10/9/2015. Agenda. Audit Committees. Presentation of Financial Statements of Not-for-Profit Entities. Audit Committees

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1 Presentation of Financial Statements of Not-for-Profit Entities Presented by Tony Smith, CPA Beth Allen, CPA GreerWalker LLP Agenda Audit Committees The Who s, Why s, What s, When s, and How s Board Governance s Role in Internal Control in Nonprofit Organizations Proposed Changes to Financial Accounting in Not-for-Profits Audit Committees 1

2 The WHOs Who should have an audit committee? Any not-for-profit that has an outside audit performed should have an audit committee. Who should serve on an audit committee? Understand the rules of the state in which your not-for-profit resides AND states where the not-for-profit solicits charitable contributions. Independence is key! No business relationships, no family members, no former executives. Typically, audit and finance committees are separate. At LEAST one financial expert is best practices. Two to five total members. All must be financially literate. The WHYs Why is an audit committee important? There is a question on the 990 asking if the organization has an audit committee. Improved controls over financial reporting. Why should all not-for-profits have an audit committee? Perception is reality. The WHATs What are the responsibilities of an audit committee? Oversight of: Financial reporting Risk management Audit function 2

3 The WHENs When should an audit committee meet? Audit committees should meet with external auditors and management at least 2-3 times per year. Prior to each audit meeting should cover auditors plan and scope. After each audit meeting should cover audit findings and audit committee should approve the audit. Additional meetings should be scheduled as needed to cover risk management or other internal issues. The HOWs How should an audit committee be governed? An official audit committee charter should be adopted and updated annually. The charter should cover specific duties and responsibilities of the audit committee. How much time should an audit committee member expect to spend on committee work? IT DEPENDS!!!!!!! Factors that affect the number of meetings and how long each meeting will include: Stage of development of entity Magnitude of issues Complexity of entity Board Governance s Role in Internal Controls at Not-For-Profit Organizations 3

4 Board of Director Checklist Audited Financial Statements on a Timely Basis Regular Finance and/or Audit Committee meetings Backup Internal Controls when no Outside Accounting Function Review bank statements Monitor contributions received Monitor the Tax Return Disclosures Board of Director Checklist Who is Collecting Donations/Contributions Evaluate internal controls Disbursement Limits for Two Signatories Who are authorized signors? Could internal personnel make the disbursement without an outside Director signing off? What about disbursement just under the limits? Board of Director Checklist Expense Reimbursement Policies Who reviews expense reports for management? Surprise Audits People don t like them but they are effective! What to do when a Director is preparing the books, writing checks, bank reconciliations? 4

5 Separation of Duties Two Person Office Business Manager Record accounts receivable entries Mail checks Write checks Record general ledger entries Reconcile bank statements Record credits/debits in accounting records Approve payroll Receive cash Disburse petty cash Authorize purchase orders Authorize check requests Authorize invoices for payment ED or Owner/Manager Approve and sign checks Sign employee contracts Complete deposit slips Perform interbank transfers Distribute payroll Reconcile petty cash Approve employee timesheets Process vendor invoices Review bank reconciliations and contents of bank statements Separation of Duties Three Person Office Bookkeeper Office Manager ED or Owner/Manager Record accounts receivable Process vendor invoices entries Receive cash Reconcile petty cash Mail checks Write checks Approve invoices for Record general ledger payment entries Distribute payroll Reconcile bank statements Authorize purchase orders Record credits/debits in accounting records Authorize employee timesheets Approve payroll Disburse petty cash Sign checks Sign employee contracts Complete deposit slips Perform interbank transfers Review bank reconciliations and content of bank statements Board of Director Responsibilities with One/Two/Three Person Office Have Bank Statement Sent to a Director (who doesn t sign checks) The Board should set the Tone at the Top Review of significant transactions Review of sample transactions Analytical Reviews 5

6 Proposed Changes to Financial Accounting for Not-for-Profits Who? And What? Generally receive significant contributed resources Includes charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations, etc. FASB has issued an exposure draft of a Proposed Accounting Standards Update, Presentation of Financial Statements of Not-for-Profit Entities Will improve usefulness of the information provided to stakeholders, reduce the complexity of reporting, or both Financial Statement Areas Affected All!! Statement of Financial Position Statement of Activities Statement of Functional Expense Statement of Cash Flows Footnote Disclosures 6

7 Statement of Financial Position The proposed rules would eliminate the distinction between assets with temporary restrictions and those with permanent restrictions. New categories: Net assets with donor restrictions Net assets without donor restrictions Classifying Net Assets Net Assets Unrestricted Temporarily Restricted Permanently Restricted Without Donor Restrictions With Donor Restrictions Endowments Net Assets With Donor Restrictions Net Assets Without Donor Restrictions Permanent Endowment Board-designated Endowment Fund Term Endowment 7

8 Classifying Net Assets Enhanced disclosure in the notes to the financial statements would provide additional information about the restrictions imposed by donors, such as the nature, amounts and effects of such restrictions. Still must track and report temporary and permanent donor restrictions Statement of Activities One Statement Two Statements Statement of operations Must present, at a minimum, the operating excess (deficit) of a not-for-profit entity after transfers Statement of changes in net assets Must provide the information necessary to derive the total change in net assets Statement of Activities The proposed rules would require not-for-profits to present: Subtotal of operating revenues, support, expenses, gains and losses that do not have donor-imposed restrictions (before internal transfers) Subtotal that shows the effects of internal transfers resulting from governing board designations, appropriations, and similar actions that place or remove self-imposed restrictions on the use of assets that make them unavailable or available for current-period activities 8

9 Statement of Activities Required Subtotals Change in Net Assets Change in Net Assets with Donor Restrictions Change in Net Assets without Donor Restrictions Operating Excess (Deficit) Before Transfers Operating Excess (Deficit) After Transfers Functional Expenses Operating Expenses Function (required) Nature (required) Non- Operating Nature (required) Function (optional) Cash Flows Requires direct method for reporting cash flows No longer required to present reconciliation to indirect method Would require certain cash flows be categorized differently than they currently are 9

10 Cash Flows Reclassifications Item Current GAAP Proposed ASU Interest and dividends Operating activities Investing activities Interest expense on long-term debt Operating activities Financing activities Purchases of PP&E, proceeds from sales of PP&E Investing activities Operating activities Contributionsrestricted for PP&E purchases Financing activities Operating activities Cash Flows Required subtotals Cash collected from customers Receipts from sales of PP&E Receipts of contributions from donors Receipts of contributions by donor stipulation are restricted for the purposes of acquiring, constructing, or improving PP&E, other long-lived assets, or acquiring or maintaining collections Cash paid to employees and other suppliers of goods or services Income taxes paid Payments at the time of purchase or soon before or after purchase to acquire PP&E or other productive assets, including interest capitalized as part of the cost of those assets Other operating cash payments, if any Increased Disclosure Management of liquidity and quantitative information about financial assets available to meet near-term demands for cash. Amounts of operating expenses by nature and function. Methods used to allocate costs among program and support functions. Underwater endowment funds. 10

11 Transition Retrospective Application Initial Year Disclose nature of reclassifications Effect on changes in Net Assets No proposed effective date Question as whether it should be the same for all NFPs No information on early adoption Questions? Beth Allen, CPA GreerWalker LLP Tony Smith, CPA GreerWalker LLP 11