policy language
2. Components of 2. Specifications of a
corporate strategy particular program or
3. Relationship service
between budgets 3. Terms and conditions of
and priorities services or contracts
4. Being a strategic 4. An operational overseer
asset and evaluator
5. Governing the 5. Monitoring the
organization management
14

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. 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. 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. 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. 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. 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. 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 31
Beginning of the Fiscal Year End of the Fiscal Year
(July 1) (June 30)
21

23. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
GAAP 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. REPORTING TO YOUR BOARD
Statement of Activities: The Basic Formula
Revenue
_ Expenses Increase or
and
Support
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. REPORTING TO YOUR BOARD
What 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. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
Statement 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. REPORTING TO YOUR BOARD
Footnotes 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. REPORTING TO YOUR BOARD
Supplemental 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. REPORTING TO YOUR BOARD
Cash Flow Projection
• Monthly changes in cash for operations
• Receipts
– Grants
– Contributions
– Membership fees
• Disbursements
– Salary
– Rent
– Operating expenses
– Debt service
– Capital expenditures
35

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. 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. REPORTING TO YOUR BOARD
Keep it simple
38

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. 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. 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. 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. THE AUDIT AND THE 990
43

45. THE AUDIT
• Audit Committee Roles and Responsibilities
– The Audit Committee Charter
• Do We Change Auditors?
• Partner Rotation
• Dealing with New Auditors
44

46. AUDIT COMMITTEE CHARTER
• Purpose
• Authority
• Composition
• Meetings
• Responsibilities
• Financial Reporting
• Internal Controls
• Internal Audit
• External Audit
• Compliance
• Reporting Responsibilities
• Other Responsibilities
45

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. 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. 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. 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. 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. 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. 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. FEDERAL FORM 990
General 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. FEDERAL FORM 990
Governance 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. FEDERAL FORM 990
Governance, 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. QUESTIONS & ANSWERS
56

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. 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. CONTACT INFORMATION
A. Robert Bloom Phone: 202-822-5000
Raffa, P.C. Fax: 202-822-0669
1899 L Street, NW, Suite 900 Direct: 202-955-6709
Washington, DC 20036 e-mail: bbloom@raffa.com
Visit 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. THANK YOU!
60