Don t be the Next Domino to Fall in the Not for Profit World!

Transcription

1 Don t be the Next Domino to Fall in the Not for Profit World! Board Member Responsibilities and Best Practices for Not-for-Profit Audit Committees Presented by: Ken Berger, President and Chief Executive Officer Charity Navigator Mike McNee, Partner-in-Charge Nonprofit and Government Services Marks Paneth LLP All Rights of Use and Reproduction Reserved Copyright 2015 Marks Paneth LLP

2 BOARD MEMBER RESPONSIBILITIES: CORE ATTRIBUTES OF A BOARD Understanding the boundaries Respecting each other and the staff of the organization Mastering the mission Communicating the vision; and living the values 2

3 THE RIGHTEOUS SERVICES THAT BOARD MEMBERS DO A Unique Role You provide the Checks and Balances Serve as an ambassador and advocate for the community Why Certain Individuals Are Recruited Goal of building a board is to find the qualities that will best support the organization's vision and goals Be clear about your own desires they are critical to your motivation Time Commitment Ask the questions - how many meetings, how many Committees, how many hours spent fundraising, cultivation, special events Giving time as a board member is a gift, so if wasted by others, you may become resentful 3

4 THE RIGHTEOUS SERVICES THAT BOARD MEMBERS DO What the Actual Role Entails At any given time, expect to be the: Ambassador, Compliance officer, Policy maker, Fundraiser, Advocate, or Manager Being a Satisfied Board Member 3 Key Factors How much you believe in the issues the organization is addressing How motivating you find the tasks to which you are assigned to accomplish How well your values match those supported by the organization Honoring Your Position Honor your role as a board member by respecting the responsibilities of staff members, and the lines that separate you and the organization 4

5 BOARD MEMBERS HOLD THE PUBLIC TRUST As a board member, you have a responsibility to be a Keeper of the Mission a Champion of the organization s values Legal Responsibilities Duty of Care Duty of Loyalty Duty of Obedience Board members are called trustees for a good reason they hold the organization in trust The Right to be Informed Conflict of Interest 5

6 STANDARDS FOR EFFECTIVE BOARDS Qualities of an Effective Board - Boards that work, work Standards for Effectiveness 1. Shared vision for the organization and the impact it will have if the vision is fulfilled 2. Shared values of the board members and the organization are understood and frame the goals 3. The mission is clear and revisited often; it is understood and shared by the board community 4. Goals and strategies are defined and endorsed 5. Board assignments are clear, specific, reasonable, and matched to the board s motivation 6. Board members support the organization financially as well as with their time 6

7 STANDARDS FOR EFFECTIVE BOARDS (CON T) 7. Board meetings are guided by an agenda, tolerant of diverse opinions, and dedicated to reaching agreements in keeping with the organization s mission 8. There is sense of teamwork when approaching a major challenge and shared satisfaction when the challenge is met 9. Board recruitment is systematic and based on identifying people who are needed to achieve the vision and goals 10. Board member rotation is encouraged, but turnover from dissatisfaction is minimal 11. Board self-evaluation is conducted annually and the results used to improve board knowledge and performance 7

8 BEST PRACTICES FOR NOT-FOR-PROFIT AUDIT COMMITTEES Organizational best practices Charter/by-laws Membership Committee operations Functional best practices Internal control basics Management override of controls Relationship with independent auditor Whistleblower program Conflict of Interest Oversight NYS Nonprofit Revitalization Act Law is Effective7/1/14. Sweeping Changes 8

9 CHARTER/BY-LAWS Written charter/by-laws Clear understanding of responsibilities of individual members Clear mandate from governing board Consistency from year to year Not-for-profits have set rules for audit committees, in certain states Forces committee/governing board to deal with many organizational issues 9

10 MEMBERSHIP Pool of eligible members Subgroup of the Board Consist of Independent Board Members Individuals outside of Board Number of members INDEPENDENT DIRECTORS: Has not been an employee of, or does not have a relative that was a key employee of, the corporation or an affiliate of the corporation in past three years; Has not received $10,000 or more in direct compensation from the corporation or an affiliate in the last three years (other than expense reimbursement); Is not a current employee of or does not have substantial financial interest in an entity that made or received payments from the corporation or an affiliate of more than $25,000 or 2% of the corporation s gross revenue (whichever is less) in the last three years (excluding charitable payments); and Does not have a relative who is a current officer of or has a substantial interest in an entity making or receiving payments of a similar amount to the organization in the past three years. 10

11 MEMBERSHIP Conflicts of interest statements Varying skill sets Accounting/auditing knowledge Financing/investing expertise Not-for-profit knowledge/experience Functional expertise Membership terms Finite terms with one or more renewals Stagger membership terms 11

