Tuesday, July 20, 2010

Supporting your Mission with Social Media

Tuesday, July 20, 2010 0
With so many different social media outlets available we’re sometimes left wondering, “Where do we even start and what makes sense for our organization?”

Over the past several years, I have seen marketing take a positive shift. The social media wave that we are experiencing has opened up more opportunities for organizations to reach their audience.

In the past, an organization’s reputation often was based around what the public said and thought about them, whether it be their fundraising efforts through the events they hosted, the strength of their boards, public financial information, or the funding they received to help carry out their mission. Now, organizations have the opportunity to regularly communicate with their audience and let their own voices and more importantly, their mission, be heard.

Not sure where to start? Start simple. Before you start any type of marketing initiative, do your homework. What are comparable organizations doing? Have their efforts been successful?

My suggestion would be to begin by creating a “Linked In” account. If you haven’t done this already, take advantage of a free resource that gives you access to over 50 million professionals worldwide. To join, all you need is a valid email address and a password. After you’ve signed in, complete your profile with as much information as possible, by adding a photo of yourself, your work history, and most importantly your organization’s website to the section labeled “Websites”. Adding this information is crucial for making it easy for people to find you. The great thing about Linked In is that it is Google friendly; meaning once you have created one, the more likely you are to show up on the first page of a Google search. After you’ve done this, you can begin doing your research.

Using the “People Search” with the “Advanced” feature on Linked In, select a location. Location may not matter if your primary goal is to learn as much as you can about what non-profit organizations are doing nationwide regarding Social Media. Next under Industry, choose “non-profit organization management”. Then, take time to click through different individual’s profiles that show up through your search results. You’ll see that some profiles have added websites; some even have Facebook pages, and Twitter accounts and blogs- be sure to explore these as well.

Eventually, you will come across a few you like and that will give you ideas for what you’d like to start doing for your organization to become more recognized using social media. In addition to searching for ideas, you’ll also want to take advantage of searching for and connecting with your board members, contributors, co-workers, and other contacts. I’d strongly recommend that all employees in your organization consider joining Linked In as well.

The next step to become more visible in the online community is to start a blog. Think about what you want to say about your mission and what you want your audience to know about you? Blogs are conversational and informative. If you’re not sure how to begin your first blog, why not talk about an upcoming event your organization is hosting, it’s an extra opportunity to get the word out. Once you begin researching other blogs and seeing what they’re communicating, it will become more natural for you to discuss a topic. Encourage your supporters to visit your blog and solicit their feedback. If you know any experts, ask them to guest blog on a topic that would impact your audience.

Use this resource as much as you can to communicate your mission with the public. Set up links from your website to your blog and from your blog to your Linked In. Put these links in any print or electronic communication you distribute. The more traffic you can drive to your organization’s websites, the better.

Once you have decided that your organization is committed to social media, develop a social media policy to be followed by those in your organization. This way, everyone is on the same page about what they want to communicate and how. Just make sure that everyone realizes this is a commitment, and will not happen overnight. Your social media initiative will take time, but if you track your efforts, you will see results.  So break out of your traditional marketing shell and be "social"!

Wednesday, July 7, 2010

Controlling Audit Fees

Wednesday, July 7, 2010 0
In these difficult economic times marked by decreases in donor contributions and public and private funding, non-profits, like other organizations, are looking closely at their expenses to determine ways to cut costs and save money. Accounting and audit fees are no exception.

Accounting firms, like other businesses, operate in a competitive environment, and should work with management to determine a reasonable fee for their services, while at the same time meet their quality control requirements under professional standards. In other words, quality shouldn't be sacrificed for price.

Management should be meeting or having conversations with their auditor at various times throughout the year, discussing their operations, changes in the accounting rules and regulations and their impact on the organization, as well as their financial status and related challenges. In the normal course of these meetings it would be appropriate to bring up the topic of fees and how they relate to the changes in the nature and operations of the entity. This shouldn't necessarily be a difficult conversation if you have a good working relationship with your auditor. Communication is the key to a good working relationship.

Now that you've broken the ice with your service provider, consider the following ideas that satisfy the needs and concerns of both the non-profit and the accounting firm that result in fees that are satisfactory to both sides:

• Have a Planning Meeting - Remember good communication? Meet with your auditor before the audit to establish a time-line for the audit, including timing of the deliverables (i.e. financial statements, tax returns), as well as meetings with the audit/finance committee or full Board of Directors.

A key discussion point at that meeting should be what financial/other information management will be providing, and when that information will be available to the auditor. Consider committing this to writing so everyone is clear on the information that will be "Prepared By Client" (often referred to as the "PBC" list). Some accounting firms include this information/list in their engagement letter.

• Get Audit Ready - Now that you know what you need to provide, do you have the internal resources and do you know what you need to do to get ready for the audit?

Consider an "internal" planning meeting similar to the one noted above to determine "who" in the organization is doing "what" for the audit. Review the trial balance in as much detail as necessary and determine what supporting information is needed and will be provided (and who in the organization is responsible for providing that information).

If you determine you don't have the necessary internal resources to provide the information promised, consider engaging the auditor for a special project, with a separate fee, to assist management in getting "audit ready". However, depending on the scope of services needed, there may be an issue with regard to auditor independence which may put the auditor in a position that prevents him/her from assisting the organization with this special project. For this or other reasons, management may also need to consider engaging the services of another service provider capable of performing these services for a reasonable fee.

• Get it Right - Now that you've determined "who" is doing "what" in the organization, make sure the information provided is complete and accurate. Supporting documentation/account reconciliations should be complete and provide enough detail to allow the auditor to understand what's in the account.

