The document discusses the roles and responsibilities of audit and finance committees for nonprofit organizations. It provides an overview of fiduciary responsibilities, financial oversight, internal control frameworks, reporting standards, tax considerations, and the roles of management and boards of directors. The document emphasizes that sound financial management and oversight of financial reporting and internal controls are among the most important responsibilities of boards of directors and their audit committees.

1. Audit and Finance Committees:
Defining their Roles and
Managing Their Work
Kay Vollans, CPA & Bob Bloom, CPA
January 28, 2015
RAFFA Learning Community
Thrive. Grow. Achieve.

2. OVERVIEW
• Introductions
• Fiduciary Responsibilities
• Financial Oversight Responsibilities
• COSO – Internal Control – Integrated Framework
• Reporting Standards of Nonprofits
• Tax Considerations
• Roles of the Board, CEO And CFO
• Financial Reporting to the Committee
• The Audit and the 990
• Q&A

3. INTRODUCTIONS
2
Bob Bloom, CPA is a Senior Manager for Raffa’s Audit
Department. He has more than 30 years of financial advisory
experience serving a variety of nonprofit organizations.
Bob serves on several not-for-profit boards, and has roles on
finance, audit and pension committees. Bob has made
numerous presentations to Boards of Directors and has been a
presenter and instructor for GWSCPA, Raffa’s Learning
Community, and internal trainings.
Kay Vollans, CPA is a Tax Manager for Raffa’s Non Profit Tax
Department. She has eight years in public accounting and
focuses on exempt organization tax compliance and consulting.
Kay has written multiple articles on various tax subjects and
delivers presentations in Raffa’s Learning Community as well as
internally for multiple departments at Raffa.

4. FIDUCIARY RESPONSIBILITIES
Legal and Compliance Requirements
• Nonprofit Organizations (NPOs) must have a
governing body overseeing the affairs of an
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
3

5. FIDUCIARY RESPONSIBILITIES
Core Concepts
• Bears the primary responsibilities for ensuring
that organizations fulfill its obligations to the law,
its members, its 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
4

6. 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
5

7. 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
6

8. 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
7

9. Systems that Protect NPOs
• Internal controls
– Goal = protection of assets and to deter fraud
• Accounting policies and procedures
– Accounting manual
– Investment policies
– Reserve/board designated endowment policies
• External audits
8
FINANCIAL OVERSIGHT
RESPONSIBILITIES

10. FINANCIAL OVERSIGHT
RESPONSIBILITIES
• QUESTIONS BY BOARD MEMBERS:
– 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?
9

11. COSO – INTERNAL CONTROL -
INTEGRATED FRAMEWORK
• In 1992, the Committee of Sponsoring
Organizations of the Treadway Commission
(COSO) released Internal Control –
Integrated Framework
• The original framework for designing,
implementing and conducting internal control
and assessing the effectiveness of internal
control
• It has been updated, because business and
operating environments have changed
dramatically:
– Complexity
– Technologically driven
– Global
10

12. COSO – INTERNAL CONTROL -
INTEGRATED FRAMEWORK
• The Framework has been enhanced by
expanding the financial reporting category
of objectives
• The Framework reflects changes in the
business and operating environments:
– Expectations of governance oversight
– Globalization of markets and operations
– Changes and greater complexities of business
– Demands and complexities of laws, rules, regulations
and standards
– Expectations of competencies and accountabilities
– Use of, and reliance on evolving technologies
– Expectation relating to preventing and detecting fraud
11

13. COSO – INTERNAL CONTROL -
INTEGRATED FRAMEWORK
• Internal control helps entities achieve
important objectives
• COSO’s Framework enables (empowers)
organizations develop a system of internal
control to adapt to changing environments,
mitigate risks, and support sound decision
making and governance of the organization
• Management and Boards of Directors (Audit
Committees) must determine how much
control is enough
• The Framework assists Boards,
management and stakeholders in their
respective duties regarding internal control
12

14. COSO – INTERNAL CONTROL -
INTEGRATED FRAMEWORK
• Components of Internal Control
– Control Environment
– Risk Assessment
– Control Activities
– Information and communication
– Monitoring Activities
• The Framework sets out 17 principles and 77
points of focus representing standard
concepts associated with each component
13

15. COSO – INTERNAL CONTROL -
INTEGRATED FRAMEWORK
• Role of the Board of Directors through the
Audit Committee
– The Board should discuss with senior
management the state of the entity’s system of
internal control
– Senior management is accountable for internal
control
– The Board should be appraised of the risks to the
achievement of the entity’s objectives re: internal
control
– The Board should challenge management
14

