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- 1. Financial Responsibilities of Not-for-Profit Board Members Instructors: John E. Adams CPA, Partner, Adams & Co. Certified Public Accountants and Consultants
- 14. Each financial statement has a purpose Financial Responsibilities for Not-for-Profit Board Members STATEMENT OF FINANCIAL POSITION (Balance Sheet) Assets Liabilities Net assets Total liabilities and net assets
- 23. Each financial statement has a purpose Financial Responsibilities for Not-for-Profit Board Members STATEMENT OF ACTIVITIES (Income Statement) Revenue Expenses Excess (deficiency) of revenue over expenses Net assets: Beginning of year End of year
- 26. Each financial statement has a purpose Financial Responsibilities for Not-for-Profit Board Members STATEMENT OF FUNCTIONAL EXPENSES Management Program and General Fundraising Total Salaries and wages Employee benefits Consultant fees Board expenses Dues and subscriptions Postage Printing and design Rent Office expense Total expenses before depreciation and amortization Depreciation and amortization Total expenses
- 27. Each financial statement has a purpose Financial Responsibilities for Not-for-Profit Board Members STATEMENT OF CASH FLOWS Cash provided by (used in) operating activities Cash provided by (used in) investing activities Cash provided by (used in) financing activities Increase (decrease) in cash Cash, beginning of year Cash, end of year
- 28. The financial statements are linked to one another Financial Responsibilities for Not-for-Profit Board Members Statement of Financial Position Cash Total net assets Statement of Activities Excess (deficit) of Rev over exp Net assets Statement of Cash Flows Excess (deficit) of Rev over exp Cash, end of year
Notas del editor
- March 25, 2010 6:30pm-8:30pm
- GOAL: To provide an overview of financial policies, controls, and reports. This is not a workshop to turn you into a finance professional. We will trade comments. Feel free to ask questions at any time.
- The ultimate authority for managing the affairs of the organization is vested in the Board of Directors. Because the law grants Directors such authority, the law also imposes on Directors an obligation to act in the best interests of the organization.
- Duty of Care = Duty to be Informed Directors must attend Board meetings. Directors who do not attend meetings are nevertheless bound by actions taken at those meetings and may be held responsible if any such actions are deemed negligent. The act of failing to attend Board meetings may itself be deemed to be negligent behavior. While the Board makes the important policy decisions that guide and determine the activities of the organization, the Board must rely on others (e.g., management, accountants, attorneys, etc.) to carry out the decisions. Such delegation is necessary and legal. A Board must monitor those to whom it has delegated authority to make sure such persons are acting responsibly. Delegation does not relieve a Board of liability.
- The best interests of the organization must prevail over any individual interest of the Director, his/her employer, and his/her family and associates. We will discuss implementing a Conflict of Interest policy a bit later.
- A Board must assure themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the Board timely and accurate information sufficient to allow management and the Board to reach informed decisions. What committees does your organization have? Typical Committee Structures Finance Committee – Primarily responsible for reviewing the overall finances and approving the budget of the organization Investment Committee – Primarily responsible for reviewing investment performance and long-range capital projects Audit Committee - Primarily responsible for engaging the independent CPA firm, reviewing audited financial statements, management recommendation letter, etc. Reference to the AICPA’s “Audit Committee Toolkit” and Grant Thornton’s “Audit Committee Handbook” An organization may be small enough that separate committees may not make sense Choose whichever committee structure works best for your organization Role of the Treasurer Review staff work (e.g., reconciliations and internal financial statements) on a regular basis (e.g., monthly or quarterly). Role will depend on the size/staff of the organization Role of the Staff Carry out the day-to-day work, prepare bank reconciliations, prepare checks, make deposits, prepare financial statements, etc.
- Credit to Michael Peregrine of McDermott Will & Emery… Revenue/Expense Management The Board should work closely with management to assure that the organization a) maintains adequate cash reserves and liquid investments to help protect operations from a sharp or unexpected decrease in revenues, b) is being operated in a cost-efficient manner, and c) considers sensitive expense reduction options when necessary (e.g., reductions in workforce, salaries, etc.). Strategic Flexibility The Board should be prepared to consider alternative strategic options through which the organization’s mission can continue. Items to consider may include: change of management control, partnering with similar organizations, and continuing to evaluate options with expert advice and counsel. Compliance With Debt Covenants Debt covenants under bond indentures and commercial loan documents may act as an “early warning” sign that an organization’s financial performance may be declining. The Board should work closely with management to understand an organization’s debt covenants, monitor compliance continuously, and assure prompt disclosure of any violations and other material adverse events.
- What is an accounting cycle? Cash Receipts Cash or check in mail received at receptionist or at special event > mail opened > deposit prepared > deposit made > receipt recorded in GL Cash Disbursements Initiate and approve purchase > invoice received in mail > invoice approved > expense recorded in GL > check prepared > check signed > check mailed Payroll Master file info prepared > timesheet prepared > timesheet approved > payroll run prepared > payroll run approved > payroll checks or direct deposit transfers prepared > checks disbursed or transfers made > reconciliation to GL
- Why are internal controls a good thing? Helps to prevent or detect errors and fraud Make sure Internal Controls are being applied to all accounting cycles Overriding control procedure - separation of duties and board oversight (especially when an organization has limited staff to completely segregate duties) Examples of Controls / Best Practices Cash Receipts – checks should be stamped “for deposit only”; receipts posted to GL by someone other than those opening mail and handling receipts; daily deposits; surety/bonding insurance Cash Disbursements – pre-numbered checks; signing of blank checks prohibited; bank statements to be sent directly to the Board Treasurer; responsible official to review bank reconciliation prepared by accountant; disbursements posted to GL by someone other than person preparing checks, approving invoices, and signing checks; use of positive pay or reverse positive pay Mention any recent examples regarding NFP fraud in the headlines
- Board should ask staff to formulate and implement Internal Controls, as necessary.
- See sample financial statements Caveat – This is just an overview
- Net Assets = Fund Balance = Equity
- Explain that Voluntary Health & Welfare organizations are required to report the Statement of Functional Expenses as a main financial statement schedule. Other organizations may choose to show this as a supplemental schedule.
- A Statement of Cash Flows adjusts for accrual items to show results from operations on a cash basis. Discuss Cash vs. Accrual methods of accounting
- Financial Controls Earlier, we discussed the Duty of Care which equates to the Duty to be Informed One of the Board’s responsibilities in this area is to oversee the organization’s financial affairs, including making sure the organization has adequate internal accounting systems and controls. The Board should approve the organization’s annual budget. Board members should expect the staff to produce timely and accurate internal financial statements and other financial reports, such as actual-to-budget reports with variances explained, on an ongoing basis. It is essential that you, as Board members, understand the financial statements of your organization and the ability to recognize a “red flag” when you see one. Safeguarding Assets The Board should oversee the effective use of the organization’s resources to ensure the organization’s assets are not misapplied or wasted. Internal policies and controls should be adopted and large and unusual transactions should be reviewed to ensure that the organization’s assets are not being misapplied or wasted. In regards to investment matters, Directors are not expected or legally required to be experts in investment matters. Retention and reliance on advisors with good reputations is considered the exercise of prudence. However, Directors are not relieved of their fiduciary obligations when delegating responsibility to others. Does your organization have a written investment policy? Variance Analysis May include reviewing actual-to-budget and current-to-prior period results Significant differences should be investigated to answer: Why the variance occurred, and What revisions to the organization’s budget or plans need to be made, if any. May indicate “red flags” as well as opportunities to take appropriate action to get things “back on track”
- Explain a “Going Concern” opinion
- Materiality – If the organization did not record the entry, would a reader’s opinion change? May need to convert the books from cash basis to accrual (GAAP) for the audit
- Discuss auditor independence
- The Board oversees the management team and external auditors. The Board should ensure: Adequate internal controls and best practices Accurate records and meeting of reporting requirements Proper authorization of activities and expenditures Existence of assets Current tax-exempt status and identification of activities that may endanger it All tax and information filings (e.g., payroll, sales, 990s, other) are filed properly and timely
- Good practice to have a policy to ensure compliance with the law Included as a question on Form 990 See sample policy from Donors Forum of Chicago
- Good practice to have a policy to ensure compliance with the law Included as a question on Form 990 See sample policy from Donors Forum of Chicago Applies to Board and staff members The policy should define the responsibility of when and to whom to report suspected misconduct May include a 24 hour anonymous hotline ACFE – Q: What is the #1 method that fraud was discovered? A: Tips
- Included as a question on Form 990 This is in conjunction with the Duty of Loyalty discussed earlier See sample policy from Donors Forum of Chicago Generally includes: Disclosure of potential conflicts Recusal of conflicted member from deliberations and voting on the transaction
- Tax and Reporting IRS Form 990 is due annually on the 15 th day of the 5 th month; up to two 3 month extensions Illinois Attorney General Form AG990-IL is due annually for 501c3 organizations 6 months after year-end; first extension of 60 days with a second extension of 2 ½ months for cause (must include draft and signed copy of Form AG990-IL, draft Form 990, draft audited financial statements, $15 fee, and copy of IRS-approved extensions) Payroll tax reporting The Board should make sure that management is properly withholding and remitting payroll taxes as well as employee and employer contributions to retirement plans The organization may be using a third-party payroll service Board members may be held personally liable for non-payment of taxes See CPAsPI Tax and Reporting Guide to Illinois Not-For-Profit Charitable Organizations