Make sure this information is accurate and that the supporting schedule/account reconciliation agrees with the amount in the trial balance. In situations where the trial balance has been "closed" and given to the auditor without the supporting documentation, you may need to provide the auditor with an accurate account reconciliation along with an adjusting journal entry to adjust the account in the trial balance to the accurate amount. In most cases this "PBC" client journal entry should not be considered an "audit adjustment" by the auditor in determining deficiencies or matters to be communicated to those in the organization charged with governance.

• What's New - Discuss with the auditor the changes in the organization since the last audit to assist the auditor in determining the scope of the audit and their assessment of the risk of material misstatements in the financial statements. While new items may surface that need to be addressed, the auditor may determine that time can be saved in other areas that have not changed or may have been assessed as having low risk based on the results of previous audits, as well as the auditors understanding of the current operations.

As part of the "ongoing communication" throughout the year, you and your auditor should be discussing new accounting and audit rules and regulations and their impact on the audit and related fees. Remember SAS 99 "Consideration of Fraud in a Financial Statement Audit" and the recent suite of "risk based audit standards" and their impact on the audits/fees? If not, you and your auditor are failing the test of good communication.

Working together as a team with frequent and ongoing communication, management and their auditor need to address the timing, scope, responsibilities, and deliverables in connection with the year-end audit. Such communication will provide the forum for discussion to determine reasonable fees for the services to be provided.

Need assistance? Contact us today.

Friday, July 2, 2010


Friday, July 2, 2010 0
The Internal Revenue Code (IRC) exempts from federal income taxation organizations or “clubs” which are organized for pleasure, recreation, and other non-profitable purposes, as long as substantially all of the club’s activities are for such purposes. Examples of such organizations are country clubs, hobby clubs, garden clubs, and amateur hunting, fishing, tennis, swimming and other sports clubs. Therefore, your golf country club or family swim club has applied for and has been granted tax-exempt status under IRC Section 501(c)(7). Hopefully. If not, that’s a discussion for another time.

Over the last few years, we have seen an overall emphasis by the Internal Revenue Service (IRS) on increasing the examination of tax-exempt organizations. Social clubs will not be left out. With an electronic filing requirement for most Form 990’s, it is becoming easier for the IRS to determine which organizations may need a “further review”.

So what could your social club be doing, or not doing, to get it into trouble with the IRS? Well, for starters, and one that all tax-exempt organizations have to deal with, is whether the club is organized and still operating in accordance with the tax-exempt purpose under which it was formed. In other words, is your organization still doing what it is supposed to be doing, and what it told the IRS it was going to be doing, when the IRS granted the organization tax-exempt status? Other areas of IRS interest for clubs are unrelated business income (UBI), carrying on nontraditional activities and record keeping.

Now, with all this being said, please understand that the IRS is not “out to get” clubs and other tax exempt organizations. They just want to make sure that the organizations are following the rules. Another big area of concern for clubs is the amount of business the club does with the general public. A lot of the clubs have found themselves in hot water with the IRS because they exceeded the 15% limit on nonmember business, and the income from the nonmember sources benefited the club’s members.

As with most tax-exempt organizations, a club will still be taxed on, and the IRS will still be looking at, its unrelated business activities and income. Generally for a club, ALL income is considered UBI except for dues, fees, charges, or similar amounts paid by members for services provided them, their dependents, or their guests. Other UBI exceptions include investment income set aside for charitable purposes, and under specific circumstances, gain on the sale of club property.

Due to the nonmember income issue for clubs alluded to above, accurate record keeping is key. Clearly, in order to calculate the correct amount of UBI, a club must be well equipped for proper record keeping. If the club cannot prove that income or receipts are member income, the default position for the IRS is nonmember income. As mentioned above, in order to retain tax-exempt status, no more than 15% of a club’s gross receipts may be from the use of its facilities or services by nonmembers. Going further, to retain tax exempt status, a club must not receive investment and nonmember income exceeding 35% of its gross receipts. A club without good records will have a difficult time in an IRS audit proving that it has not exceeded these thresholds.

Another concern for clubs that could jeopardize their exempt status is engaging in nontraditional activity. The IRS has provided an unofficial 5% safe harbor for clubs in regard to nontraditional activity. An example of a nontraditional activity is the sale of alcoholic beverages by a club for off-premises consumption. The 5% will be included in the 15% mentioned above regardless if the service is provided to members.

In wrapping up, I think you can see that once a club has been granted tax-exempt status by the IRS, it’s not all fun and games after that. Maybe a good bit of fun and games for the members (remember the club was organized for pleasure and recreation), but the organization and the members have to remember that they are organized and operated as a tax exempt organization, and that means there are rules to be followed. So before you take that next lap in the pool or get ready to tee off, make sure someone is paying attention to the rules and what needs to be done to retain that tax exempt status.

Monday, June 14, 2010

Does Your Organization Have a Written Conflict of Interest Policy?