16. COSO – INTERNAL CONTROL –
INTEGRATED FRAMEWORK
Principles Points of Focus
1
The organization demonstrates
a commitment to integrity and
ethical values
1 Sets the tone at the top
2 Establishes standards of conduct
3
Evaluates adherence to standards of
conduct
4 Addresses deviations in a timely manner
2
The Board of Directors
demonstrates independence
from management and
exercises oversight of the
development and performance
of internal control
5 Establishes oversight responsibilities
6 Applies relevant expertise
7 Operates independently
8
Provides oversight on Control Environment,
Risk Assessment, Control Activities,
Information and Communication, and
Monitoring Activities
3
Management establishes, with
board oversight, structures,
reporting lines, and appropriate
authorities and responsibilities
in the pursuit of objectives
9 Considers all structures of the entity
10 Establishes reporting lines
11
Defines, assigns, and limits authorities and
responsibilities
15
Control Environment

17. COSO – INTERNAL CONTROL –
INTEGRATED FRAMEWORK
Principles Points of Focus
4
The organization demonstrates
a commitment to attract,
develop, and retain competent
individuals in alignment with
objectives
12 Establishes policies and practices
13
Evaluates competence and addresses
shortcomings
14 Attracts, develops and retains individuals
15 Plans and prepares for succession
5
The organization holds
individuals accountable for their
internal control responsibilities
in the pursuit of objectives
16
Enforces accountability through structures,
authorities and responsibilities
17
Establishes performance measures,
incentives and rewards
18
Evaluates performance measures,
incentives and rewards for ongoing
relevance
19 Considers excessive pressures
20
Evaluates performance and rewards or
disciplines individuals
16
Control Environment (continued)

18. REPORTING STANDARDS OF NONPROFIT
ORGANIZATIONS
• In order for Board members to make
educated decisions, information reported to
them 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
17

19. 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
18

20. 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
19

21. FORM 990 – PAGE 6
• Policies not
required but
considered
“good
governance”
according to IRS
• Form 990 review
by entire board
(this form)
Presentation Title / Page 20

22. TAX CONSIDERATIONS
Form 990: Annual Federal information return
for exempt organizations
– Program service accomplishments
– Attached schedules based on appropriate
answers to “trigger” questions about activities
– Governance policies described should be verified
– Board members and compensation reporting
– Public support test
– Failure to file or timely file costs
21

23. TAX CONSIDERATIONS
Tax return compared to Audited financial
statements:
– GAAP reporting can be different from IRS
requirements
– Part XI Reconciliation of net assets
– Schedule D Reconciliation
– i.e. Donated services and use of facilities not
allowed to be reported as revenue/expense
(different from donated goods)
22

24. TAX CONSIDERATIONS
Unrelated Business Income (UBI):
DEFINED:
– Trade or Business: activity conducted for the production of
income from selling goods or performing services
– Regularly carried on: activities that have a frequency and
continuity, pursued in a manner similar to non-exempt
organizations
– Not “substantially related” to exempt purpose: does not
contribute importantly to accomplishing organization’s purpose
23

25. TAX CONSIDERATIONS
Unrelated Business Income (UBI):
– Form 990-T: Required filing (for gross UBI of $1,000 or more)
that calculates taxable income on unrelated business activities
• Advertising on websites or in periodicals
• Debt-financed income
• Job web activity
• Inventory: mugs, t-shirts, bumper stickers
24

26. TAX CONSIDERATIONS
Unrelated Business Income (UBI):
– Exceptions:
• Interest/Dividends/Capital Gains
• Real property rentals
• Royalties
• Convenience
• Volunteer activity
• Donated goods
25

27. TAX CONSIDERATIONS
More UBI considerations:
– Substantial services in relation to rent/royalty
arrangements may create UBI
– Alternative investments (K-1’s) verified for UBI and
state reporting
– Verifying: Net operating losses and carryforwards
– Planning: Quarterly payments on tax for cash flow
26

28. TAX CONSIDERATIONS
State considerations:
– General business license
– Sales tax exemption certificate
– Personal property tax filings
– State charitable registrations
– UBIT: location of business and domicile state
27

29. TAX CONSIDERATIONS
Other compliance items:
– Payroll – 940, 941, unemployment, W-2, 1099
– Retirement and Benefit Plans
– Dissolutions & mergers
– Lobbying/political registrations
– Political Action Committees & FEC filings
– Retirement plans
– Foreign ownership or accounts
28

