Does your organization receive federal awards either directly or indirectly?  If so, your grantor may require you to have an audit. There are three primary types of audits that may be required.

1. Financial statement audit – this is the typical audit that many for-profit enterprises have conducted as well as not-for-profit organizations.  It is a process that involves auditing the account transactions and year-end balances included in the organization’s financial statements and reporting on the “fairness of the presentation”.  It is all encompassing – not just concerned with the federal awards received.
2. Yellow book audit – this is a type of financial statement audit that is conducted under Government Auditing Standards.  Its focus is also oriented towards financial statement reporting, but it also includes assessing internal controls and compliance issues.  As with a financial statement audit, a yellow book audit’s objective is to provide an opinion on whether the financial statements are free of material misstatements. 
3. Single audit – this type of audit is required when the amount of federal awards EXPENDED (or incurred) during an organization’s fiscal year exceeds $500,000.  The term EXPENDED means the amount of expenses that the organization incurred related to the grant, not the amount of expense that have been paid. Be aware that the amount of funds RECEIVED is not the trigger.  This audit is focused on one or more “major” programs that received federal funding.  If you have a single audit, then the financial statement audit must be conducted under Government Auditing Standards (a.k.a.  a yellow book audit).

Financials statement audits may be “optional” for some not-for-profit organizations, with only the Board of Directors requiring an audit.  Yellow book audits will be required by law, regulations or grant contract and would not be optional.  Additionally, single audits are not optional.  If you expend more than $500,000 in your fiscal year, this type of  audit is required by the federal government.

So how do you know what type of audit is required?  You must read your grant agreement.  Typical language may include, “If the contractor receives $500,000 or more from all federal sources during one fiscal year, the contractor shall have an independent, organization-wide audit conducted in accordance with the Single Audit Act of 1984…“  If the grant agreement does not mention audit requirements, then you should contact the grantor for clarification.

If your grant agreement does not require you to have an audit, please keep in mind that this does not diminish your responsibility to comply with the grant and compliance requirements that govern federal awards. If you have any questions regarding compliance, contact us.

Tax-exempt executives continue to receive scrutiny over compensation. In a recent WSJ.com article, a university president received a “no confidence vote” from its faculty due, in part, to the large increase in salaries and related perks over the last 8 years. Salaries and related perks increased 71%, from 2002 to 2008. With the negative public reaction to the AIG bonuses, more and more tax-exempt organizations are being scrutinized by stakeholders and the general public.

The IRS enforces this scrutiny by requiring non-profits to annually disclose the compensation of officers, directors, trustees, key employees and 5 highest compensated employees (those receiving > $100,000). In Part VII (page 7) of the Form 990, organizations are required to list the individual’s name/title, average hours worked per week, position, compensation(W-2/1099-Misc) from the organization, reportable compensation from related organizations and other estimated amounts of compensation (deferred and certain nontaxable benefits).

What defines a key employee? This individual is not an officer (O), director (D) or trustee (T), who meets the following 3 criteria:
1. Receives $150,000 or more of compensation from the organization and related organizations.
2. Has responsibilities, powers or influence over the organization (similar to O,D,T), or manages a discrete segment that represents 10% or more of operations;
3. Included in the top 20 of highest paid employees.

Remember Form 990 is a public document and “the public” will be able to review the organization’s compensation policies, practices and disclosure of selected positions.

What types of benefits are on the IRS’ radar? See my next post.

Senators Schumer, Levin and Stabenow announced today they’ve introduced legislation to simplify the excise tax that applies to private foundations (PFs).  In place of the current two-tiered system (1%/2%), the bill would institute a single tax rate.  Based on a study by the Council on Michigan Foundations, a tax rate of 1.32% for all PFs would result in no net change in the total excise tax collected from PFs.

The Senators expect their revision would spur increased distributions from PFs to public charities.  Under the current system, a PF pays the 1% tax in years where its distributions as a percentage of its asset base exceed the 5-year weighted average of distributions to asset base.  Thus, a PF can manage its tax liability by making small incremental increases in its giving level. 

Conversely, when a PF has a significantly higher distribution percentage in a given year (for instance, following Hurricane Katrina), the PF will be penalized in future years by the increase in the 5-year weighted average, unless they continue with the new higher distribution percentage.  The proposed legislation would free PFs from deciding between a desired contribution and their future tax bills.

If you have questions about the proposed legislation, contact us.