Monday, June 14, 2010 0
Any organization that has had to prepare the new Federal Form 990 has seen this question - page 6, Section B, item 12a. Furthermore, if your organization does have a written conflict of interest policy, "are officers, directors or trustees, and key employees required to disclose annually interests that could give rise to conflicts?"
What is a conflict of interest, and why do I need a policy for this?
Back in January 2010 my first blog addressed Board governance, describing a Board member's fiduciary responsibility to protect the assets of the organization it serves, which includes putting the interests of the organization ahead of his or her own personal interests. If a Board member or staff member in a decision making role has a personal interest that conflicts with the interests of the organization it serves, and he or she may be influenced by that personal interest when making a decision for the organization, there is a conflict of interest (Board Source, Managing Conflicts of Interest: A Primer for Nonprofit Boards, 2006). This conflict could potentially prevent the Board member from fulfilling his or her legal and fiduciary responsibilities, and ultimately jeopardize the organization's tax exempt status.
The following are a few simple examples of potential conflicts of interest:
  •  the organization rents office space in a building owned by a board member or related family member;
  • the organization purchases goods or services from a company owned by a board member or related family member;
  • a board member serves on the Board of more than one nonprofit organization, and has to approach the same donors for a substantial contribution on behalf of both organizations;
  • a key staff member or volunteer accepts a gift from a vendor which does business, or seeks to do business, with the organization.
Public confidence is important to most nonprofit organizations. Even the appearance of impropriety could be damaging to the reputation of the nonprofit organization. Creating a written conflict of interest policy based on the needs and circumstances of the organization can help prevent actual conflict of interest situations. A conflict of interest policy should apply to all Board and staff members, as well as certain volunteers. Each member and volunteer should agree in writing to uphold the policy.
Key elements of a written conflict of interest policy include:
1. Full disclosure of the potential conflict (known relationship/interest)
2. Board member abstention from discussion and voting when it pertains to transactions involving the potential conflict (known relationship/interest)
3. Staff member abstention from decision-making when it pertains to transactions involving the potential conflict (known relationship/interest)
A written conflict of interest policy should require full disclosure from each new Board and staff member and each new volunteer at the time he or she first becomes associated or involved with the organization, and then it should be required annually. The policy should also require members and volunteers disclose conflicts that may arise during the year as soon as they are known. Making this an agenda item for each board meeting would help the Board keep abreast of potential conflicts that may arise throughout the year. Once these disclosures are made, they need to be independently reviewed and approved perhaps by the Executive Committee or some other similar Committee of the Board of Directors.
If you have questions about situations in your organization that may appear to be conflicts of interest, or if you want assistance in creating a written conflict of interest policy for your organization, please contact Elko & Associates Ltd. Remember, even the appearance of impropriety could damage the organization's reputation as well as jeopardize the organization's tax exempt status. So address those potential conflicts of interest now!

Tuesday, June 8, 2010

When it Comes to Fraud Risks, "Cash is King"

Tuesday, June 8, 2010 0
By now most of you are familiar with or at least aware of SAS 99, Consideration of Fraud in a Financial Statement Audit, which requires the auditor to gather, assess, and respond to information regarding fraud that could lead to the risk of material misstatement in an organization's financial statements. Subsequently the AICPA issued the set of risk assessment audit standards requiring auditors to obtain a more in-depth understanding of an organization in order to better identify the risks of material misstatements in the financial statements they were auditing, including the risk of fraud. While these standards discuss financial reporting risks and misstatements of an organization's financial statements, there's also a call to address misappropriation of assets, i.e. theft of assets or fraudulent expenditures.

Most times when you read about the occurrence of fraud in a non-profit organization, it’s usually about theft or misappropriation of assets, and it usually involves cash; and these are the ones that make the papers. Most non-profits don't want those outside the organization to know that theft has occurred; it’s just not good PR, particularly if you're a local organization looking for donations from the public or some other donor who wants to know the money is being put to good use (not the bookkeeper’s vacation home). Those in the organization who have incentive, opportunity, and attitude to rationalize their behavior will generally "go for the green" if you let them. So how should this risk be addressed?
Familiar battle cries...."Where was the Board", "Where was management", "Why didn't the auditors catch this", just to name a few. You've heard them before.

Good governance by the Board includes financial oversight - we've addressed this in some of our previous Blogs. If the organization is small and doesn't have the luxury of adequate personnel to provide proper segregation of duties, someone on the Board, preferably someone with knowledge of financial matters, needs to be involved. Things for the Board to consider:

• review and signoff on monthly bank reconciliations and credit card statements

• obtain access to bank account, credit card, and general ledger information for review purposes

• require a second signature on all checks (or at least the larger ones - set a limit)

These or similar practices can be used by management where there's limited personnel and a shortage of controls. If possible, management should perform its own internal fraud risk assessment, focusing on the use of cash and related controls for cash receipts and disbursements. (see “Managing the Business Risk of Fraud: A Practical Guide”.
For us auditors, as we gain a thorough understanding of the organization’s control environment, policies, procedures, systems and controls (as outlined above), we need to then verify that such oversight and preventative measures are, in fact, in place and working. Consider using data extraction software and similar tools to identify certain populations or trends, i.e. payments to “cash”, individuals, similar vendors, as well as common addresses, etc.

A commonly used small business general ledger software package allows the user to “turn off” the audit trail feature, so a check can be generated and the payee subsequently changed in the system. Depending on the general ledger software and the ability to manipulate transactions in the software, consider examining original cancelled checks (or copies received directly from the bank) to ensure the payees and endorsements are consistent with the payee recorded in the general ledger.

Remember, non-profits don’t get bad press because their employees or volunteers steal office supplies and office furniture and equipment. When it comes to fraud risks and the related financial losses, “CASH IS KING”. Make sure this asset is well protected and being put to good use in achieving the organization’s mission.

Wednesday, May 19, 2010

Special Events Reporting

Wednesday, May 19, 2010 2
Many non-profit organizations conduct fundraising activities which are considered “special events”. Special event revenues and expenses have specific financial reporting requirements, which are defined by professional accounting standards. So what is a “special event” and what are the specific reporting requirements?

Special events, as defined by accounting standards, are generally fundraising events where attendees usually receive a direct benefit such as a meal, entertainment, a “parting” gift, etc. Examples of special events are: fundraising dinners, auctions, theater parties, golf outings, races, raffles, etc.

