Governance, as defined by Webster’s dictionary, comes from the noun word, government. Government, in it’s purest form, is a political function of policy making, distinguished from the administration of policy decisions.

Since the summer of 2004, tax-exempt entities have experienced continued pressure from regulatory and legislative agencies. Consider the following important dates:

1. Spring 2005 – Panel on the Nonprofit Sector issues interim report on charitable reform measures.
2. June 2006 – IRS releases new Form 1023 with new governance questions.
3. August 2006 – Pension Protection Act of 2006 signed into law.
4. February 2007 – IRS publishes a discussion draft of good governance policies
5. Fall 2007 – Commissioner of Exempt Organizations begins giving speeches on governance issues.
6. December 2007 – Redesigned 990 released.
7. December 2008 – Form 990 (core form and related schedules) finalyzed.
8. 2009 – IRS pledges to release a checklist for its agents to use during audits to determine how governance relates to tax compliance.

Why is the IRS interested in governance? The first and prominent answer, according to Steven T. Miller, IRS Comission, Tax Exempt and Government Entities,  a well-governed organization is more likely to be compliant with the tax law, while poor governance can easily lead to trouble. Good governance also allows organizations to self-identify and self-resolve problems. Governance practices influence whether an organization is operated to further exempt purposes, and whether the organization serves public, rather than private, interests.  Good or bad governance dictates whether the organization’s executives are compensated fairly or excessively. It influences whether the organization makes informed and fair decisions regarding its investments or its fundraising practices, or whether it allows others to take unfair advantage.

According to Miller, Read the rest of this entry »

If your organization has ever been involved with a single audit, you know that they are a “different animal”. Very different than a financial statement audit. Why? Single Audits involve testing for “compliance with rules”.  RCO recently sponsored a workshop for the Executive Exchange where we highlighted common compliance deficiencies that we have observed while conducting single audits. In an effort to help not-for-profit organization become more compliant, we thought we would share these findings with our “blog community.” 

There are potentially 14 areas of compliance requirements.  The first step in compliance is knowing which of these requirements pertain to your grant(s). Which requirement relate to your grant, see this post. The compliance requirements are listed below and include some of the “common” deficiencies we have encountered.

• Allowable activities – activities that are being performed under the “guise” of a grant are not allowed by that grant.
• Allowable costs – expenses charged to the grant are not approved; documentation, such as invoices, can’t be located; expenses that are being allocated, such as salaries, are not done properly and/or proper documentation is not maintained.
• Cash management – funds that are drawn down are not spent timely; reimbursements are requested from the grantor before the funds are actually spent by the not-for-profit organization.
• Davis-Bacon Act – not knowing that this requirement applies to your grant (usually involves federal awards used for construction purposes).
• Eligibility – not maintaining proper documentation to show that program recipient was eligible for services; no review to ensure that staff are following guidelines.
• Equipment and real property management – not performing an inventory of items obtained with federal awards; not clearly marking/tagging property; not maintaing accurate records of items acquired and/or disposed of that were purchased with federal awards.
• Matching, level of effort, earmarking – not monitoring during the year to determine if you are meeting the match or level of effort; using income items for a match that do not qualify; documentation to determine if these items have been complied with have not been maintained or is incomplete.
• Period of availability – requesting reimbursement of an expense that was incurred before or after the grant period.
• Procurement – not checking the excluded parties list (at www.epls.gov) to determine if vendors with which you do business have been suspended or debarred; not following your organization’s procurement policies; not obtaining bids when required.
• Program income – not properly recorded or misclassified; used as part of your match when it is not allowed.
• Real property acquisition and relocation assistance – not doing your research when purchasing property that may require relocation of the current owners.
• Reporting – not submitting your reports to the grantor timely or not knowing when the reports are to be submitted; documentation for number of participants served or expenses requested for reimbursement on the reports does not agree with the documentation supporting these numbers.
• Subrecipient monitoring – not realizing that you have subrecipients; not properly monitoring those subrecipients

For more information about these compliance requirements, you can review the OMB Circular A-133, Compliance Supplement, OMB Circular A-122 (cost principles) and OMB Circular A-110 (administrative requirements) on-line.

Featuring guest author Cory Halliburton, attorney with Weycer, Kaplan, Pulaski & Zuber, P.C.

Child abuse. These two words are used so often in the media that society has become callused to their significance. One of the most emotionally and financially devastating events to an organization can occur when a child is abused or neglected on site. Any organization that has children on site must take steps to prevent abuse and to make sure all employees (and volunteers, if possible) have a good grasp of Texas’ child abuse reporting laws. This issue will eventually arise in your organization. Be ready.  