Intuition is built from our experiences and causes us to have gut feelings about situations. Discernment is the ability to blend intuition and intellect, to see a partial picture and fill in the missing pieces. Discernment allows us to see the root of the problem and evaluate options.

Does it seem like some people often appear to be in the right place at the right time? Could it be that they have the willingness to use their experience and follow their instincts.

For more information on leadership qualities, read The 21 Indispensable Qualities of a Leader by John Maxwell.

Alternative investments are investments for which a readily determinable fair market value does not exist. In other words, investments that are not listed on traditional exchanges or whose market price isn’t available from traditional sources like the NASDAQ. The difficulty in determining their fair market value presents a challenge to auditors, who must utilize a number of nonstandard procedures to become comfortable with the fair market value provided.

In order to facilitate the auditor’s ability to become comfortable with the fair market value of alternative investments, it is important that management understand their responsibility. It is management’s responsibility to:
• Understand the fund manager’s method for valuing the alternative investments
• Understand the nature of the underlying investments and the portfolio strategy used by the fund manager
• Obtain sufficient information to evaluate and challenge the fund’s valuation
• Determine the fair value measurements and disclosures to be included in the financial statements

For more information on alternative investments and how they may affect your audit contact us.

Authored by Ashley Parsons.

Today RCO is leading a governance conference provided to tax-exempt organizations in the Dallas-FW community and across the state. Nearly 70 tax-exempt participants and specialist will engage in governance topics. The pre-session workshop is designed to identify exceptional board qualities. The reverse will also be examined, what are the dysfunctional and passive qualities of boards.

During the luncheon session we will review the three different modes of governance, fiduciary, strategic and generative. What is the generative mode? Generative thinking is performed almost everyday, external to the board. So how does the board begin generative thought? Governance as Leadership, published by BoardSource provides examples of generative thinking and governance.

The afternoon session will be led by a panel of specialist, including Benton Clark, Christi Stinson, Frank Sommerville and Cory Halliburton. They will be reviewing principles of good and ethical governance, fiduciary responsibilities including conflict of interest and risks of certain ministries.

During the next month we will discuss the highlights of the conference.

As a former employee of a not-for-profit organization, we always got excited when we learned of a pledge (also known as a promise to give) from a generous donor. What can be difficult to understand is what you do with that information. There are two kinds of pledges and the treatment of each is different.

1. Unconditional promises to give are statements by a donor of their intent to make a contribution of some kind at a future period. (For example, the ABC Foundation informs you that they have voted at their last Board meeting to give your organization $10,000 in January.)
2. Conditional promises to give are pledges by a donor that are “conditioned” upon some other event (other than the passage of time) occurring. (Some examples are: 1). A donor states that he will give you $5,000 for your capital campaign if a contract with a builder has been signed. 2). A foundation will contribute $100,000 if a new program is implemented. 3). A corporation will donate $1,000 if other corporations in your community do the same.)

Remember: Conditional pledges require some other action to occur.

So what is the different accounting treatment?

Read the rest of this entry »

Every member of the board has fiduciary responsibilities, not just the finance or audit committee members. As a board member, don’t you think it would be important to have a basic understanding of the different types of financial reporting. What does the operating cycle and financial data really mean?

What is the difference between cash basis, modified cash and accrual basis of reporting? 

In cash accounting money is recorded as it enters and leaves the building (or account).

Accrual accounting records revenue and expenses as it is earned/incurred. For example, if work has taken place of if a viable donor has unconditionally promised to give a contribution, then we record it as revenue earned. The money is not in the building yet, but the actions that created that money have occurred “unconditionally”, therefore it is earned. It is basically the same with expenses. Under the accrual method, expenses are not recorded when the bill is paid. Expenses are recorded when the action has taken place that caused that expense. Accrual accounting gives certain financial statement users a clearer picture of what is going on within the organization, not just how cash is moving around.

What is modified cash…good question. Watch for further discussion.

Earlier this month the WSJ.com disclosed an article written by Deborah Solomon and Laura Meckler relating to President Obama’s plan to restrict executive salaries. Organizations that receive a substantial amount of government aid may be restricted on the amount of executive compensation.

The possible restrictions include a $500,000 cap on executive salaries. Additional compensation could be provided in the form of restricted stock or funds that are tied to the long-term health of the organization. President Obama’s tentative plan also restricts executives from receiving severance payments; and allowing shareholders “more say” in how top executives are compensated. This restriction will not apply to any of the existing financial-rescue bailout programs.

Should organizations that receive federal funds be restricted on how much executives are compensated? Read the rest of this entry »