Governance and Greater Financial Awareness in Nonprofit Organizations

Transcription

1 Governance and Greater Financial Awareness in Nonprofit Organizations Presented by: Arthur M. Winstead, Jr. Davenport, Marvin, Joyce & Co., LLP Certified Public Accountants & Consultants 1 1

2 What will we cover in this presentation? Financial responsibilities of management and board members Financial reporting - understanding financial statements and generally accepted accounting principles (GAAP) Internal controls - establishment and monitoring The audit committee - structure and responsibility Educating new board members Tax reporting - the role of the Board and management

3 Definition of those charged with governance Those charged with governance. The person(s) or organization(s); i.e., a corporate trustee with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity. This includes overseeing the financial reporting process. Those charged with governance may include management personnel; for example, executive members of a governance board or an ownermanager

4 The changing environment of financial governance The environment concerning financial governance for all entities has changed dramatically over recent years. While the change in the for profit environment has been great, the change in the non-profit environment has been great as well

5 Financial reporting responsibility of the Board The Board is the ultimate governance body for the organization The Board sets the organization s business and ethical standards - the tone at the top The Board sets the policies, oversight, and direction of the organization s activities The Board selects the organization s management, monitors management, and changes management when necessary

6 Financial reporting responsibility of the Board (cont d) While not all board members are required or should have the following attributes related to financial reporting, there should be an adequate number of Board members having them: Understanding of GAAP GAAP as it relates to accounting estimates, accruals, and reserves

7 Financial reporting responsibility of the Board (cont d) Internal control over financial reporting The establishment or consideration of an audit committee and the role of an audit committee Experience or experience actively supervising individuals (management) preparing, auditing, and/or evaluating financial statements

8 8 8 Financial reporting responsibility of management Management is required to prepare and take responsibility for the financial statements (more on this later) Management is required to maintain an adequate system of internal control, including how responsibilities are fulfilled and management s assessment of the effectiveness of the organization s internal controls 8

9 Financial reporting responsibility of management (cont d) Internal control responsibility (cont d) Identification and assessment of factors that could cause the financial statements to contain misstatements whether due to error or fraud Document risk assessment procedures Coordinate the role of external and internal auditors, including assisting the external auditor with preserving the external auditor s independence; i.e., the proper performance of non-attest services by the external auditor

10 Financial reporting responsibility of management (cont d) Internal control responsibility (cont d) Proper coordination of the financial reporting process with the external auditor, including management s responsibility for the financial statements regardless if the financial statements are drafted by the external auditor

11 11 11 NPO Financial reporting the financial statements Four basic financial statements: 1. Statement of Financial Position - the balance sheet - prepared as of a specific date 2. Statement of Activities - the income statement - prepared for a specific period of time 3. Statement of Cash Flows - disclosure of the sources and uses of cash for a specific period of time 4. Statement of Functional Expenses - disclosure of expenses by functional activity - program expenses, management (G&A) expenses, and fundraising expenses 11

12 How are the financial statements prepared/presented? GAAP - the standards, rules, and conventions used to prepare financial statements In the U.S., NPO GAAP is established by the Financial Accounting Standards Board (FASB) Currently, all former sources of GAAP; FASB statements, FASB staff positions, FASB Interpretations, FASB Emerging Issues, AICPA Accounting Principles Board Opinions, AICPA Technical Research Bulletins, Interpretations, SOPs, and Practice Bulletins have been grouped into the FASB Accounting Standards Codification

13 13 13 The Statement of Financial Position As of a certain date/a given point in time Provides information about the NPO s assets (economic resources), liabilities (claims against assets), and net assets (assets in excess of liabilities that are either restricted or unrestricted) The Statement of Financial Position (the balance sheet) is the foundation of the Conceptual Financial Reporting Framework used in the U.S. and globally. The rights and obligations of an entity create the center/foundation of an entity financial reporting for fair and fully disclosed accounting of material transactions 13

14 The Statement of Activities Reports the sources (revenue) and uses (expenditures) of the NPO Revenue can be restricted and unrestricted Revenue - increases to assets or decreases in liabilities Expenses - decrease in assets or increase in liabilities Gains and losses - peripheral or incidental transactions

15 The Statement of Cash Flows Reports the NPO s cash receipts and cash payments over a period of time by three types of activities: 1. Operating activities - the revenue/support less the expenditures of the NPO (the change in net assets), the increase or decrease in net assets from gains and losses, accounting for the changes in noncash revenue and expenditures, and accounting for the cash change in current assets and liabilities

16 The Statement of Cash Flows (cont d) 2. Investing activities - the cash provided or used by acquiring and disposing of debt and equity investments, and acquiring and disposing of fixed assets 3. Financing activities - the borrowing of money, the repayment of amounts borrowed

17 The Statement of Functional Expenses A detail statement of the expenses by the natural classification and functional use/activity - program, management, and fundraising

18 The Notes to the Financial Statements Typically are disclosed in three categories: 1. Summary of Significant Accounting Policies 2. Additional detail required in order for the reader to be fully aware of the nature of the amounts in the financial statements - detail about specific assets, liabilities, revenue, expenses, and gains and losses 3. Other information - litigation, claims and assessments, subsequent events, and other information management believes the reader needs in order to fully understand the financial statements

