Six Financial Oversight Strategies for Nonprofits

Transcription

1 Six Financial Oversight Strategies for Nonprofits

2 You Inspire Us! 1) Greet your new friends! 2) Surf the binder and resources 3) Enjoy The Hope Center 4) Watch for MORE resources in 7 days: ECFA.org/Content/Six-Financial-Oversight-Strategiesfor-Nonprofits

3 Board Committee Structure and Financial Oversight Michael E. Batts

4 Board Committee Structure and Financial Oversight Overview

5 Board Policy and Governing Documents

6 Committees

7 Whether carried out directly or via committee, the board s financial oversight should extend to the following areas:

8 The Board s Financial Oversight Ensuring that the organization s financial condition is sound and that it has the financial capacity to conduct its programs and activities as intended; Adopting and monitoring compliance with appropriate financial policies in conformity with the organization s governing documents; Approving and monitoring compliance with the organization s operating budget and capital expenditures budget for each fiscal year;

9 The Board s Financial Oversight Establishing and carefully monitoring compliance with a well-drafted conflicts-ofinterest policy to address transactions with related parties in a manner that represents good governance and compliance with federal tax law; Ensuring that the organization has proper and adequate internal controls over financial operations and activities;

10 The Board s Financial Oversight Ensuring that an independent audit of the organization s financial statements is conducted annually by a CPA firm highly experienced in serving nonprofit organizations and addressing any risk issues raised by the audit firm in connection with the audits; Ensuring that the organization s auditors or tax counsel are proactively addressing tax compliance matters and reporting their findings to the board or its designated committee; and

11 The Board s Financial Oversight Properly approving the CEO s compensation package following federal tax guidelines under the advice of good tax counsel and documenting the board s basis for determining that the compensation is not excessive.

12 An organization s board can avoid financial scandals of the types that have been reported in the media by following a few common-sense practices.

13 Common Issues in Scandals Executive compensation and perks Lavish or extravagant expenditures Business transactions with related parties Handling of donor-restricted gifts

14 Common-Sense Practices What practices could help avoid scandals in each of these areas? Watch out for media spin in connection with related party transactions.

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16 An Organization-wide Approach to Risk Management Michael E. Batts

17 Significant risks faced by ministries today

18 Approaching risk management from the top

19 Ideas and observations in specific risk areas

20 Risk-based Corporate Structure Model Main Operating Entity (Charity or Church) Tier 1 A B C Tier 2 Real Estate Holding Entity Liquid Investment Holding Entity (often referred to as a foundation) High Risk Activity Entity (Counseling, etc.) Copyright Batts Morrison Wales & Lee, P.A. All Rights Reserved.

21 Ideas and observations in specific risk areas: Governing documents Tax status and compliance Financial controls Insurance coverage Operational areas

22 Summary and Conclusion

23 Q & A with the Speakers!

24 Lunchtime Table Topic

25 ECFA Update 5-Minute Memo!

26 Effective Internal Control Strategies Dan Busby John Van Drunen

27 The Unique Nonprofit Environment Christ-centered nonprofits often place a higher degree of trust in staff and volunteers than with other organizations Revenue often comes in the form of contributions Reliance on contributed services of volunteers Many volunteers volunteers have a limited nonprofit financial background

28 Who Has the Best Ideas for Gaming the System? The auditors? System consultants? Probably you!

29 Your Greatest Asset Protection Risks Before the assets are recorded on your books skimming Cash larceny after cash has been recorded Billing schemes Payroll schemes Expense reimbursement schemes

30 Your Greatest Asset Protection Risks Check tampering Cash register disbursement schemes Noncash misappropriations Cash-on-hand misappropriations Electronic transactions

31 Efficiency vs. Effectiveness Looking for Reasonable Assurance

32 Balancing Asset Controls With Efficient Operation When controls are too loose When controls are too tight When there is an appropriate mix of controls

33 Primary Weaknesses Source: Association of Certified Fraud Examiners (ACFE), 2010 Report to the Nation on Occupational Fraud and Abuse (Used with Permission).

34 One Size Does Not Fit All.

35 Control Environment Establishing the atmosphere of integrity Getting the right people in the right places Encouraging the high road Developing your staff

36 Risk Assessment Determining your external and internal risks Reviewing your risks in light of your objectives Determining ways to mitigate these risks Reviewing risks as the operating environment changes

37 Information and Communication Getting the right information to the right people at the right time Making your systems work for you, not the other way around Staying up to date on issues Emphasizing the importance of controls from the highest position on down

38 Monitoring Monitor for changes in the environment Look for undiscovered mistakes Monitor for trends An ongoing process, not an event Report issues or possible gaps in controls Efficiency vs. effectiveness

39 A Word about COSO Committee of Sponsoring Organizations of the Treadway Commission

40 Special Factors Contributing to Good Internal Control Background checks Lock box Use of a positive pay system Special controls over wire transfers Controls over electronic receipts and payments Reviews for ghosts on the payroll and ghost vendors

41 Merchant Account Internal Controls Work with your merchant account provider to make sure you are PCI compliant and that staff are not able to steal credit card information from donors: Who has access to control your merchant account? Do you have more than one merchant account? Who has authority to issue credits or refunds? Does your processing system allow credits where there is no matching previous debit? How would you know if someone changed the routing information on your account for a while? Or changed it one of your many merchant accounts?

