Audit and Finance Committees: Defining their Roles and Managing Their Work

Bob Bloom, CPA & Aaron Fox, CPA June 22, 2016

Raffa Learning Community

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OVERVIEW

• Introductions

• Fiduciary Responsibilities

• Financial Oversight

• Internal Control

• Reporting Standards of Nonprofits

• Tax Considerations

• Roles of the Board, CEO And CFO

• The Audit and Federal Form 990

• Q&A

INTRODUCTIONS

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Bob Bloom, CPA is a Senior Manager for Raffa’s Audit Department. He has more than 35 years of financial advisory experience serving a variety of nonprofit organizations. Bob serves on several not-for-profit boards, and has roles on finance, audit and pension committees. Bob has made numerous presentations to Boards of Directors and has been a presenter and instructor for GWSCPA, Raffa’s Learning Community, and internal trainings. Aaron Fox, CPA is a Senior Manager for Raffa’s Nonprofit Tax Department. He has more than 7 years of experience working with tax-exempt organizations. Aaron oversees the preparing and reviewing of annual tax returns and providing tax consultations to all types of nonprofits. Aaron has led numerous presentations and webinars on behalf of various organizations.

FIDUCIARY RESPONSIBILITIES

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FIDUCIARY RESPONSIBILITIES

Legal and Compliance Requirements

• Nonprofit Organizations (NPOs) must have a governing body overseeing the affairs of an organization

• All states require NPOs incorporated in their state to have a Board of Directors

• IRS Form 990 contains a series of questions concerning the board and its governance practice

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FIDUCIARY RESPONSIBILITIES

Core Concepts

• Bears the primary responsibilities for ensuring that organizations fulfill its obligations to the law, its members, its donors, its staff and the public

• Mission, strategic directions and broad policies are set by the board in conjunction with the CEO and senior staff

• Must protect the assets of the organization and provide oversight to ensure its financial, human and material resources are used appropriately to further the organization’s mission

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FINANCIAL RESPONSIBILITIES

• Sound financial management is among the most important responsibilities of the board

• Financial Oversight responsibilities: – Review and approve annual budget

– Review timely financial reports at least quarterly

– Monitor actual financial results against approved budget

– Oversee annual audit process and review audited financial statements

– Review Form 990

Delegated to the Audit or Finance Committee

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ROLES AND RESPONSIBILITIES

What is an Audit Committee?

• An audit committee is a sub-committee of the governing board charged with oversight of:

– The audit process – Evaluation of auditor qualifications, independence

and performance – Risk management / internal controls – Ethics and compliance programs – Whistleblower complaints – Review of Federal Form 990

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ROLES AND RESPONSIBILITIES

What is a Finance Committee?

• The Finance Committee is a sub-committee of the governing board charged with oversight of: – Overseas the annual budget process – Overseas financial recourses – Advises the governing Board on key financial

decisions and transactions – Overseas the following governance policies

• Conflict of interest • Whistleblower policy (could be audit committee) • Record retention • Investment and endowments

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FINANCIAL OVERSIGHT RESPONSIBILITIES

• Ensure current written financial policies exist and staff are adhering to the board approved policies

• Ensure adequate internal controls are in place to deter and detect fraud and misappropriation of assets and financial reports – Separation of duties – no one person should

perform duties of receiving, depositing and spending its funds

– Physical security of assets

– CEO/CFO are responsible for internal controls

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Systems that Protect NPOs

• Internal controls

– Goal = protection of assets and to deter fraud

• Accounting policies and procedures

– Accounting manual

– Investment policies

– Reserve/board designated endowment policies

• External audits

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FINANCIAL OVERSIGHT RESPONSIBILITIES

FINANCIAL OVERSIGHT RESPONSIBILITIES

• QUESTIONS BY BOARD MEMBERS:

– How well do we review financial reports and monitor financial performance?

– Are we making relevant comparisons – e.g., performance against budget and prior year’s information?

– Do we need to upgrade the Board’s financial expertise?

– Has the organization established a reserve fund and related policies and guidelines?