19 Internal Controls - those charged with governance and management Internal controls is the process, affected by the NPO s board, management, audit committee (if one is in place), and other entity personnel, and designed to provide reasonable assurance about the NPO s Financial reporting reliability Compliance with applicable laws and regulations Effectiveness and efficiency of operations

20 Internal Controls (cont d) The start of efficient and effective internal controls starts with their design The design is based on: The NPO s environment Risk assessment Control activities Information and communication Monitoring The above five components compose the COSO internal control framework that is recognized globally

21 Internal Controls (cont d) Internal controls cannot: Guarantee reliability of financial reporting guarantee compliance with laws and regulations guarantee a NPO s success or survival In other words, internal control is not an absolute guarantee or panacea

22 Internal Controls (cont d) Is management and those charged with governance committed to ethical values? Is management and those charged with governance committed to competence? Is management and those charged with governance committed to a philosophy and operating style that is conducive to an atmosphere supporting an organizational structure dedicated to accurate, reliable, and consistent financial reporting? Does management and those charged with governance assign authority and responsibility dedicated to these principles?

23 Internal Controls (cont d) Clearly management and those charged with governance have the responsibility for overseeing the risks and controls over financial reporting overseeing the tax, legal, and certain other regulatory and compliance matters; i.e., grants, environmental, etc. Management and those charged with governance can delegate the performance, but not the responsibility of any of these areas

24 Internal Controls (cont d) This is a big take away The external audit is not and cannot be an internal control

25 The Audit Committee Responsibilities: dependent on factors such as requirements that may be established by law- very few of these related to audit committees in the NPO environment can be a number of responsibilities assigned to the board, but none of the responsibilities of management should be assigned to the audit committee

26 The Audit Committee (cont d) Responsibilities (cont d): should be unique to the NPO s needs and its culture - one size does not fit all should not be so great and so detailed the audit committee may lose sight of its major objectives or start to perform its duties at too high of a level

27 Audit Committee Responsibilities Appointing, compensating, retaining, and evaluating the external auditor Overseeing the external audit plan Discussing the annual audited financial statements Overseeing the external audit process and audit results Monitoring internal control over financial reporting

28 Audit Committee Responsibilities (cont d) Discussing interim financial statements and the external auditor s review of those statements Monitoring the external auditor s independence Approving audit and non-audit services Overseeing the internal audit function, if one exists Establishing and monitoring the NPO s whistleblower procedures

29 Audit Committee Responsibilities (cont d) The Board of Directors also frequently assigns additional responsibilities to the audit committee involving the oversight of the company s: Code of ethical conduct Special investigations involving possible fraud and related problems Compliance with laws, rules, and regulations Communications from attorneys about potential violations of law Litigation matters

30 Additional Audit Committee Responsibilities (cont d) Related-party transactions Officer and director expense accounts and perquisites Financial risks Earnings press releases Self-assessment of performance

31 Educating those charged with governance Certain basic information required: Information about the entity and environment in which it operates - regulatory and economic Biographies of senior management Minutes of the previous year or years Committees, including structure and duties Self assessment conducted by the NPO or by a third party

32 Educating those charged with governance (cont d) Certain basic information required: (cont d) Prior financial statements and tax filings Prior communication letters from the external auditor History of non-attest work performed by the external auditor Information regarding legal counsel and previous communications from legal counsel

33 Educating those charged with governance (cont d) And another take away Conduct an orientation session for all new members of the Board and the Board s finance committee

34 Form 990 Take away- If a member of management or anyone charged with governance understands the 990, in all likelihood they are well prepared for substantially all of their duties and responsibilities regarding financial issues of the NPO. Since 2008, the 990 requires a greater degree of involvement than ever before for those charged with governance. Most of the 990 and most of its disclosures are visible to the public and donors. Because of that, the public and donors are using 990s more than ever before as to making judgments and forming recommendations as to levels of support based on their reading and interpretation responses and information on the

35 Form 990 (cont d) Management has responsibility, but those charged with governance have to affirm they understand and have reviewed the 990. A big focus of the questions on the 990 is not to necessarily focus on policies, rules, and procedures required by the IRS, but assist those charged with governance that the financial policies and procedures of the NPO support sound government and demonstrate to potential donors and the public the NPO s compliance

36 Form 990 (cont d) Example of how this works on the 990- questions regarding certain items such as whistleblower policies, document retention and destruction and conflict of interest policy while not required by the IRS rules and regulations do provide evidence to those charged with governance and the public the NPO does pursue levels of good financial practices. While a no response to certain questions may not violate an IRS rule or regulation, the no response is visible to the public and donors and may provide resistance for support of the NPO

37 Form 990 (cont d) The public and donors can see the NPO s description of the significant program services of the NPO and ultimately decide on levels of support based on those descriptions

38 DQUESTIONS Davenport, Marvin, Joyce & Co., LLP Arthur M. Winstead, Jr., CPA Partner Phone: (336) Green Valley Road, Suite 201 Greensboro, NC dmj.com