Financial Oversight Workshop: BoardWALK Feb 2010

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Workshop for nonprofit board members on key financial oversight considerations, along with techniques on visual reporting

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Financial Oversight Workshop: BoardWALK Feb 2010

  1. 1. Financial Oversight Board roles and responsibilities Robert P. Seestadt, CPA
  2. 2. <ul><li>“ Oversight is somewhere between micromanaging and absence” </li></ul><ul><li>~ anonymous board member </li></ul>
  3. 3. The Oversight Role <ul><li>Understanding </li></ul><ul><li>Interacting </li></ul><ul><li>Assessing </li></ul><ul><li>Establishing </li></ul>
  4. 4. <ul><li>Understanding </li></ul><ul><li>~ Financial statements and traditional oversight elements </li></ul>
  5. 5. Typical Oversight Responsibilities <ul><li>Understand stakeholders needs and interests </li></ul><ul><li>Listen & ask questions </li></ul><ul><li>Approve annual budget * </li></ul><ul><li>Approve audit * </li></ul><ul><li>Control investment of capital funds * </li></ul><ul><li>Approve contracts * </li></ul><ul><li>Understand financial statements </li></ul><ul><li>Understand internal control structure </li></ul><ul><li>Avoid / disclose conflict of interest * </li></ul><ul><li>Understand risk & insurance </li></ul>
  6. 6. 1: Embody Stakeholder Interests <ul><li>Grantors & Donors </li></ul><ul><li>General public </li></ul><ul><li>Government </li></ul><ul><li>Lenders </li></ul><ul><li>Other </li></ul>
  7. 7. 2: Listen & Ask Questions <ul><li>Show up to meetings </li></ul><ul><li>Read materials (in advance, if possible) </li></ul><ul><li>Ask questions </li></ul><ul><li>Supportive, team perspective </li></ul>
  8. 8. 3: Approve Annual Budget <ul><li>Written financial plan </li></ul><ul><li>Tied to the Organization’s strategic plan and mission </li></ul><ul><li>Realistic under circumstances? </li></ul><ul><li>Plan for various scenarios </li></ul><ul><li>Identify “Risks and Opportunities” </li></ul><ul><li>Build in accountability </li></ul><ul><li>Monitor variances from actual </li></ul>
  9. 9. 4: Approve Audit <ul><li>Financial statement audit </li></ul><ul><li>Audit “Opinion” </li></ul><ul><ul><li>Unqualified </li></ul></ul><ul><ul><li>Qualified/other </li></ul></ul><ul><li>Internal Controls </li></ul><ul><li>Management Letter </li></ul><ul><li>Audit committee </li></ul>
  10. 10. 5: Control Investment of Funds <ul><li>Cash reserve </li></ul><ul><li>Understand investment risks and vehicles </li></ul><ul><li>Investment policy: What types of investments are acceptable, etc </li></ul>
  11. 11. 6: Approve Contracts <ul><li>Long-term commitments </li></ul><ul><li>Can designate executive to sign agreements </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Long-term lease </li></ul></ul><ul><ul><li>Employment contracts </li></ul></ul><ul><ul><li>Significant agreements to purchase </li></ul></ul>
  12. 12. 7: Understand Financial Statements <ul><li>Basic statements </li></ul><ul><ul><li>Report letter (Auditor) </li></ul></ul><ul><ul><li>Statement of Position (Balance Sheet) </li></ul></ul><ul><ul><li>Statement of Activities (Revenue & Expense) </li></ul></ul><ul><ul><li>Statement of Cash flows </li></ul></ul><ul><ul><li>Footnotes </li></ul></ul><ul><li>Cash vs. Accrual </li></ul><ul><li>Net Assets </li></ul><ul><ul><li>Unrestricted </li></ul></ul><ul><ul><li>Temporarily Restricted </li></ul></ul><ul><ul><li>Permanently Restricted </li></ul></ul>