12 COMMITTEE OPERATIONS Rules of designating committee Chair Number of meetings per year Organizational meeting Review of audit plans Financial statement review and comparing to budget and audit results Audit results and management letter recommendations review Set meeting times and dates in advance 12

13 COMMITTEE OPERATIONS Meeting attendance Absence control? Stand-ins permitted? Teleconferencing permitted? Meetings open to nonmembers? Nonmembers rights to address committee? Ability to hire outside counsel and advisors 13

14 COMMITTEE OPERATIONS Minutes of meetings prepared and approved Organizational support/committee secretary Conflicts of interest statements oversee the adoption and implementation Annual self-review of activities Oversee the accounting and financial reporting process Annually retain or review the retention of the auditor Whistleblower policies implementation Conflict of interest signoff reviews Annually consider the performance and independence of the auditor Report to the Board 14

15 INTERNAL CONTROL BASICS Beyond segregation duties Internal control framework Five elements of internal control in COSO (Committee on Sponsoring Organizations) framework Audit committee is a component of internal control 15

16 ELEMENTS OF INTERNAL CONTROL Control environment Risk assessment Control activities Information and communication Monitoring 16

17 MANAGEMENT OVERRIDE AICPA calls it Achilles Heel of Fraud Prevention Common overrides Fictitious transactions Change accounting periods ( cutoff manipulation) Manipulate reserves Alter records Audit committee responsibilities 17

18 AUDIT COMMITTEE ACTIONS Maintain skepticism Understanding of the business Pressures on management Financial reporting capabilities Budget/legal considerations Brainstorming executive session Supervise code of conduct activities Whistleblower program Conflict of interest oversight 18

19 INFORMATION AND FEEDBACK Independent auditors Internal audit (if applicable) Key employees General counsel Department heads Human resources Accounting staff resignations Results of exit interviews 19

20 RELATIONSHIP WITH INDEPENDENT AUDITORS Focus is on financial statements Audit committee oversight Selection and compensation Audit scope Reporting requirements Audit adjustments Audit or report on internal controls (rare) Management letters and recommendations 20

21 RELATIONSHIP WITH AUDIT COMMITTEE Direct access/executive sessions Periodic reporting Monitoring audits planned/completed Review of findings/corrective action plans/corrective actions Assignment of special projects/audits 21

22 WHISTLEBLOWER PROGRAM Basic concepts Easier misappropriation of assets Harder financial reporting fraud Required for nonprofits having 20 or more employees and Annual revenue in excess of $1 million, in NYS Not new concept for some not-for-profits Government oversight Citizens/clients served Media and press Fraud/waste/abuse hotlines Whistleblower Policy shall include Procedures for reporting violations Procedures for preserving the confidentiality of reported information Designated administrator of the policy (an employee, officer or director) A requirement that a copy of the policy be distributed to directors, officers employees and volunteers 22

23 PROGRAM STRUCTURE Dependent on size of the entity How to blow the whistle By Phone By Mail Expect the good, the bad and the ugly 23

24 WHO RUNS THE PROGRAM? Management Has the resources May filter/suppress information Audit committee Has the objectivity They drive the program Likely not to have resources Accordingly, the Chair only gets results and communicates to President, etc. 24

25 AFTER THE WHISTLE BLOWS Federal protection against retaliation Real protection Management buy-in Fraudulent complaints Not a means to job security 25

26 CHECKLIST FOR COMPLIANCE: NONPROFIT REVITALIZATION ACT 2013 Please note that the checklist is not meant to be all-inclusive. It is not designed to include: 1. Smaller not-for-profit organizations (those with revenues under $1 million) 2. An assessment of what type of nonprofit you are ============================================================================================================= Please fill in the blank spaces as follows: Y=Yes, N=No, N/A= Not Applicable Compensation 1. Is there evidence that the compensation vote or deliberation occurred without the subject employee in the room? 2. If the key employee was present during discussions (prior to a vote or deliberation) at the Board or Board committee level, was it merely to answer questions or provide background information? Board Structure 1. Is there reference in the by-laws to not allowing the Board Chairman to be an employee? 2. Is there an Audit Committee (AC)? If not, does another committee or the entire Board act as the AC? 3. Are all members of the AC independent members of the Board? 4. Any non-board members can augment the activities of the AC (or a committee acting as an AC) but they have no official capacity. Is it evident that this is the case? Conflict of Interest 1. Is there a policy to ensure that the directors, officers and key employees act in the best interest of the not-for-profit (NFP)? 2. Does the policy contain a definition of what constitutes a conflict? 3. Are there procedures for disclosing the conflict to the AC or, if no AC, to the committee acting as the AC or the Board? 4. When there were Board or committee deliberations regarding the conflict, were the conflicted parties not present? 26