Professional accounting standards require revenues and expenses from special events which are ongoing “major and central” activities to be reported gross (revenues and expenses are separately reported). These standards permit (but do not require) receipts and related costs from special events, which are “peripheral or incidental” activities, to be reported net (expenses are netted against revenue). (AICPA A&A Guide, “Not-for-Profit Organizations”, para. 13.21)

So how do I know if my event is “major and central” or “peripheral or incidental”? The standards provide us with some guidance. There are two factors to consider when determining if an event is “major and central” or “peripheral or incidental” – 1) frequency of the events, and 2) significance of the gross revenue and expenses.
Events are ongoing major and central activities if -

1) they are normally part of an organization’s strategic plan and the organization normally carries on such activities (e.g. an annual art auction), or
2) the event’s gross revenues or expenses are significant in relation to the organization’s annual budget (e.g. Budget $500,000, event gross receipts $50,000, event gross expenses $30,000)

Events are peripheral or incidental activities if –

1) they are not an integral part of the organization’s usual activities, or
2) their gross revenues or expenses are not significant in relation to the organization’s annual budget.

If you’ve determined your event is “major and central”, the special event revenue should be reported as a separate line item in the revenue section of the Statement of Activities. The cost of the direct benefit to the donors can be reported as either –
• a line item deducted from the special event revenue in the revenue section, or
• as a specific expense in the expense section of the Statement of Activities
Other expenses associated with this “major and central event” will be reported with your other fundraising expenses.
In addition to financial reporting requirements, there are also specific reporting requirements for special events on the Federal Form 990. These requirements will be addressed in a future “blog”.

The discussion above is a very general description of the financial accounting and reporting requirements for special events. For more information or guidance on accounting for and reporting on special events, please contact Elko & Associates Ltd. See you at the next “Special Event”!

Tuesday, May 11, 2010

Is Your Charitable Organization Eligible for Real Estate Tax Relief?

Tuesday, May 11, 2010 2
In the Commonwealth of Pennsylvania, charitable organizations may qualify for real estate tax relief if the organization qualifies as a “purely public charity”. Other states may have similar laws that allow for a charitable organization to eliminate or reduce its real estate tax burden if certain tests or requirements are met. Since the majority of my experience is with Pennsylvania, I will focus on how an organization can attain this exemption in Pennsylvania.

As stated above, if an organization meets the requirements to qualify as an institution of purely public charity, they will qualify for real estate tax exemption. The basic requirements for an organization to be an institution of purely public charity are described in Pennsylvania Act 55 and the Hospital of the University of Pennsylvania (HUP) court decision. They are:

1. Advancement of a charitable purpose;

2. Operate entirely free from a profit motive;

3. Donate or render gratuitously a substantial portion of its services;

4. Benefit a substantial and indefinite class of persons who are legitimate subjects of charity; and

5. Relieve the government of some of its burden.

Act 55 provides some objective and measureable standards to use when interpreting the court decision in HUP. An institution of purely public charity must satisfy each of the basic requirements using specific criteria stated in the Act.

Act 55 also provides for a rebuttable presumption. Basically, an institution is presumed to meet the standards of a purely public charity if it applies for and receives a sales tax exemption from the Pennsylvania Department of Revenue. However, this rebuttable presumption is not available to organizations with annual program service revenues exceeding $10 million (increasing 1% per year commencing July 1, 1999) unless the organization has entered into a voluntary agreement (PILOT-payment in lieu of taxes) with a political subdivision wherein the organization conducts substantial business operations.

Our experience has been that most charitable organizations can meet requirements #1, #4 and #5. However, organizations have a difficult time proving that they meet the Act 55 standards to satisfy requirements #2 and #3. Particularly troublesome to organizations is supporting the fact that they donate or render gratuitously a substantial portion of their services, requirement #3. Even though there are seven different tests that can be met to satisfy this requirement, the complexity of the mechanics of certain tests, along with the vagueness of the Act 55 legislation, makes for a difficult challenge. However, all is not lost. The fact that portions of Act 55 are somewhat vague and ambiguous creates a two-edged sword that can be used by both the taxing authority and the charitable organization to bolster their positions on any of the five basic requirements.
How do you make this happen? Our experience has been that in most cases the charitable organization will file an appeal with the taxing authority, claiming that they are exempt from real estate tax under the provisions of Act 55. In mostly all cases the taxing authority will deny the appeal and then the fun begins. Both sides engage legal counsel to represent them. Documents are exchanged, meetings are held, and depositions are taken. The attorneys for the taxing authority may hire accountants and other experts to analyze the mountain of paperwork provided by the charitable organization to support their position. Expert reports are prepared by both sides and exchanged. More meetings are held to see if there can be a compromise worked out. If not, it is off to court for a judge to make the final determination.
If you are a Pennsylvania charitable organization, and you are paying real estate taxes, you may want to take a look at Act 55 and the HUP court decision to see if you can meet the tests and be exempt from real estate taxation.

Monday, March 29, 2010

Functional expense reporting - What does this mean and why is it necessary?

Monday, March 29, 2010 3
Non-profit organizations that present their financial statements in accordance with generally accepted accounting principles ("GAAP") are required to report their expenses by their "functional" classification either in the Statement of Activities or in the Notes to the Financial Statements.

Tax exempt organizations who file the Federal Form 990 must report their expenses in the Statement of Functional Expense, and document the method of allocation in their records.
The Financial Accounting Standards Board defines functional classification as "a method of grouping expenses according to the purpose for which costs are incurred. The primary functional classifications are program services and supporting activities". (SFAS No. 117, par. 168)

Program services are activities that provide goods and services to the beneficiaries, customers and members of the non-profit organization that fulfill the purpose or mission for which the non-profit organization exists. (SFAS No. 117, par. 27)

Supporting services are activities not directly related to the purpose or mission for which the non-profit organization exits, but which are necessary for the non-profit organization to operate. Supporting services generally include management and general, fund raising and membership-development activities. (SFAS No. 117, par. 28)

Most financial statement users are more interested in the functional classification of expenses than in the natural classification (e.g. payroll, rent, supplies, travel, etc.). Functional classifications help management see exactly where funding is going, so they can better run the organization. Board members look at functional classification to assess how well the organization is performing. Funders and the general public want to know how much of each dollar they contribute is spent on achieving the organization's purpose or mission.
While GAAP and the Federal Form 990 are very specific in saying that you must report costs by functional classification, they are somewhat vague about how a non-profit organization should do this. Direct costs that are associated with a specific program or supporting service should be charged directly to that functional category. That's the easy part! But what if I have a cost that pertains to more than one functional expense category, i.e. indirect costs? Both GAAP and the Form 990 require these costs to be allocated using a method that is both reasonable and consistent from year to year.