  13. 13. Statement of Position <ul><li>Net Assets </li></ul><ul><ul><li>Assets – Liabilities=Net Assets </li></ul></ul><ul><ul><li>Types: </li></ul></ul><ul><ul><ul><li>Unrestricted </li></ul></ul></ul><ul><ul><ul><li>Temporarily restricted </li></ul></ul></ul><ul><ul><ul><li>Permanently restricted </li></ul></ul></ul><ul><ul><li>Donor intentions determine restriction </li></ul></ul>
  14. 14. Sample Financial Statements: Statement of Position <ul><li>Assets </li></ul><ul><li>Cash $125 </li></ul><ul><li>Trade receivables $ 45 </li></ul><ul><li>Pledges receivable $390 </li></ul><ul><li>Property (net) $5,400 </li></ul><ul><li>Other assets $ 20 </li></ul><ul><li>Total Assets $5,980 </li></ul>Liabilities & Net Assets Trade A/P $ 75 Accrued Liab $ 25 Notes Pay $5,000 Total Liabilities $5,100 Net Assets Unrestricted $750 Temp Restricted $130 Total Net Assets $880 Total Liab & Net Assets $5,980
  15. 15. Statement of Activities <ul><li>Revenues </li></ul><ul><ul><li>Earned </li></ul></ul><ul><ul><li>Contributed </li></ul></ul><ul><ul><li>Transfers </li></ul></ul><ul><li>Expenses </li></ul><ul><ul><li>Operating </li></ul></ul><ul><ul><li>Depreciation & amortization </li></ul></ul><ul><li>What about capital purchases? </li></ul>
  16. 16. Sample Financial Statement: Statement of Activities <ul><li>Unrestricted Temp Rest </li></ul><ul><li>Revenues </li></ul><ul><li>Fees $800 </li></ul><ul><li>Membership sales $ 55 </li></ul><ul><li>Contributed $800 </li></ul><ul><li>Release/temp rest $750 (750) </li></ul><ul><li>Total Revenue $1,605 $50 </li></ul><ul><li>Expenses </li></ul><ul><li>Staff wages $800 </li></ul><ul><li>Other program $400 </li></ul><ul><li>Business $100 </li></ul><ul><li>Depreciation $400 </li></ul><ul><li>Total Expense $1,700 </li></ul><ul><li>Revenue over/(under) $(95) $50 </li></ul><ul><li>Net asset beginning $845 $80 </li></ul><ul><li>Net asset ending $750 $130 </li></ul>
  17. 17. Expenses & Functional Allocations <ul><li>Program: </li></ul><ul><ul><li>Costs incurred for particular program(s) </li></ul></ul><ul><li>Management & General: </li></ul><ul><ul><li>Oversight, business management, recordkeeping, budgeting, and all management /admin unless related to direct programs </li></ul></ul><ul><li>Fundraising: </li></ul><ul><ul><li>Costs of fundraising effort, including allocated costs </li></ul></ul><ul><li>Tip: Look at form 990 </li></ul>
  18. 18. Statement of Cash Flows <ul><li>Reconcile beginning & ending cash </li></ul><ul><li>Sources: </li></ul><ul><ul><li>Operating activities </li></ul></ul><ul><ul><li>Investing activities </li></ul></ul><ul><ul><li>Financing activities </li></ul></ul>
  19. 19. Footnotes <ul><li>Sometimes the most interesting part of the financials </li></ul><ul><ul><li>Nature of organization </li></ul></ul><ul><ul><li>Method of recording transactions </li></ul></ul><ul><ul><li>Significant issues </li></ul></ul><ul><ul><li>Additional detail that may be helpful in understanding statements </li></ul></ul>
  20. 20. Responsibilities 8: Understand Internal Controls <ul><li>What are internal controls? </li></ul><ul><li>Segregation of duties </li></ul><ul><ul><li>Custody </li></ul></ul><ul><ul><li>Authorization </li></ul></ul><ul><ul><li>Recordkeeping </li></ul></ul><ul><li>Can be difficult in small organizations </li></ul><ul><li>Examples </li></ul><ul><ul><li>Recording checks/reconciling stmt/signing authority </li></ul></ul><ul><ul><ul><li>Tip: Review of bank statement </li></ul></ul></ul>