42 Merchant Account Internal Controls Is there a separate transaction receipt that goes to someone beside the person overseeing your merchant account? Are their instructions on file with your credit card processor/underwriters preventing a single person from unilaterally changing the routing instructions? Review how credit card merchant account statements are reconciled for bank statement and accounting purposes. Should be done (or at least initially reviewed) by someone that doesn t have access to credit card account access.

43 Merchant Account Internal Controls Does the person with access to your merchant account also have access to any of the following? Accounting System Donor System Bank Account/Statements If so, you may want to review for any opportunities for fraud.

44 Merchant Account Internal Controls Do your electronic payments offer limited ways to enforce internal controls over funds? Is the person processing payments able to change/add recipients? If considering electronic disbursements, investigate bill.com. This is an cloud-based accounts payable management service operated by a subsidiary of the AICPA.

45 Fraud Today $ Amount Frequency Source: Association of Certified Fraud Examiners (ACFE), 2010 Report to the Nation on Occupational Fraud and Abuse (Used with Permission).

46 Understanding the Elements

47 External Fraud Photo Credits Left to Right:; Boston Public Library, Print Department; AP Photo / The Star Tribune, Jerry Holt; CNBC, Wikimedia

48 Internal Fraud

49 How Fraud Is Discovered IT Controls Confession Police Monitoring External Audit Document Examination Account Reconcilliation By Accident Internal Audit Management Review Tip 0% 10% 20% 30% 40% 50% Source: Association of Certified Fraud Examiners (ACFE), 2010 Report to the Nation on Occupational Fraud and Abuse (Used with Permission).

50 What Can We Do? Create an environment of integrity and accountability: Encourage the high road Educate others about fraud Demonstrate oversight

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52 Budgeting as a Strategy to Improve Financial Position Michael E. Batts

53 What is budgeting?

54 What are your organization s financial objectives?

55 Do you have a plan to accomplish your organization s objectives?

56 What does a financial plan look like?

57 Are reserves and surplus in a nonprofit ministry or church biblical?

58 Bold but rational strategies that can improve your organization s financial outlook

59 Ten strategies and thoughts to improve your organization s financial position

60 Bad Budgeting Horror Stories

61 Budgeting Policy Guidelines

62 Budgeting Tips Learned from the Recession Reserves, reserves, reserves Bankability

63 Renew loan relationships way early!

64 Don t compromise in the area of key internal controls.

65 Remember the law of unintended consequences.

66 Views about spending when the economy improves

67 Coffee Break!

68 10 Things Management and the Board Should Know About your Financial Data Dan Busby John Van Drunen

69 Is your cash balance adequate? Trends What are the trends Why is there a trend Cash related to restrictions or deferred revenue Cash retention policy

70 Is Debt Manageable? Current with debt obligations Average days of accounts payable Balloon payments Organizational philosophy on debt

71 Trends in Unrestricted Net Assets PPE less related debt reported separately from other unrestricted net assets Reasons behind changes (or no change) in unrestricted net assets Organizational philosophy on maintaining unrestricted balances Budgeting

72 Trends in Revenues Over-all revenue Significant sub-components Revenue diversity Organizational philosophy of revenue diversity

73 Health of Contributions or Grants Is there dependency on a few sources? Likelihood of continued funding

74 Managing Restricted Net Assets Revenue reported separately Used on a timely basis Cash available to cover restricted net assets

75 Overall Health of your Organization Regular and timely reporting Consolidated or separate reporting

76 Functional Expenses Functional expenses vs. natural expenses Program vs. support General & administrative vs. fundraising

77 Impending Cuts Net asset reserves Non-payroll and payroll expenses and the impact to program activities

78 Presentation Financial and non-financial data Summarize information, with supporting detail where appropriate Dashboards

79 Different Approaches for Different Audiences Public Givers Board Staff

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81 Presentation Financial and non-financial data Summarize information, with supporting detail where appropriate Dashboards

82 Sample Internal Dashboard Report

83 Sample Internal Dashboard Report

84 Sample Internal Dashboard Report

85 Reflection Your 1 Big Take-away! Watch for online feedback survey in the next 7 days.

86 Thanks for coming! Closing Thoughts To Sign up for our Text the keyword ECFA to ECFA.org/Content/Six-Financial- Oversight-Strategies-for-Nonprofits

87 Copyright and Permission Notice Copyright 2012, ECFA. All rights reserved. Participants of the March 14, 2012 ECFA Forum have permission to use this PowerPoint and the binder materials within their own organization. ECFA, 440 West Jubal Early Drive, Suite 130, Winchester, VA Telephone (540) ECFA.org

88 Six Financial Oversight Strategies for Nonprofits