Considerable freedom is allowed in applying judgment when determining reasonable allocation methods. Here are some guidelines to follow:

  • Objective allocation methods are preferred over subjective methods. For example, it's better to allocate salaries based on time sheets or a time study rather than on a subjective estimate of how time was spent.

  • Different allocation methods may be used for different types of expenses. For example rent and utilities might be allocated based on square footage. You need to review each expense account and determine an appropriate allocation method to use for each.

  • Consistency from year to year is strongly recommended, but facts and circumstances may change from year to year, necessitating a change in allocation method.

  • Review your allocation methods each year to be sure they are still appropriate under the current circumstances.
For more information or guidance on reporting functional expenses or the cost allocation process, please contact Elko & Associates Ltd. We can help you understand the accounting rules described above and the appropriate methodologies to apply to your internal accounting records (including chart of accounts), so that management, the Board, funders and the general public have the right information to make sound business and giving decisions.

Tuesday, March 16, 2010

The Misunderstood "Foundation"

Tuesday, March 16, 2010 0
Although I have developed a special affinity for and interest in tax-exempt organizations, my real bread and butter, so to speak, is as a tax professional. And as I look at the calendar, today is March 15. This means we are right in the belly of the tax season beast. I also lost an hour of sleep over the weekend which I am not too happy about.

Corporate returns need to be filed or extended today! Then we get into the stretch run, the march towards April 15. “Into the valley of death……”. No food or water for days. Your family forgets who you are, sometimes intentionally. You get home at night only to find that your 70-pound greyhound (“Roxy”) has taken over your side of the bed, and isn’t moving for anybody. Off to the couch and Seinfeld reruns.

Now you might be asking, what has any of this to do with foundations? I will respond- absolutely nothing! That’s why blogging is so much fun. However, the real point of my tirade is that I haven’t really had the time to focus on a specific topic to blog about. And, with all kidding aside, these blogs are important to me and my non-profit colleagues, as well as our firm. Thus, here’s a little conversation about foundations.

The reason I use the word misunderstood is based on my experiences over the years with individuals who are thinking about, or who are in the process of, forming a charitable organization. About 50% will say that they are forming a charitable foundation, at which time I will put on my “Mr. Smarty Pants” hat and say, “Are you talking about forming a private foundation?” And, even though they may be on the telephone, I can see their face transforming into a large question mark.

Inevitably, they are simply talking about forming a “publicly” supported public charity, not a “privately” supported private foundation. To their defense, we do see many publicly supported charities use the term foundation within the name of the organization. There are also many private foundations that do not have the word foundation as part of their name.

So, when someone is talking to you about a foundation, be sure you know exactly what they are talking about. This is important from an advisory standpoint since each type of charitable organization, whether it be publicly supported or a private foundation, has specific issues, guidelines, etc. that must be addressed and adhered to. For example, after 5 years in existence, a publicly supported charity will need to make sure that it does not fail the public support test for 2 years in a row. A private foundation does not have this concern. However, a private foundation does have to calculate a required distribution each year. This required distribution amount is a percentage of the foundation’s average non-charitable use assets, and the foundation has until the end of the following year to make the distribution.

Private foundations pay tax on their net investment income. Publicly supported charities as a rule do not, unless the income is determined to be unrelated business income. One area where both types of these charitable organizations have to “toe the line” is in regard to situations where a private individual may personally benefit from the organization’s assets or income. Public charities have the private inurement, private benefit and intermediate sanction rules to deal with when these types of transactions arise. Private foundations have the self-dealing rules which are in place to prevent these types of activities.

Well, I could go on and on about private foundations, but it is time to get back to the tax returns and the long march to April 15. Let’s raise a glass to large tax refunds, pleasant client relationships, and getting home before Roxy gets into the bed!

Monday, March 8, 2010

Does My Non-profit Need an Audit?

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I get a lot of phone calls from prospective clients inquiring if we do audits, and the cost to do an audit. After I advise them that we do provide audit and other attest services, I ask them a simple question – Why do you need an audit? Often times there's silence on the other end of the phone or the answer is “I’m not sure” or “My boss asked me to call” or “I’m a non-profit, aren’t I supposed to have an audit?”

While the question is simple the answer might not always be as simple. The fact is, there may be several reasons a non-profit organization should have an audit, and reasons you may not need an audit. The following are reasons your non-profit may need or require an audit:

Grantors/Donors – As more non-profit organizations increase their fundraising efforts they often seek grants from various foundations and public/private sector agencies. These agencies may require that audited financial statements be provided or accompany the grant application. These agencies want to make sure that their money is going to legitimate, financially stable organizations that have reasonable controls in place to ensure the money will be spent for the purpose requested. These grantors may also request a copy of a management/deficiency letter that may be the by-product of the audit and addresses control or operational deficiencies and related recommendations to address these deficiencies. These grantors may require audited financial statements throughout the grant period as well for the same reasons, to monitor the use of the proceeds and the financial health of the non-profit grantee.

Federal, state and local government agencies – Some non-profit organizations receive grants or other awards from government agencies, and the related agreement may require that the recipient organization have an organization-wide audit that includes some level of testing of compliance and internal controls. The infamous “Single Audit” or audit in accordance with OMB Circular A-133 may be a requirement of the grant agreement, and is generally required for organizations that have total expenditures of federal awards in excess of $500,000 during the organization’s fiscal year. These federal awards may be direct awards from the federal government or pass-through awards to state or local government agencies that are ultimately passed through to the non-profit organization.