Know your employees and volunteers. Investigate whether your employees, members or volunteers are registered sex offenders by reviewing the Texas Department Public Safety website. Have employees and, if possible, volunteers who work with children, agree, pledge or acknowledge, in writing, that they have not (since the last acknowledgment) and will not engage in sexual or other physical misconduct with children. Require this monthly, quarterly or otherwise as the organization may implement. Educate employees about signs of abuse or neglect. This education may be provided through videos or other materials available through various on-line resources. Make sure employees are aware of any procedures to follow in the event abuse or neglect is suspected, including how to report to the governing board members. 
Chapter 261 of the Texas Family Code contains a fairly complex system for reporting suspected child abuse or neglect. Generally, a person having cause to believe that a child’s health or welfare has been adversely affected by abuse or neglect by any person shall immediately make a report. This is a very broad standard for reporting.  The terms “abuse” and “neglect” have specific definitions under the statute, many of which use terms such “an observable and material impairment” in the child’s growth or development or “substantial risk” of harm. At times, it is difficult to know whether an event is a reportable one, but to best protect the children associated with the organization, it is usually best to make a good faith report and allow the professionals to handle the investigation of whether or not abuse or neglect in fact exists.

Contributions are received from multiple sources and may have unrestricted and restricted designations. The designation relates to the donor’s intent for the funds. If the donor does not specify how or when the funds are to be used, the contribution is classified as unrestricted support. These types of contributions ultimately increases unrestricted net assets.

If the donor stipulates that the funds are to be spent on a particular item/activity or within a particular period of time, then the contribution is temporarily restricted. If the contribution is never to be spent, as in the case of certain endowments, the contribution is permanently restricted, thus increasing permanently restricted net assets. These permanently restricted net assets generate investment income that can be spent, but the investment income may have donor restrictions to consider as well.

Recording a contribution increases cash and increases revenue. Therefore the asset account is debited and the revenue account is credited. The revenues are classified based on the donor’s intent. When the donor’s restriction has been met then the funds are released and classified as unrestricted support.

There are two different methods utilized in recording temporarily restricted revenues. The first method allows temporarily restricted contributions to be recorded as unrestricted support if the purpose or timing is met in the same year as the receipt.  The second method requires the full amount of temporarily restricted contributions to be recorded as restricted support when received and then released as the restriction has been met.

For more information on recording and classifying contributions, see FAS 116, Accounting for Contributions Received and Contributions Made.

To be an effective leader, you must have a positive attitude.  Your attitude drives your behavior and your behavior affects those working around you.  To remain positive, think about these things:

1. Your Attitude is a Choice.  You can’t always control what happens to you (or what your client/coworker does or doesn’t do), but you can control how you react to those circumstances.

2.  Your Attitude Determines Your Actions.  Your attitude drives your behavior.  Your body language is a reflection of your attitude.

3.  Your People Are a Mirror of Your Attitude.  A leader creates the environment that determines people’s moods at the office and their mood, in turn, affects their productivity and level of engagement.

4.  Maintaining a Good Attitude is Easier Than Regaining One.

Need help in readjusting your attutide?  If you need an attitude “pick-me-up,” try the following: Read the rest of this entry »

There are three methods an organization can use to account for their daily transactions: pure cash basis method, accrual method and modified accrual method. The major difference between these methods is how an organization records its inflow (receipts) and outflow(disbursements) of cash. Let’s define the pure cash basis method.

The pure cash basis method of accounting only recognizes income or expense when cash is received or paid. Basically, this means that an organization will not record an expense when a service is performed, or invoice is received, but rather when payment for that service or invoice occurs. Similarly they will not record revenue when a service is preformed or a sale is made, but rather when payment is received. This is the most basic method of accounting and may be appropriate for very small organizations.

However, because the cash basis method of accounting does not match income to expense, it does not provide the most accurate information about the financial position of an organization. For this reason many companies choose, and some are required, to use the accrual method of accounting. What is the accrual basis of accounting?

Read the rest of this entry »

Introducing guest author, Stephen Tatum, Partner and Attorney with Cantey Hanger, LLP.
Service on tax-exempt boards is attractive to the public for a number reasons, allowing us to give back to our community. Most never think of potential liability arising from such service, or are satisfied that state law provides adequate protection for members of tax-exempt boards who act in good faith. The United States Court of Appeals for the Fifth Circuit recently affirmed a decision from a Federal District Court in Beaumont that could cause many members of tax-exempt boards to have second thoughts. The February 26, 2009 opinion on Verret v. USA, should provide individuals considering board service a new set of questions that should be answered before agreeing to accept a board appointment.