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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK

• In 1992, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released Internal Control – Integrated Framework

• COSO Internal control framework has become the most widely adopted control framework worldwide

• The original framework for design, implementing and conducting internal control and assessing the effectiveness of internal control

• It has been updated, because business and operating environments have changed dramatically: – Complexity – Technology driven – Global

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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK

• The Framework has been enhanced by expanding the financial reporting category of objectives

• The Framework reflects changes in the business and operating environments: – Expectations of governance oversight – Globalization of markets and operations – Changes and greater complexities of business – Demands and complexities of laws, rules, regulations

and standards – Expectations of competencies and accountabilities – Use of, and reliance on evolving technologies – Expectation relating to preventing and detecting fraud

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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK

• Internal control helps entities achieve important objectives

• COSO’s Framework enables (empowers) organizations develop a system of internal control to adapt to changing environments, mitigate risks, and support sound decision making and governance of the organization

• Management and Boards of Directors (Audit Committees) must determine how much control is enough

• The Framework assists Boards, management and stakeholders in their respective duties regarding internal control

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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK

• Role of the Board of Directors through the Audit Committee – The Board should discuss with senior

management the state of the entity’s system of internal control

– Senior management is accountable for internal control

– The Board should be appraised of the risks to the achievement of the entity’s objectives re: internal control

– The Board should challenge management

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THE COSO CUBE

• COSO depicts the relationship in the form of a cube: – The three objectives are

represented by the columns

– The five components are represented by the rows

– The entity’s organization structure is represented by the third dimension

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REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS

• In order for Board members to make educated decisions, information reported to them must be: • Accurate & Complete

– Enable management & board to make informed decisions

• Timely – Keep current on financial status

• In Context – Presented in relationship to the history - Goals &

Programs of your nonprofit • Appropriate

– Include financial information deemed important to management & board

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REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Principle Financial Documents

• Annual audited financial statements

• Monthly/Quarterly unaudited financial statements prepared by staff, in accordance with GAAP, or cash basis

• Annual Budget

• Other ad hoc or unique financial reports – Budget vs. actual reports (vs. prior year to date) – Cash flow projections – Departmental financial statements

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REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Other Important Financial Reports

• IRS Form 990

• Major Financial Commitments – Loans, Purchases, Acquisitions

• Investment Statements & Policies

• Reserve Policies – Operating – Capital – Program initiatives

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TAX CONSIDERATIONS

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FORM 990 – PAGE 6

• Policies not required but considered “good governance” according to IRS

• Form 990 review by entire board (this form)

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TAX CONSIDERATIONS

Form 990: Annual Federal information return for exempt organizations – Program service accomplishments – Attached schedules based on appropriate

answers to “trigger” questions about activities – Governance policies described should be verified – Board members and compensation reporting – Public support test – Failure to file or timely file costs

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TAX CONSIDERATIONS

Tax return compared to Audited financial statements:

– GAAP reporting can be different from IRS requirements

– Part XI Reconciliation of net assets – Schedule D Reconciliation – i.e. Donated services and use of facilities not

allowed to be reported as revenue/expense (different from donated goods)

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TAX CONSIDERATIONS

Unrelated Business Income (UBI): DEFINED: – Trade or Business: activity conducted for the production of

income from selling goods or performing services

– Regularly carried on: activities that have a frequency and continuity, pursued in a manner similar to non-exempt organizations

– Not “substantially related” to exempt purpose: does not contribute importantly to accomplishing organization’s purpose

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TAX CONSIDERATIONS

Unrelated Business Income (UBI): – Form 990-T: Required filing (for gross UBI of $1,000 or

more) that calculates taxable income on unrelated business activities

• Advertising on websites or in periodicals • Debt-financed income • Job web activity • Inventory: mugs, t-shirts, bumper stickers

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TAX CONSIDERATIONS

Unrelated Business Income (UBI):

– Exceptions:

• Interest/Dividends/Capital Gains

• Real property rentals

• Royalties

• Convenience

• Volunteer activity

• Donated goods

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TAX CONSIDERATIONS

More UBI considerations: – Substantial services in relation to rent/royalty

arrangements may create UBI – Alternative investments (K-1’s) verified for UBI and

state reporting – Verifying: Net operating losses and carryforwards – Planning: Quarterly payments on tax for cash flow

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TAX CONSIDERATIONS

State considerations: – General business license – Sales tax exemption certificate – Personal property tax filings – State charitable registrations – UBIT: location of business and domicile state

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TAX CONSIDERATIONS

Other compliance items: – Payroll – 940, 941, unemployment, W-2, 1099 – Retirement and Benefit Plans – Dissolutions & mergers – Lobbying/political registrations – Political Action Committees & FEC filings – Retirement plans – Foreign ownership or accounts

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TAX CONSIDERATIONS

Don’t be hesitant to ask tax related questions: – Ask your organization’s financial officer

or your tax advisor – Form 990 review period typically set aside

for Board members

Your exempt organization’s 990 return is your business...and everyone else’s!