State law - Pennsylvania, for instance, requires organizations soliciting funds for a charitable purpose to register with the Department of State's Bureau of Charitable Organizations, file an annual registration statement, a copy of its IRS Form 990, and the appropriate financial statements. Organizations receiving $300,000 and over must file audited financial statements with the annual registration form.

Banks, vendors, landlords or other independent third parties - Loan agreements may have covenants or other provisions requiring the borrower to submit annual audited financial statements so they can get an accurate picture of the organization's financial status. Vendors, landlords, and other third parties may have the same requirements depending on the level of financial interaction and resources at stake.

Internal control - Management and/or those charged with governance (i.e. the Board of Directors) may believe that having an annual audit is a good internal control over financial reporting and safeguards assets of the organization. In general, an audit should not be relied upon as a primary internal control. This can be expensive, and while testing may be done for transactions that occurred throughout the year, the annual audit is performed once a year at the end of the organization's fiscal year. Management should ensure that good internal controls are in place throughout the year to safeguard the organization’s assets and promote good financial reporting.

In summary, while an audit may be perceived as a good annual check-up for the organization, management needs to consider the cost vs. benefit before making such an investment. In some cases, as noted above, the decision may be out of your control and a third party may be the one making the decision for you.

Still not sure? Contact us

Monday, March 1, 2010

Governance Practices Assessment

Monday, March 1, 2010 1
Public charities BEWARE! IRS audits are becoming more intrusive. Although the IRS doesn’t mandate the governance practices it’s inquiring about on Part VI of the Federal Form 990, it is focusing on the answers to those questions. The IRS recently created the Governance Check Sheet (Form 14114) that its examining agents will use to capture data about the governance practices and related internal controls of your public charity. The IRS claims they are gathering this data in an attempt to gain a better understanding of the relationship between governance practices and tax compliance. Hmmm . . . The IRS believes that prudent governance practices lead to better tax compliance. Perhaps this explains the motive behind the numerous governance questions in Part VI of the Federal Form 990?

The Governance Check Sheet will explore the following areas:
• Governing Body and Management – includes questions about the public charity’s
  • Mission statement
  • By-laws and articles, and
  • Board members and board meetings
• Compensation – includes questions about
  • Compensation arrangements for trustees, directors, officers, and key employees,
  • Compensation determinations, and
  • Comparability data considered
• Organizational Control – includes questions about the public charity’s
  • Family and business relationships, and
  • “Effective control” of the organization
• Conflict of Interest – includes questions about the public charity’s
  • Conflict of interest policy
• Financial Oversight – includes questions about the public charity’s
  • Use of its assets
  • Financial reports provided to/discussed with board members
  • Board’s review of the Federal Form 990 before filing
  • Independent accountant’s report
  •  Management letter
• Document Retention – includes questions about the public charity’s
  • Document retention and destruction policy
  • Minutes of board meetings
So what can public charities do to prepare themselves? They can perform a governance practices self-assessment! This assessment should be performed even if the public charity currently files the Federal Form 990-EZ. Beginning in 2010, an organization exempt from income tax under IRC Sec. 501(a), which includes organizations described in Sec. 501(c)(3), must file Federal Form 990 if it has either gross receipts of $200,000 or total assets of $500,000 at the end of the tax year. The Governance Check Sheet is available here.

Are you a new organization that is applying for recognition as a tax-exempt organization? Then you should consider the questions in this Governance Check Sheet when you complete the application for recognition of exemption. And, whether you’re an existing tax-exempt or an organization applying for tax-exempt status, be sure to maintain documentation to support your answers. Revenue agents are being asked whether their examinations were “hindered by a lack of necessary documentation” (question #26 of the check sheet).
Feel free to contact us if you have any questions or need assistance with any of these matters. But don’t wait – it’s better to have the answers before the IRS asks the questions!!

Tuesday, February 23, 2010

Who Regulates the Non-Profit Sector?

Tuesday, February 23, 2010 2
The last tax blog is a tough act to follow. Who can compete with the non-profit BLOB? Is this the same Blob from the 1988 movie which consumes everyone in its path? I certainly hope not.

Some of you who are involved with non-profit organizations may think there is a so-called Blob in the non-profit world; the Internal Revenue Service (IRS). I wouldn’t go as far as saying that the IRS “consumes everyone in its path,” but the IRS does monitor and regulate the activities of all non-profit organizations.

Some responsibilities of the Internal Revenue Service’s Division on Tax-Exempt and Government are:

• Reviewing applications for tax exempt status (Forms 1023)

• Granting tax exempt status

• Revoking tax exempt status

• Reviewing and auditing the Forms 990 filed

• Enforcing the tax code

• Asserting penalties

As you can see, the IRS has many responsibilities and limited resources to monitor all non-profit organizations. The public cannot depend on the IRS alone to govern the non-profit sector.

State governments have their own laws governing nonprofit organizations. In most states, the attorney general is responsible for regulating non-profits. Many states have filing requirements in addition to the federal filing requirements. States are responsible for enforcing their laws and investigating complaints of consumers. In order to figure out the requirements of your state refer to the IRS’ State Links, which is a collection of state government websites for tax-exempt organizations.

The most important regulators of the non-profit world are the donors. Would you give your hard-earned money to anyone who asks? I think not. I would need more information in order to make an educated decision. How do they intend to use the money? Have they used the money as intended in the past? Is anyone profiting? These are just some of the questions you may ask before giving an individual money, so ask the same questions before supporting a non-profit organization. The IRS may provide us with valuable tools to monitor and review, such as the Form 990, but the responsibility for oversight is truly the donors.