The facts in this case are important both for the purpose of demonstrating why the Court held the board chairman personally liable for payroll taxes unpaid by the hospital he served as chair of its board, and so that others can evaluate their own potential for liability in this situation. Read the rest of this entry »

Board responsibilities have been defined by case law dating back hundreds of years to the common law of England. The fiduciary responsibilities of care, loyalty (faith) and obedience have now become widely knows as the 3 “D’s”.

Duty of care is defined by the actions of an “ordinarily prudent person” in similar circumstances. When acting with care, board members: regulary attend and are adequately prepared for the board meetings; function independently; frequently review financial data and related policies.

Duty of faith involves acting in the best interest of the organization. Board members typically submit to and monitor conflicts of interest and avoid the appearance of a personal gain.

Duty of obedience is activated by compliance with corporate policies (bylaws) and procedures. Boards acting in obedience ensure compliance with all regulatory and reporting requirements, including filing tax returns and remitting required taxes.

Boards that do not exercise their fiduciary responsibility can be held personally responsible. In February the United States Court of Appeals for the Fifth Circuit affirmed a decision from a Federal District Court in Beaumont holding a board chair, the ED and the CFO personally responsible for unremitted payroll taxes and withholdings. A recent article in the Star-Telegram.com disclosed the court’s findings and the assessment.

Has your tax-exempt organization properly filed all the required tax forms and remitted the withholdings and payroll taxes on a timely basis? If you don’t know, perhaps you should ask. Board members could be held personally liable.

I ask this quite often to new accounting graduates when they’re applying for jobs.  Most give me a “deer in the headlights” look.  Others just stare angrily at me.  For any of you who’ve been in those interviews, and are reading this, I sincerely apologize.  It’s probably too much of a philosophical question for an interview when you’re just out of school and nervous.  But I do think it is an important concept.  When the dust clears, why are we here?  To me, it’s difficult to do your job well unless you have a good sense of your role and purpose.

This may just be my own opinion, but I think the accountant’s function can, for the most part, be summarized in three areas of responsibility.

Number 1 – To provide timely and accurate financial information to management in order to support decision making.  The financial statements, and other financial information, are the basis for the majority of decisions made by management of most entities.  The accountant’s ability to provide information accurately, on a timely basis, is crucial to each entity’s ability to make decisions and succeed.  Although this looks different for each particular business, the responsibility is similar.

Number 2 – To safeguard the entity’s assets.  Again, this looks different for each particular business, but the ability to design and implement an effective internal control structure is a vital responsibility of the accountant.  Whether it’s segregation of duties, reviews and approvals, reconciliations or just a second set of eyes looking at transactions, the internal control structure must be constantly monitored in order to protect the entity’s assets from misappropriation.  And at the heart of this responsibility, is the accountant’s own integrity.  This is a discussion for another day, however.

Number 3 – To follow the law.  Although simple, there are many legal ramifications to the accountant’s responsibility.  These include, but are not limited to, payroll taxes, labor laws, income taxes, vendor payments and collection laws.  The accountant has a responsibility to his/her employer to ensure that the entity follows all applicable laws and tax codes.

Again, it may just be my opinion, and there may be some blatant omissions, but if an accountant can take care of those three responsibilities, they’re doing a pretty good job.  And if you ever interview with me, and can repeat those, you’ve got a pretty good chance of understanding the requirements and function of the job.

Earlier this month Deloitte & Touche issued their report on General Motor’s financial statements. According to CFO.com, March 5, 2009 article by Sarah Johnson, D&T’s opinion included the following going concern qualification, “The corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern.”

Because of the sluggish economy and market conditions, many organizations are facing pointed questions from their auditors. These “going concern” questions are raised because of certain indicators that include the following:

1. Negative trends – recurring operating losses; working capital deficiencies (current liabilities exceed current assets [therefore cash and assets converting to cash in the current period] are not enouch to pay the obligations that are due); operating activities are not producing cash; adverse key financial ratios.

2. Other financial difficulties – default on bank loans or violations of debt covenants; denial of credit from suppliers; noncompliance with statutory capital requirements; seeking new sources of financing.

3. Internal matters – work stoppages; need to significantly revised operations; substantial dependence on new product; labor difficulties.

4. External matters – legal proceedings that may jeopardize operations; loss of principal customer or supplier; uninsured or underinsured catastrophic loss.

During the audit engagement the auditor, complying with generally accepted auditing standards, obtains information about the continued operations of the organization. If any of the above items have been identified, then the auditor must evaluate management’s plans to overcome the operational obstacles. Management must consider the following in order to eleviate a “going concern” by the auditor:  Read the rest of this entry »