  21. 21. Responsibilities 9: Avoid/Disclose Conflicts of Interest <ul><li>What constitutes a conflict of interest? </li></ul><ul><li>Are all transactions with disqualified persons inappropriate? </li></ul><ul><li>What are the main elements of a conflict of interest policy. </li></ul><ul><li>What type of disclosure should be required? </li></ul><ul><li>What should be done if a conflict of interest exists. </li></ul>
  22. 22. <ul><li>The Management Letter </li></ul><ul><li>Using audit results to improve oversight </li></ul>
  23. 23. <ul><li>Financial Oversight </li></ul><ul><li>5 things NOT to do </li></ul>
  24. 24. Financial oversight: 5 things NOT to do <ul><li>Avoid auditor communication at all costs </li></ul>
  25. 25. Financial oversight: 5 things NOT to do <ul><li>Avoid auditor communication at all costs </li></ul><ul><li>Allow for weak whistleblower policy </li></ul>
  26. 26. Financial oversight: 5 things NOT to do <ul><li>Avoid auditor communication at all costs </li></ul><ul><li>Allow for weak whistleblower policy </li></ul><ul><li>Forget to document meetings and minutes </li></ul>
  27. 27. Financial oversight: 5 things NOT to do <ul><li>Avoid auditor communication at all costs </li></ul><ul><li>Allow for weak whistleblower policy </li></ul><ul><li>Forget to document meetings and minutes </li></ul><ul><li>Assume others will ask questions </li></ul>
  28. 28. Financial oversight: 5 things NOT to do <ul><li>Avoid auditor communication at all costs </li></ul><ul><li>Allow for weak whistleblower policy </li></ul><ul><li>Forget to document meetings and minutes </li></ul><ul><li>Assume others will ask questions </li></ul><ul><li>Believe everything you are told </li></ul>
  29. 29. <ul><li>Interacting </li></ul><ul><li>Insight through Inquiry </li></ul>
  30. 30. <ul><li>Establishing “Tone at the Top” </li></ul><ul><li>A Key Element in Oversight </li></ul>
  31. 31. <ul><li>Assessing </li></ul><ul><li>Introduction to “Collective Finance” </li></ul>
  32. 32. Which of the following types of technical assistance would be helpful now to your organization? Source: Nonprofit Finance Fund March 2009 survey of 47 nonprofit leaders; used with permission
  33. 33. Key terms in financial assessment <ul><li>Capital position </li></ul><ul><ul><li>Strong </li></ul></ul><ul><ul><li>Healthy </li></ul></ul><ul><ul><li>Moderate </li></ul></ul><ul><ul><li>Fragile </li></ul></ul><ul><ul><li>Poor </li></ul></ul><ul><li>Forward momentum </li></ul><ul><ul><li>Significant </li></ul></ul><ul><ul><li>Favorable </li></ul></ul><ul><ul><li>Sustaining </li></ul></ul><ul><ul><li>Insufficient </li></ul></ul><ul><ul><li>Stalled </li></ul></ul>
  34. 34. Momentum Capital Example: A reporting tool
  35. 35. Momentum Capital Example: Reporting tool
  36. 36. Momentum Capital Example: Reporting tool
  37. 37. Momentum Capital Example: Reporting tool
  38. 38. Momentum Capital Collective Example: Very little agreement
  39. 39. Momentum Capital Example: Some agreement
  40. 40. Momentum Capital Example: Focused assessment
  41. 41. Momentum Capital Example: 8 nonprofit organizations Feb. 5 2010
  42. 42. <ul><li>Next Steps </li></ul><ul><li>More help & questions? </li></ul><ul><li>Volunteer and low-cost CFO assistance </li></ul><ul><li>Collective finance setup and board exercise </li></ul><ul><li>Discussion groups for nonprofit finance staff </li></ul><ul><li>Other nonprofit finance </li></ul><ul><li>Robert Seestadt </li></ul><ul><li>248.894.6153 </li></ul><ul><li>[email_address] </li></ul>

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