Not For Profit Board Development

Financial Responsibilities of Not-for-Profit Board Members

Instructors:John E. Adams CPA, Partner, Adams & Co.Certified Public Accountants and Consultants

Topics

• Fiscal Oversight• Accounting Systems and Controls• Financial Statements• The Audit• Compliance with Regulations for Not-for-

Profit Organizations

Financial Responsibilities for Not-for-Profit Board Members

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Fiscal Oversight

A Not-for-Profit Board Member’s Fiduciary Responsibilities

• Duty of Care• Duty of Loyalty• Duty of Obedience


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Fiscal OversightDuty of Care

• “Reasonable and prudent person” standard.

• Exercise reasonable diligence and due care in conducting corporate business.

• Directors and officers must be informed about the activities and finances of the organization and govern in a reasonable manner.


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Fiscal OversightDuty of Loyalty

• Prohibits directors and officers from using their position of trust for personal advantage at the expense of the organization.


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Fiscal OversightDuty of Obedience

• Directors have a duty to follow the organization’s global governing documents (such as Articles of Incorporation and Bylaws) to carry out the organization’s mission and to ensure that funds are used for lawful purposes.

• Directors must also comply with state and federal laws relating to the organization.


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Fiscal Oversight

• Typical Committee Structures• Role of the Treasurer• Role of Staff


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Fiscal Oversight – Current Developments

In the current economy, board members should review the following on a regular basis:

• Revenue/Expense Management• Strategic Flexibility• Compliance with Debt Covenants

Accounting Systems and ControlsAccounting Cycles

• Cash Receipts• Cash Disbursements• Payroll• Other


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Accounting Systems and ControlsInternal Controls

Internal controls are procedures designed to provide reasonable assurance that transactions are properly authorized, that assets are safeguarded against unauthorized and improper use and that transactions are properly recorded and reported.


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Accounting Systems and ControlsInternal Controls

Questions to Ask:• Do we have internal controls in place over

all significant accounting cycles?• Are they written?• Are they being followed?• Are they being reviewed?


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Financial Statements

• Snapshot of the different not-for-profit financial statements – the basics and how they are linked to one another

• What to expect from your organization with financial reports


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Each financial statement has a purpose


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STATEMENT OF FINANCIAL POSITION (Balance Sheet)

Assets

Liabilities

Net assets

Total liabilities and net assets

Financial StatementsStatement of Financial Position

• Presents the financial position of an organization at a specific point in time.

• Essentially the “balance sheet”• It represents the collective financial history of

the organization from its inception to the date of the report.

• This statement lists assets (what it owns), liabilities (what it owes), and the net assets (net worth) of the organization.


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Financial StatementsAssets

• Property and resources of an organization that have a measurable financial value which are owned by the organization.

• Assets should be listed in order of liquidity (ability to be converted into cash).


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Financial StatementsAssets

Type of Accounts:Cash

Accounts ReceivableInventories

Prepaid ExpensesInvestmentsFixed AssetsOther Assets


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Financial StatementsLiabilities

•Amounts owed by the organization to its creditors.•Liabilities also should be reported in order of liquidity (how soon they are due to be repaid.)


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Financial StatementsLiabilities

Type of Accounts:Account Payable

Accrued ExpensesDeferred Revenue

Notes Payable

Financial StatementsNet Assets

The difference between total assets and total liabilities representing the net assets of the organization. The statement of financial position is updated with the net results of activities (reported on Statement of Activities) through the change to its net assets.

FAS 117, Financial Statements of Not-for-Profit Organizations, requires all nonprofit organizations to report net assets between three categories:•Unrestricted Net Assets•Temporarily Restricted Net Assets•Permanently Restricted Net Assets


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Unrestricted Net Assets•Net assets that are neither temporarily restricted or permanently restricted by donor-imposed stipulations. •The only limits on the use of these net assets are the broad limits resulting from

–the nature of the organization –the environment in which it operates –the purposes specified in its articles of incorporation or bylaws –relevant laws and limits resulting from contractual agreements

•May include self-imposed or board-designated limits.


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Temporarily Restricted Net Assets•Net assets that result from donor-imposed restrictions that permit the organization to use up or expend the donated assets as specified and is satisfied either by the passage of time or by actions of the organization.

Permanently Restricted Net Assets•Net assets that result from donor-imposed restrictions that stipulate resources be maintained permanently, but permit the organization to use up or expend part or all of the income derived from the assets.


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STATEMENT OF ACTIVITIES (Income Statement)

Revenue

Expenses

Excess (deficiency) of revenue over expenses

Net assets: Beginning of year End of year

Financial StatementsStatement of Activities

• Also called Statement of Support and Revenues and Changes in Net Assets

• Similar to a profit and loss statement• Describes how an organization’s

resources were received/earned and expenses were spent/incurred during a given period.


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Financial StatementsStatement of Activities

Expenses: Costs incurred by an organization in carrying out its mission, usually categorized as either program or supporting services (management and general, and fundraising). Always reported under Unrestricted Net Assets.

Change in Net Assets: Difference between total revenue and expenses, which is added to the net assets at the beginning of the year to arrive at the net assets at the end of the year.