30. TAX CONSIDERATIONS
Don’t be hesitant to ask tax related questions:
– Ask your organization’s financial officer
or your tax advisor
– Form 990 review period typically set aside
for Board members
Your exempt organization’s 990 return is your
business...and everyone else’s!
29

31. ROLES - EFFECTIVE BOARD LEADERSHIP
30
• A shared understanding of the
organization’s mission and vision
• A clear sense of roles and responsibilities
• Trust
• 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

32. ROLES – GOVERN MORE/MANAGE LESS
31
More On
1. Policy issues
2. Components of
corporate strategy
3. Relationship between
budgets and
priorities
4. Being a strategic
asset
5. Governing the
organization
Less On
1. Policy language
2. Specifications of a
particular program or
service
3. Terms and conditions of
services or contracts
4. An operational overseer
and evaluator
5. Monitoring the
management

33. GOVERNING BOARD RESPONSIBILITIES
• Determining mission and setting policy
• Hires and evaluates the executive
• Ensures that adequate resources are available
• Approves budget; monitors financial results
• Sets investment policy; monitors results
• Sets 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 on implementation of recommendations
32

34. EXECUTIVE OFFICER RESPONSIBILITIES
• Institutes Executive Board policy
• Hires, monitors, and evaluates staff & volunteers (including
finance)
• 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; 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
33

35. FINANCIAL OFFICER RESPONSIBILITIES
• Awareness 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
34

36. PITFALLS OR OPPORTUNITIES
• Choose 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
35

37. IDEAS FOR PRODUCTIVE MEETINGS
• Mission-based meetings
• Have the right presiding officer
• Frequency/Cycles
• Preparation: Agenda/Consent
Agenda/Reports
• Minutes
• Evaluation/Feedback
• ENJOY!
36

38. FINANCIAL REPORTING TO THE
COMMITTEE
37

39. REPORTING TO YOUR BOARD
• Foundation
– Consolidated Statement of Financial Position
– Statement of Activities
• Community Based Organization – 1 page summary
– Financial Report
• Consolidated NPO – 1 page summary
– Financial Report
• Association
– Financial Reports
– Budget
• Private School
– Dashboard
– Statement of Activities
38

40. 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
39

41. 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
40
POINT THIS OUT TO YOUR BOARD

42. 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
41
POINT THIS OUT TO YOUR BOARD

43. THE AUDIT AND THE 990
42

44. THE AUDIT
• Audit Committee Roles and Responsibilities
– The Audit Committee Charter
• Do We Change Auditors?
• Partner Rotation
• Dealing with New Auditors
• Audit Committee Toolkit
43

45. AUDIT COMMITTEE CHARTER
• Purpose
• Authority
• Composition
• Meetings
• Responsibilities
• Financial Reporting
• Internal Controls
• Internal Audit
• External Audit
• Compliance
• Reporting Responsibilities
• Other Responsibilities
44

46. DO WE CHANGE AUDITORS –
SOME CONSIDERATIONS
• 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
45

47. DO WE CHANGE AUDITORS –
SOME CONSIDERATION S (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
46

48. 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 an audit of a
subsidiary whose assets and revenue constitute
20% or more of the consolidated total
47

49. 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
or 10 years
• Be flexible
48

50. 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
49

51. • 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
• Other Reports
– AU-C 260 – The Auditors Communication with Those
Charged with Governance
– AU-C 265 – Communicating Control Matters Identified in an
Audit (the Management Letter)
50
NEW AUDITORS –
WHAT WILL BE REQUIRED? (continued)

52. 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
51
* or with your current auditors

53. AUDIT COMMITTEE TOOLKIT
• Independence Questionnaire
• Audit Committee Planner
• Audit Committee Charter
• Audit Committee Best practices
• And the 1 pager –
– Roles and Responsibilities
52

54. FEDERAL FORM 990
COMPLIANCE ITEMS
• Compliance timeline should line up with
audit to avoid extensions and final deadlines
• Avoid last minute gathering of tax
information by setting up processes to
gather IRS required information throughout
the year
• Understand risk areas and prevent tax
surprises
53

55. QUESTIONS & ANSWERS
54

56. 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)
55
24

57. 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
 Appendix XII – Raffa’s Audit Committee Toolkit
56
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58. © Raffa, P.C., June 2014
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
For information for and
about nonprofits visit
www.iknow.org
To become or find a nonprofit board
member visit
www.boardnetusa.org
57

59. 58
Bob Bloom, Senior Audit Manager
Direct: 202-955-6709
E-mail: BBloom@raffa.com
Kay Vollans, Tax Manager
Direct: 202-955-6757
E-mail: KVollans@raffa.com
Thank You