Monday, February 15, 2010

Welcome to My Blog

Monday, February 15, 2010 0
Hello to everyone out there in Cyberspace (is that still what it’s called?) and welcome to our BLOG!

My 4 year-old daughter wanted to know why I was writing to a BLOB. Sad to say, I have been accused of worse.

Anyway, what do you think of the name of our blog? NON-PROFIT AFTER HOURS. Yep, you guessed it, my idea! We have gotten positive feedback on the name, and just one or two negative comments. Some people need to lighten up!

This is what I am supposed to be doing, correct? Just saying what is on my mind.

I’m blogging…….I’m blogging…..I’m blogging……

How am I doing so far?

Our blog is to be centered around the non-profit world, and for me, the tax related aspects of non-profits. Now, synonymous with the term “non-profit” organization is “tax-exempt” organization. Well, as I have heard from more than one person, if the organization is tax-exempt, there can’t be many tax-related aspects, and if there are, they can’t be that complex.

Well, as for me and my 4 year-old daughter’s BLOB, we say think again!

I have dealt with non-profits throughout my 30 plus year career working in taxes. However, I have focused on or “specialized” in this niche area for the last 10 plus years. And I will tell you, that some of the issues that arise in the non-profit area can rival any that come up in the for-profit arena.

Sure, you for-profit guys and gals have your Section 382 loss limitation rules, special allocation and substantial economic effect rules for partnerships, transfer pricing studies, S-corporation shareholder basis and at-risk-rules, blah, blah, blah…. But how many of my for-profit brethren work with religious organizations? Yes, we answer to a higher authority. Oh, and don’t even get me started with the issues surrounding joint ventures with tax-exempt organizations and the crazy, excise tax laden, world of Private Foundations. Private inurement…snap…don’t even go there!

The numerous issues that are out there along with the heightened scrutiny that non-profits are under from Congress, the IRS and state authorities make the non-profit world both an interesting and challenging area to practice. I was told that there is an internal struggle within the government regarding the “monitoring” of tax-exempt organizations. One school of thought is to increase regulation and oversight while the other says to let the organizations go about their business with minimal governmental intervention. We will see as time goes on, how this will play out.

I mean no offense to anyone as my blog is meant for all to read and from time to time, enjoy. Over the next few weeks, months and hopefully years, we will be exploring, together, the “tax related aspects” of “tax-exempt” organizations.

Until next time…….beware the non-profit BLOB!

Monday, February 8, 2010

Does Your Non-profit Organization Need a Physical Examination?

Monday, February 8, 2010 0
I recently turned the big “5” – “0”, and everyone, friends and family alike, told me I needed to get a physical. It had been a number of years since the last check-up with the doctor. Why do I need a physical? I feel fine (typical “guy” response, right?). Even though things seem to be OK on the outside and there were no noticeable problems that I could identify, how do I know that everything is OK on the inside? I don’t – hence the need for a physical examination.

What about your non-profit organization? Things seem to be going well on the outside – you’re meeting the objectives of your mission; you’re running at or near budget; the Board meets regularly and they seem happy with what they see and hear. So far, so good. But how are things going on the inside? Did you ever read in the paper or hear on the news how there was another theft in a non-profit organization (someone was stealing money over a long period of time), or the local NFP is going out of business due to lack of funding? I‘m sure with these entities that things seemed good on the outside while problems were brewing on the inside over a period of time. Maybe the situation would have been different if the non-profit had a periodic examination.

Here are some ideas to consider for your non-profit organization’s physical examination:

• Board of Director involvement – do you have the right committees focused on key oversight roles, including – audit/finance committee, strategic planning, mission related committees, executive review (addressing performance and compensation of key executives) – and do the people on these committees have the appropriate skills to perform these oversight roles.

• Adequacy of internal controls – consider periodic review and testing of internal controls (can rotate cycles each year – for instance, if the organization has good internal controls in payroll, maybe this cycle doesn’t need to be reviewed each year unless there are major changes in the policies, procedures or personnel).

• External audit – the organization may already be required to have an annual external audit due to state, regulatory, or by some other third party user (i.e. bank or donor). If not, consider obtaining an external audit by an independent accounting firm.

• Initiate/update a fraud/general risk assessment program – identify and evaluate fraud risk factors that may indicate the presence of:
  • Incentives or pressures for management, employees, or volunteers to commit fraud.
  • Opportunities to commit fraud, usually combined with a belief that the fraud will go undetected.
  • Attitudes/rationalizations on the part of management, employees, or volunteers to justify committing fraud.
A tool you may find helpful in this area is “Managing the Business Risk of Fraud: A Practical Guide”. The guide is sponsored by The Institute of Internal Auditors, The American Institute of Certified Public Accountants, and the Association of Certified Fraud Examiners.

• Audit/Finance Committee oversight – this committee is key to making sure the items noted above (and others) are being addressed and the financial affairs of the organization are being monitored. This committee should:
  • Work with management to establish financial budgets and assist with monitoring budget vs. actual performance.
  •  Ensure the organization has good internal controls (which are reviewed and tested as needed - discussed above).
  • Review internal financial statements and make sure they make sense and will be understood by the full Board.
  • Participate in selecting external auditors and work with them to understand the results of the external audit and any related communications (i.e. management recommendation letters).
  • Review and evaluate investment policies and performance (especially if the organization does not have a separate investment committee).
These are a few ideas to consider and get you started; we’ll discuss these topics in greater detail in the future. For now, the important thing to do is meet with your doctor (management and the Board) and determine the frequency and needs of your physical examination. Don’t procrastinate and wait until there’s a big problem. Do it now while you feel good and things are going well. You never know what’s happening on the inside unless you check. Feel free to contact us if you need a consult or a “second opinion”.