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ROLES – EFFECTIVE BOARD LEADERSHIP

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ROLES - EFFECTIVE BOARD LEADERSHIP

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• A shared understanding of the organization’s mission and vision

• A clear sense of roles and responsibilities • Trust • Establish guiding principles, policies and

mission for the organization • Regular review of the strategic plan and

mission (keep them fresh and relevant) • Establish metrics for success

ROLES – GOVERN MORE/MANAGE LESS

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More On 1. Policy issues 2. Components of

corporate strategy 3. Relationship between

budgets and priorities

4. Being a strategic asset

5. Governing the organization

Less On 1. Policy language 2. Specifications of a

particular program or service

3. Terms and conditions of services or contracts

4. An operational overseer and evaluator

5. Monitoring the management

GOVERNING BOARD RESPONSIBILITIES

• Determining mission and setting policy

• Hires and evaluates the executive

• Ensures that adequate resources are available

• Approves budget; monitors financial results

• Sets investment policy; monitors results

• Sets operating policies; monitors progress; evaluates outcomes

• Responds to executive’s information

• Monitors compliance

• Establishes strong internal control environment; monitors adequacy of controls (auditor involved); follows up on implementation of recommendations

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BOARD MEMBER RESPONSIBILITIES

• Display loyalty and exercise prudence

• Act in good faith and be responsible

• Keep informed in order to make appropriate decisions

• Monitor the organization’s financial health

• Ensure the appropriate checks and balances are in place

• Monitor the organization’s risk management

• Avoid micro-management - be governors, not managers

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EXECUTIVE OFFICER RESPONSIBILITIES

• Institutes Executive Board policy • Hires, monitors, and evaluates staff & volunteers (including

finance) • Uses resources as directed by Board; participates in resource

development • Creates budget to implement Board policy • Provides adequate and timely financial information to Board • Manages investments and other assets; safeguards assets

(including adequate insurance) • Implements operating policies • Keeps Board informed, especially when problems impend • Ensures compliance with laws & regulations (including tax,

donor restrictions, OMB) • Operates strong internal control system; administers ethical

standards; implements auditor recommendations

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FINANCIAL OFFICER RESPONSIBILITIES

• Awareness of organization mission and policies • Hires and monitors financial staff • Assists Executive as requested • Assists Executive in creation of budget; monitors

progress; alerts Executive to impending problems • Keeps detailed investment records; monitors

performance • Assists Executive as requested; keeps financial

records • Keeps Executive informed (also Board, as

requested by Executive) • Monitors compliance with laws and regulations • Designs and operates internal control system;

implements auditor recommendations

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PITFALLS OR OPPORTUNITIES

• Choose members for values and skills rather than friendship or connections

• Avoid conflicts and personal agendas

• Perform self assessments

• Reward motivation; recognized enthusiasm and outstanding performance

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IDEAS FOR PRODUCTIVE MEETINGS

• Mission-based meetings • Have the right presiding officer • Frequency/Cycles • Preparation: Agenda/Consent

Agenda/Reports • Minutes • Evaluation/Feedback

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THE AUDIT AND THE 990

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THE AUDIT COMMITTEE AND EXTERNAL AUDITORS

• The Audit Committee (an operating committee of the Board) is charged with oversight of: – The Audit Process – Internal controls – Risk Management – Ethics and compliance program – Review of Federal Form 990 – Roles and Responsibilities – The Audit Committee

Charter

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THE AUDIT COMMITTEE CHARTER

• Once the Audit Committee has been established, it should create an Audit Committee Charter, which should encompass: – The committee’s purpose – Duties and responsibilities of the committee – Define membership, terms – Establish the number of times the committee should

meet – Define authority of the committee and reporting

requirements to the full Board of Directors – And as many other items as the Board deems

appropriate

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AUDIT COMMITTEE CHARTER

• Purpose • Authority • Composition • Meetings • Responsibilities • Financial Reporting • Internal Controls • Internal Audit • External Audit • Compliance • Reporting Responsibilities • Other Responsibilities

