2014-03-04 educating & presenting financial information to board members
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Educating & Presenting Financial Information to
Board Members
Bob Bloom March 4, 2014
RAFFA Learning Community
Thrive. Grow. Achieve.
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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)
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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
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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
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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
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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
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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
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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
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FINANCIAL OVERSIGHT RESPONSIBILITIES
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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?
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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
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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
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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
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ROLES – EFFECTIVE BOARD LEADERSHIP
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• A shared understanding of the organization’s mission and vision
• A clear sense of roles and responsibilities
• Trust
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ROLES – SHARED MISSION
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• 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
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ROLES – GOVERN MORE/MANAGE LESS
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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
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ROLES
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• 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?
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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
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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
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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
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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
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IDEAS FOR PRODUCTIVE MEETINGS
• Mission-based meetings • Have the right presiding officer • Frequency/Cycles • Preparation: Agenda/Consent
Agenda/Reports • Minutes • Evaluation/Feedback • ENJOY!
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REPORTING TO YOUR BOARD
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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
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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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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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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
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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
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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
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POINT THIS OUT TO YOUR BOARD
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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
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POINT THIS OUT TO YOUR BOARD
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THE AUDIT AND THE 990
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THE AUDIT
• Audit Committee Roles and Responsibilities – The Audit Committee Charter
• Do We Change Auditors? • Partner Rotation • Dealing with New Auditors
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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
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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
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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
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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
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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
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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
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• 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
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NEW AUDITORS – WHAT WILL BE REQUIRED (continued)
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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
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* or with your current auditors
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QUESTIONS & ANSWERS
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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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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
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© 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
For information for and about nonprofits visit
www.iknow.org
To become or find a nonprofit board member visit
www.boardnetusa.org
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: [email protected] Visit our Web Site at: www.raffa.com
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THANK YOU!