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STATEMENT OF FUNCTIONAL EXPENSES Management

Program and General Fundraising TotalSalaries and wagesEmployee benefits Consultant feesBoard expensesDues and subscriptionsPostage Printing and designRentOffice expenseTotal expenses before depreciation and amortizationDepreciation and amortization Total expenses


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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 cashCash, beginning of yearCash, end of year


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The financial statements are linked to one another

Statement of Financial Position

Cash

Total net assets

Statement of Activities

Excess (deficit) ofRev over exp

Net assets

Statement of Cash Flows

Excess (deficit) ofRev over exp

Cash, end of year

Financial Statements - What to expect from your organization

• Periodic financial reports• Internal/interim statements• Annual budgets• Variance analysis – actual to budget


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The Audit

Audit Requirement:• Charitable organizations with $300,000 or

more in cash receipts are required by the Illinois Attorney General’s Office to have an audit annually.

• Some smaller organizations are required to have an audit by their funding agency. For example, many foundations have audit requirements.


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What is an audit?• Independent CPA examines the organization's

internal controls, financial policies, financial statements and supporting details, and then performs testing

• Auditor issues an opinion on the financial statements.– Unqualified ("Clean" audit)– Qualified ("Except for")– Adverse ("Not properly stated")– Disclaimer ("No opinion")

• Financial audits are usually done annually


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An audit provides…• An objective professional opinion that the financial

statements prepared by management present fairly, in all material respects, the financial position as of the fiscal year end and the results of operations and cash flows for the year then ended, in accordance with generally accepted accounting principles

• Confidence in the financial information presented• Not a guarantee that everything is 100% accurate• May reduce the probability of fraud• Increased focus on any weaknesses in financial control

and other financial matters• A tool for board members and organization managers,

who are primarily responsible for ensuring the accuracy and reliability of financial information


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An audit does not provide…

• An audit is not designed to detect fraud.• An audit is not designed to detect every error

in the books• The audit does not replace good internal

controls.


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Other Services• Many auditors provide nonprofits with other year-end

services, which are not part of the audit. These may include preparing:– year-end financial statements (including footnotes)

based on client records– depreciation schedules– accrual and other adjustments based on client

information• Smaller nonprofits with limited accounting expertise

may choose to pay their auditors for these tasks. However, these services are provided in addition to the audit and could be completed by staff or volunteers to lower the cost of the audit


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Alternatives to an Audit

• Compilation– Presenting in the form of financial statements

information that is the representation of management without expressing assurance.

– No assurance is provided on the statements or underlying assumptions.

– The accountant need not be independent.• Review

– Results in the expression of less assurance than an audit, but more than in a compilation

– Consists of analytical procedures and inquiries.


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The Board Oversees the Audit

• Relationship of the auditor is with the Board -- Board members have oversight of the management team and the external auditors.

• The Board members, staff management team, and auditors work together to make sure the not-for-profit organization is fulfilling its mission, following best practices, and meeting their reporting requirements.


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The Audit – Board and Staff Roles

While every organization works differently:

• Board’s role (or Audit/Finance Committee) – Hires the auditor, evaluate their performance, and meets at the beginning and the end of the audit with the auditor.

• Staff role – Make sure financial records are complete and properly maintained and that all accounts are reconciled. They should prepare the analyses the auditors ask for, be available to meet with the auditors as needed, and provide whatever information is requested to the auditor.

The Audit

When the Board receives the audited financialstatements, board members should:

• Read and understand the financial statements, including footnotes

• Meet with auditors• Ask questions of management or the auditors about

things you don’t understand• Good practice for the Board to have an executive

session with the auditors and without staff present


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How to Prepare for an Audit

• Review and update your internal control policies.• Review prior year misstatements identified.• Compare information in the minutes to the

financial records for accuracy.• Review financial statements and identify and

document significant variances with:– Current year actual versus prior year actual amounts. – Current year actual versus current year budgeted

amounts.

How to Prepare for an Audit

• Review prior year management recommendation letter.

• Identify new or complex transactions.• Be prepared and ready on the first day of

fieldwork.• Communicate with auditors on a regular basis

during fieldwork and throughout the year, as needed


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Compliance with Regulations for Not-for-Profit Organizations

Document RetentionSarbanes-Oxley Act includes provisions which make it a crime to alter, conceal, cover up, falsify or make a false entry in any record, document, or tangible object with the intent to impede, obstruct or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or in any Chapter 11 bankruptcy. Violations are subject to fines and prison terms of up to 20 years.


Whistleblower Sarbanes-Oxley Act protects whistleblowers. This section makes it a crime to knowingly, with the intent to retaliate, take any action harmful to any person, including interference with the employment or livelihood of such person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense.


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Conflict of Interest PolicyThe purpose is to protect the organization’s interests and its tax-exempt status when it is contemplating entering into a transaction or arrangement that might unfairly benefit an individual’s private interest. This policy is intended to supplement, but not replace, any applicable state laws governing conflicts of interest applicable to nonprofit and charitable corporations.


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Other Governance PoliciesOther governance policies and procedures now being

asked for on Form 990 include:• Board Composition• Compensation Determination and Review• Expense and Travel Reimbursement• Board Minutes• Form 990 Review• Grant Making• Joint Venture Agreements• Relationships With or Between Key Individuals


Tax and Reporting Responsibilities

• Form 990• Form AG990-IL• Payroll Taxes

• See CPAs for the Public Interest Tax and Reporting Guide for Illinois Not-for Profit Charitable Organizations


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Resources

• CPAs for the Public Interest - www.icpas.org/CPAsPI.htm

• Board Source - www.boardsource.org• Donors Forum - www.donorsforum.org

http://www.icpas.org/CPAsPI.htm

http://www.boardsource.org/

http://www.donorsforum.org/

Documents

Not For Profit Board Development