This document provides an overview and outline for a presentation titled "Educating & Presenting Financial Information to Board Members". The presentation covers fiduciary responsibilities of board members, financial oversight responsibilities, reporting standards for non-profit organizations, roles of the board, CEO and CFO, reporting to the board, audits, and a question and answer session. It includes over 40 slides covering these topics in detail over approximately 2 hours.

1. Educating & Presenting
Financial Information to
Board Members
Bob Bloom
March 4, 2014
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
– Dashboard
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
corporate strategy
2.
3.
Relationship
between budgets
and priorities
Specifications of a
particular program or
service
3.
Terms and conditions of
services or contracts
4.
Being a strategic
asset
4.
An operational overseer
and evaluator
5.
Governing the
organization
5.
Monitoring the
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
21

23. REPORTING TO YOUR BOARD
• Foundation
– Financial Report
• Community Based Organization
– Financial Report
• Non Profit Organization
– Consolidated Financial Statement
• Association
– Budget
• Private School
– Dashboard
– Statement of Activities
22

24. 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
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25. 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
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26. 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
25

27. 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
26

28. 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
POINT THIS OUT TO YOUR BOARD
27

29. 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
POINT THIS OUT TO YOUR BOARD
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30. THE AUDIT AND THE 990
29

31. THE AUDIT
• Audit Committee Roles and Responsibilities
– The Audit Committee Charter
• Do We Change Auditors?
• Partner Rotation
• Dealing with New Auditors
30

32. AUDIT COMMITTEE CHARTER
•
•
•
•
•
•
•
•
•
•
•
•
Purpose
Authority
Composition
Meetings
Responsibilities
Financial Reporting
Internal Controls
Internal Audit
External Audit
Compliance
Reporting Responsibilities
Other Responsibilities
SEE ATTACHED AUDIT COMMITTEE TOOLKIT
31

33. 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
32

34. 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
33

35. 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
34

36. 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
35

37. 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
36

38. 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
37

39. 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
38

40. QUESTIONS & ANSWERS
39

41. 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)
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40

42. 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/professionalscientific/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
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43. CONTACT INFORMATION
A. Robert Bloom
Raffa, P.C.
1899 L Street, NW, Suite 900
Washington, DC 20036
Visit our Web Site at:
For information for and
about nonprofits visit
www.iknow.org
Phone:
Fax:
Direct:
e-mail:
202-822-5000
202-822-0669
202-955-6709
bbloom@raffa.com
www.raffa.com
To become or find a nonprofit board
member visit
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
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44. THANK YOU!
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