Thursday, January 28, 2010

How Effective is Your Board of Directors?

Thursday, January 28, 2010 0
We've all heard about fraud and embezzlement in the nonprofit sector, especially over the last several years. It's been in the newspapers, on the radio, television and on the web. And one of the prevailing questions on our minds when we hear these stories is, “Where was the Board?”

The Board of Directors of a nonprofit organization has a fiduciary responsibility to protect the assets of the organization it serves, by being informed and actively overseeing the organization’s operations and finances. This means attending regularly scheduled board meetings and being prepared to actively engage in carrying out the mission of the organization.

What are the qualities of a good board member? A good board shares a passion for and a commitment to the nonprofit’s mission; a good board member is willing to “roll up his sleeves” when necessary to get the work done. A good board member is willing and able to help raise money for the organization. A board member is expected to contribute at some level, in order for the organization to communicate to funders that the board members are committed to the organization and its mission. A good board member has a strong connection and is influential in his or her community.

What are some useful skills to look for in a prospective board member?

• Fundraising and grant writing skills
• Accounting and bookkeeping skills (a CPA who specializes in NFP’s would be most valuable)
• Banking/financing and investment skills
• Database, website or other technical skills
• Employee and volunteer management skills
• Public speaking skills
• Marketing skills
• Legal skills (an attorney who specializes in NFP’s would be most valuable!)

What is the optimum number of board members and what should the terms be?

• Most states establish a minimum (usually one to three members)
• Odd number of members avoids tie votes
• A size range is better than a firm number (members tend to come and go)
  • Small to medium sized nonprofits – five to nine board members recommended
  •  Larger nonprofits – a range of nine to 15 board members is recommended
  • Very large nonprofits can typically accommodate more than 15 board members
• Two to three years is a common term length
• Stagger terms, and consider limiting consecutive terms
• Number of board members (size range) and term limits should be included in the organization’s bylaws

What constitutes an effective board meeting?

• Meet regularly – at least quarterly, and keep meetings to no more than two hours
• Give notice of meetings – set the meeting dates for the entire year in advance
• Provide an agenda – send agenda and minutes of the previous board meeting to the board in advance of the meeting, so board members come to the meeting prepared
• Begin the meetings on time!
• Invite staff and outsiders, when appropriate, to keep the board informed and engaged
• Know the decision making methods – should be included in the organization’s bylaws

If your organization follows the above board related guidelines, it will be able to create a Board capable of effectively overseeing the organization’s operations and finances and be in a position to prevent or detect the widely publicized improprieties. Further, the Board has the legal duty and authority to set policies, and monitor compliance with those policies. Over the next several months, we will discuss the various governance policies that your organization should implement in order for your organization to improve transparency and accountability at a time when governance issues are being widely scrutinized by Congress, the IRS, the exempt organization sector (your constituents), Attorneys general, and the media.

Tuesday, January 19, 2010

Is this the first year your organization has to file the revised Form 990?

Tuesday, January 19, 2010 0
I know what you’re thinking. You’ve already heard enough about the revised Form 990. But was your organization required to file it last year? I have had the opportunity of helping several organizations complete the revised Form 990. One thing I’ve learned is that the preparation of the revised Form 990 can certainly be a daunting task, especially if the organization did not take the time to familiarize itself with the form and the additional information that is needed. Time has come and gone. For the 2009 tax year more organizations may be required to file the revised Form 990. This year organizations will be only able to file the Form 990-EZ if their gross receipts are under $500,000 and their total assets are under $1,250,000. If this is the first year filing the revised Form 990, hopefully you have become familiar with it and you have done some planning. If not, you still have some time, but you should start now! Whether it is your first year or second year filing the revised Form 990, I hope the following tips help you:
  • Review your organization’s mission and program service accomplishments. Do your organization’s program service accomplishments truly convey the organization’s mission? Can you be more descriptive? Remember the federal and state governmental agencies are not the only ones looking at your Form 990; it will be posted on Guidestar, The Wise Giving Alliance of the Better Business Bureau, and Charity Navigator. Organizations and individuals can review the Form 990 in order to make decisions on whether or not to support your organization, so make sure your Form 990 is not only accurate, but look at it as a marketing tool for your organization.
  • Identify which of the sixteen schedules your organization will need to complete by answering the questions on Part IV of the Form 990. Unfortunately these questions will sometimes take you in a circular pattern by referring you to the following pages of the Form 990 where financial information is reported. Therefore, be prepared with your financial information in order to complete these questions.
  • Answer the questions on Page 6, Part VI Governance, Management, and Disclosure. Based on the answers to these questions decide which policies and procedures your organization should consider adopting or revising. You may notice the top of page 6 acknowledges that this section “requests information about policies not required by the Internal Revenue Code.” So you may ask yourself, do I really need to address these questions? You certainly do need to answer them, but you do not have to answer them “yes”. However, be sure to review your state laws, because state law might require such policies. Also, the IRS believes adopting some of these policies and procedures will help safeguard the organization’s assets.
  • Become familiar with the financial reporting requirements. There is much more detailed financial information required on the revised Form 990. If possible, make changes to your chart of accounts to efficiently capture the required financial information.
  • I know we all like hanging out with SALY (same as last year), but don’t get too comfortable hanging out. There are numerous questions and many of the definitions related to these questions have changed or have been rewritten to be clearer, so don’t assume all of your answers will be the same as prior years. Review the definitions at the very end of the 990 instructions to be sure you understand the question being asked.
  • Last of all, don’t hesitate to ask for help. The Form 990 requires a lot of information, so it might save you time and aggravation by asking for assistance. The IRS website has a lot of information to help preparers of the Form 990. In addition, attorneys and accountants can be a very helpful resource. Therefore, don’t hesitate to pick up the phone and call your CPA or the Elko & Asssociates non-profit team.
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