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EXTERNAL AUDITORS

Oversight of the external auditors • Appoint or replace the independent auditor • Review the audit plan and scope of the audit

prior to the start of audit – The audit engagement and deliverables and timing – Auditor approach – Meet the senior leaders of the audit team – Discuss auditor required communication to those

charged with governance – Discuss and approve other services and special

projects

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EXTERNAL AUDITORS

Oversight of the external auditors • Meet with the auditors (post audit before Board

of Directors meeting) – Review draft financial statements – Discuss required communications to those charge

with governance – Discuss communications relating to internal controls – Hold executive session with the auditors – Maintain an open line of communications through

out the year

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EXTERNAL AUDITORS

• Evaluate the auditors – Does the audit team meet the organization’s

needs relating to knowledge and skills • Enough partner/manager involvement • Are they experienced with NPOs • Did auditor meet the timeline, or adjust the plans to

respond to changing risks and circumstances • Did the auditors communicate changes to the audit

plan appropriately to the audit committee • Did the auditor ensure to keep the audit committee

abreast of developments of accounting principles and audit standards that have an impact on the audit

• Are the fees charged reasonable

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EXTERNAL AUDITORS - PARTNER ROTATION

Common misconception – Sarbanes Oxley Does NOT mandate change of Auditors

• Sarbanes Oxley: §203 requires (for public companies) that the lead audit partner and audit partner responsible for reviewing the audit (concurring partner) to rotate off the audit every five years

• Other partners will be permitted to serve a maximum of seven consecutive years with a two year time out period. Such audit partners include partners of registrant company, parent company and those who lead an audit of a subsidiary whose assets and revenue constitute 20% or more of the consolidated total

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EXTERNAL AUDITORS – EVALUATIONS AND CHANGE

• Audit Committee should adopt a policy to evaluate auditors annually – Policy could mirror Sarbanes Oxley and mandate

partner or manager rotation – Could evaluate auditors every 5 to 10 years – Could mandate change of auditors every 5 or 10

years – Be flexible

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COORDINATION WITH THE REVIEW OF FEDERAL FORM 990

• Compliance timeline should line up with audit to avoid extensions and final deadlines

• Avoid last minute gathering of tax information by setting up processes to gather IRS required information throughout the year

• Understand risk areas and prevent tax surprises

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QUESTIONS & ANSWERS

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APPENDICES

Appendix I – Sample Whistleblower Policy (Raffa) WB Toolkit (AICPA)/WB Firms (Raffa)

Sample Conflict of Interest Policy (excerpt from Board Source)

Appendix II – Tips for Creating and Elements of a Good Document Retention Policy (Unknown)

Appendix III – Best Practices Checklist (Independent Sector) Appendix IV – Checklist for Accountability (Independent

Sector) Appendix V – Executive Summary of the US Senate Finance

Committee Report (The Panel on the Nonprofit Sector) Appendix VI – State Governance Proposals and Bills (National

Council of Nonprofit Associations) Appendix VII – CA Nonprofit Integrity Act (Chronicle of

Philanthropy) Appendix VIII – Parts of Audit Committee Toolkit (Raffa)

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APPENDICES

Appendix IX – Trust is not an internal control, By Olson, Cheryl R, October 1, 2003, Publication: The CPA Journal, Wednesday, October 1 2003

Source: http://www.allbusiness.com/professional-scientific/accounting-tax/1157058-1.html#ixzz1XAHNyuew

Appendix X – Committee of Sponsoring Organizations of the Treadway Commission – Internal Control Integrated Framework, Guidance on Monitoring Internal Control Systems

Appendix XI – Not-for-Profit/Exempt Organizations Blog: Non-Profit Lawyers & Attorneys: Proskauer Rose Law Firm: Tax & Corporate Law for 501c(3) Organizations – Is the Foreign Corrupt Practices Act on your Radar Screen, By Emily Stern, posted August 18, 2010:

Appendix XII – Not-for-Profit Goverance – Summary Checklist from the Journal of Accountancy – September 2013

https://shar.es/1YYcrT

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Bob Bloom, Senior Audit Manager Direct: 202-955-6709 E-mail: BBloom@raffa.com Aaron Fox, Senior Tax Manager Direct: 202-955-6701 E-mail: afox@raffa.com

Thank You