27 CHECKLIST FOR COMPLIANCE: NONPROFIT REVITALIZATION ACT 2013 CONTINUED Whistleblower 5. Is there no evidence that the conflicted party tried to influence the vote and deliberations? 6. Was the conflict and its resolution disclosed in the minutes? 7. Does the policy provide for procedures to disclose and address related-party transactions? 8. Is it a requirement that a conflict policy and a signoff be done for anyone looking to join the Board? 9. Is the conflict sign-off done before the Board member is appointed? 10. At least annually, are all Board members and senior members of management required to acknowledge the policy and disclose conflicts or confirm the absence of conflicts? 11. Are the annual signoffs presented to the AC chair or Board chair if no AC? 12. Has the AC (or some appropriate committee) been empowered to oversee the conflict policy and implementation and compliance? 13. If number 12 above is no, does the Board do it? 1. Is there a policy? 2. Does it provide for no recrimination toward a whistleblower? 3. Does the policy contain procedures (including confidentiality) to report violations? 4. Does the policy state a designated person to receive complaints and that those complaints go to the AC or Board? 5. Is a copy of the policy given to all Board members, employees and volunteers involved with the NFP? Audit Oversight 1. Is this organization required to file an audit report with the NYS Attorney General? If not, this section is not applicable. Examples of non-required would be C6 organizations. 2. Are all persons involved (with official capacity) in the audit oversight members of the Board who are independent? 3. Does the oversight group oversee the accounting and financial reporting processes of the NFP and the audit of its financials? 4. Does the oversight group annually retain the auditors by signing or approving the engagement letter? 5. Does the oversight group review the pre-audit timing and scope of the audit with the auditors? 6. Does the oversight group review the post-audit results of the audit including key assumptions in the audit, internal control matters, material risks in the financial reporting process, whether there were any restrictions on the audit process, significant disagreements with the auditors, accounting principle or treatment issues and any management recommendations? 27

28 CHECKLIST FOR COMPLIANCE: NONPROFIT REVITALIZATION ACT 2013 CONTINUED 7. Does the oversight group annually assess the adequacy of the auditors and the process? 8. If the oversight group is the AC or a Board committee, are its activities reported to the Board? Related Parties (RP) 1. Are all RP transactions discussed by the Board and is it demonstrated that the relationship is fair, reasonable and in the NFP s best interest? 2. If an alternative provider exists, is there overwhelming evidence that not using the alternate was to the NFP s benefit? 3. Have all Board members and key employees with an interest in the RP disclosed to the Board material facts about the interest? 4. Was the RP relationship and transaction approved by a majority of the Board or an independent committee such as an AC? 5. Were all RP s recused from meeting, deliberating and approving the transactions and relationships? 6. Are these matters documented in the minutes? Modernization and Miscellaneous Matters FYI 1. Board meeting notices can be sent electronically FYI 2. Participation in meetings can be by remote FYI 3. Written consents can be electronic FYI 4. The threshold requirements to have an audit performed increased from over: $250,000 to $500,000 (2014), $750,000 (2017), $1 million (2021) FYI 5. The floor for when an accountant s review report will be needed is increasing in 2014 from $100,000 to $250,000 and the range beyond that floor for when a review is needed extends up to the threshold for the audit levels as indicated above. FYI 6. For 2014, the NYS Office of the Attorney General has clarified that the new filing threshold will be applied for financial reports due on or after July 1, 2014, whether the due date is the initial filing deadline or an extended deadline. FYI 7. Board approval is still needed for real estate purchase/sale transactions but not required for leases FYI 8. Two-thirds Board approval is needed to dissolve the NFP Remember, any No answer requires remediation to be in compliance with the Nonprofit Revitalization Act. In addition, we understand that some of the questions could be subjective and open to interpretation and a Yes response is not a guarantee of compliance. If you have questions about the Nonprofit Revitalization Act or would like further assistance with the checklist, please contact Mike McNee, Partner-in-Charge of the Nonprofit and Government Services Group, or any of the dedicated professionals listed on toward the end of this document. 28

29 CHECKLIST FOR COMPLIANCE: NONPROFIT REVITALIZATION ACT 2013 CONTINUED Here is our Not-For-Profit Team Leadership: Michael L. McNee Partner-in-Charge P: Hope Goldstein Partner P: Joseph J. Kanjamala Partner P: Warren Ruppel Partner P: Anthony J. Tempesta Partner P: Robert Lyons Tax Director, Exempt Organizations P: