Board Room

Don’t Operate Blind: Jump-Start Your Accounting Department

Get the financial information you need to be an effective steward of your chorus

by Eric Fraint

Does this scenario sound familiar? You are the executive director, or perhaps a member of the senior management, or a board member of a chorus. You need financial information to make good decisions but you are not getting what you need to perform your job or to fulfill your fiduciary responsibilities as a board member. Your accounting department, whether it is a volunteer part-time bookkeeper in a small organization or a paid staff member in a larger organization, is not providing you with financial reports or other information vital to running the organization.

What do you do? What standards for financial reporting should your chorus adhere to? What reports should your accountant produce and when? The following outlines a baseline, a minimum acceptable level of performance, to which you should expect your accountant, no matter whether volunteer or not, to maintain.

Financial Reporting BaselineThe Financial Reporting Baseline (FRB) is a standard that we recommend for every nonprofit organization, regardless of size, with annual budgets of as little as $100,000 to budgets of many millions. As the executive director or board member, you have every right to expect this baseline level of performance to be met. You should feel comfortable presenting this FRB to your accounting staff and you should expect them to meet it. The FRB has three components:

The Financial Reporting Package: Every month you accountant should present to you a series of financial reports. At the very minimum this package should contain three reports: a Statement of Financial Position (commonly referred to as a Balance Sheet), a Statement of Activities (commonly referred to as an Income Statement or a “P & L” for Profit & Loss Statement), and a Cash Flow Statement. These reports should be presented for the organization in total, including all restricted funds. The reports should be presented on an accrual basis.

Timeliness: Information delivered late is information of diminished usefulness. Your monthly financial reports should be in the hands of the executive director no later than the end of the third week in of the following month. For example, your financial reports for the month ending August 31 should be in the executive director’s hands no later than September 24. Many organizations can and should do better. This is only the baseline. If September 24 comes and passes and you do not have your financial reports, ask why.

Bank and Investment Account Reconciliations: Bank and investment account reconciliations do not generate a financial report. However, from a financial accounting

standpoint, they are such an essential internal control that we consider them to be part of the baseline. Your accountant must reconcile all bank and investment accounts as soon as possible each month before financial reports can be issued. The reconciliation process must be completed by the second week of the month so that financial reports can be issued by the third week as mentioned previously. Organizations no longer have to wait for paper statements to arrive in the mail to begin the reconciliations. Most banks offer online access to account activity. Access to investment account activity may in some cases be unavailable, but even here we are seeing this information become increasingly available online.

If your chorus cannot meet the three criteria of the FRB, serious questions can arise about the organization’s financial management. This is a matter of concern for not only the executive director, but for board members and funders as well.

Financial Reporting Baseline PlusOnce the baseline has been met, your organization should strive to attain the next level, or the Financial Reporting Baseline Plus (FRB+). FRB+ adds the following four elements:

Different Formats for Different Readers: Just as no one car is suitable for all drivers, no one financial report format is suitable for all readers. Choruses should have the flexibility to make their own choices about the level of detail they prefer to see in a financial report. The executive director needs a detailed set of financial reports to fully understand what is happening within the organization (a good accountant can aid this understanding by explaining key variances in the reports and other developments). The Finance Committee also needs a detailed set of financial reports. It might be the same package used by the executive director, or perhaps a modified set of reports with most, but not all of the details. However, the board typically does not need to see financial information at this level of detail. Financial reports prepared in summary form are usually more helpful for presentation at a board meeting. Funders represent another broad constituency that need information in various formats and in different levels of detail. By using accounting software correctly, and with a properly designed chart-of-accounts, even the smallest accounting department can meet these various levels of reporting needs.

Reporting of Restricted Funds: Problems can arise when a nonprofit organization mishandles restricted funds. One way to avoid this is to provide financial reports in sufficient detail to allow the reader to see the status of these funds. Depending on the cash flow position of the organization and the degree to which it possesses restricted funds, reports at this level of detail need not be developed monthly. A quarterly analysis is reasonable in most situations where cash flow is strong. Weaker cash flows indicate a need for more frequent analysis.

Departmental and Program Income Statements: Department and program managers need to see information relevant to their areas so that they can manage their work appropriately. The accountant should be able to generate these statements every month.

Forecasting on a Cash and Accrual Basis: Many accountants complete their financial reports and skip a vital next step—forecasting. We recommend a particular approach to forecasting that we call a “rolling forecast.” It rolls forward an organization’s financial results to the end of its fiscal year by taking the year-to-date actual results and then revising the forecast for the remaining months on both a cash and an accrual basis. This tool effectively answers the question: “How are we doing and where do we expect to end the year?”

Proper use of accounting software makes these reports possible for even a one-person accounting department. Meeting the standards described above is one way to ensure that your accounting is serving you well.

Author CreditEric Fraint is president of Your Part-Time Controller, LLC, which provides accounting and financial consulting services to nonprofit organizations. For information, visit www.yptc.com or call 856-779-7080.

Pull QuoteOrganizations no longer have to wait for paper statements to arrive in the mail to begin the reconciliations. Most banks offer online access to account activity.

No one financial report format is suitable for all—choruses should have the flexibility to make their own choices about the level of detail they prefer to see in a financial report.

SIDEBARComing Soon: The New IRS Form 990—What Does it Mean for Your Chorus?

In December 2007, the IRS released the 2008 Form 990, Return of Organization Exempt from Income Tax, the form filed by public charities and other tax-exempt organizations. It will be used for the 2008 tax year with returns filed in 2009, with an optional phase-in period for smaller organizations, which can file the Form 990-EZ for 2008 and 2009 tax years if it satisfies both the gross receipts and assets tests in the table below.

Phase-in Requirements for Smaller OrganizationsMay file 990-EZ for: If gross receipts are: If assets are:

2008 tax year (filed in 2009) >$25,000 and <$1 million <$2.5 million

2009 tax year (filed in 2010) >$25,000 and <$500,000 <$1.25 million

2010 and later tax years >$50,000 and <$200,000 <$500,000

Very small organizations with annual gross receipts of $25,000 or less must now file Form 990-N (which the IRS calls the “e-postcard”). The $25,000 threshold moves up to $50,000 in 2010. Failure to file for three consecutive years will result in a loss of tax-exempt status. If you are required to file a 990 under current regulations, you will continue to file the new 990, subject to the phase-in allowances.

How Does it Affect My Chorus? More information is required, so it will take longer to prepare and could cost you

more The 990 is a public document; with the increased disclosures your organization will

face greater transparency and scrutiny Expect a learning curve the first year for you and your tax preparer Watchdog organizations will start to incorporate the new disclosures in their rankings Donors may balk at contributing to nonprofit’s that lack certain governance policies Ultimately, your organization should benefit from the increased scrutiny and

enhancement of governance policies by management and the board

What Are the Changes? Disclosure of conflict of interest policies, and consistent monitoring Written whistleblower policy Written document retention and destruction policy (Audit) committee with responsibility for oversight and selection of auditor Compensation disclosure: for CEO, executive director, or other top official; other

officers and key employees Compensation review process that includes approval by independent persons,

comparability data, contemporaneous substantiation Increase in compensation thresholds: 5 highest paid contractors: $50k to $100k;

former directors and trustees: $0 to $10k; current highest paid employees: $50k to $100k; former officers, key employees, and other highest compensated employees: $0 to $100k

All current officers, directors, trustees, and key employees with their compensation must be listed

Description of significant new programs, changes in any other significant programs, and exempt purpose achievements of three largest programs

New or expanded disclosures for number of volunteers, non-cash expenditures, lobbying or political campaign activities, transactions with related parties and “interested” persons, major dispositions of assets, endowment funds, activities outside the U.S., professional fundraising activities, fundraising events that grossed more than $15K, grantmaking activities

How To Prepare Work with your accountant to ensure that adequate reporting systems are in place Boards and managements should review the additional disclosure requirements and

decide what, if any, changes to their governance policies and practices are needed Discuss with your auditors what can be done to reduce the time and cost of preparing

the 990Adapted from New IRS Form 990 for 2008: A Practical Guide, by Your Part-Time Controller, www.yptc.com