When I tell folks that I am an auditor, I immediately get that defensive look as they assume that I am a dreaded IRS auditor (which I am not). When I further explain that I audit financial statements, I usually receive a weak smile and a slight head nod, as if to signal that they are glad I am not with the IRS, but they really don’t have an idea what I do and are a little too embarrassed to ask or don’t really care. For those of you employed at non-profit organizations or serve on their Board of Directors, I thought I would take a few moments and explain what an audit of financial statements really entails. In a later post I will address who may need to have an audit.

So what is an audit of financial statements? Usually on a monthly basis, the controller, CFO, or accountant at your organization prepares financial statements, usually consisting of a balance sheet and income statement. These statements are used by staff, management and the Board of Directors to make decisions about the organization. But all of the information is gathered by and reported by people INTERNAL to the organization. A financial statement audit involves someone EXTERNAL to the organization, an independent certified public accountant.

Audits of financial statements are done according to a set of standards that all CPA’s must adhere to, which are referred to as Generally Accepted Auditing Standards (GAAS). These standards have been developed by the American Institute of Certified Public Accountants and are monitored and revised based on financial circumstances, including failures related to fraud.

So how do we perform an audit? See my post, next month.

To ensure a Plan Sponsor is fulfilling their fiduciary obligations related to the oversight of an employee benefit plan I have listed some of the internal control matters that should be addressed (please note this is not an all inclusive list as facts and circumstances of each Plan vary):

1. Ensure all user control considerations included in the third party administrator’s (record-keeper, trustee, custodian, etc) Type II SAS 70 are in place at the Plan Sponsor
2. Analyze compliance testing results provided by the third party administrator and if the Plan failed any tests ensure that corrective action is taken in a timely manner (distributions or additional contributions to the Plan as necessary)
3. Determine if established internal controls are designed appropriately to catch errors or fraud that may occur during the processing of transactions related to the Plan. Consider conducting a brainstorming session with individuals involved in the Plan in determining what could go wrong and then determine if controls currently in place are adequate to address such risks.
4. If the census is prepared by the Plan Sponsor ensure that the total wages included in the census reconciles with the organizations payroll records (remember census must include all employees that received a paycheck during the year whether employed by the organization or not during the year); the census should also be reconciled with the record-keeper statements (employee contributions, employer contributions and loan repayments). Key point – A reconciled census that agrees with the Plan Sponsors audited financial statements and the record-keeper statements will save time and money during a benefit plan audit
5. Controls should be in place to ensure all information included on the participant statements (social security #, name, compensation, date of birth, date of hire and date of termination) is complete and accurate.  Inaccurate information could lead to:

• Allowing individuals to enter the plan when they were not eligible to do so or not allowing an employee into the plan that is in fact eligible.
• Inaccurate amounts being withheld for employee contributions and/or employer matching contributions.
• Inaccurate amounts being withheld or forfeited when an employee receives a distribution (early distribution tax penalties or issues related to utilizing the appropriate vesting percentage for employer contributions)

     6. Determine if the annual Form 5500 reconciles to the Plan’s financial statement’s

 Interested in refining your internal controls for benefit plan recordkeeping. More will come in a later blog post…

Whether your annual audit is approaching or this will be your business’ first audit ever, an audit can seem like a daunting event. But there are ways to make this potentially painful event pass with minimal frustration:

10. Begin working on your schedules weeks before the audit occurs, you might have questions and your auditor is just a phone call or email away.
9. Keep track of issues you struggled with during the year. It will help the auditor key in on important areas at the beginning of the audit.
8. Get the confirmations back to the auditors quickly! The more time there is to send these out the better chance the auditor receives the accurate information. Not getting them back causes more work for all parties involved.
7. Communicate your schedule to the auditors. This helps the auditor work around your normal responsibilities.
6. Make all your adjustments to your trial balance before you provide it to the auditor.
5. Those schedules we talked about earlier make sure they tie to that final trial balance.
4. Make needed documentation easy to access and provide it to the auditors as soon as possible.
3. Be available! Here’s a tip, set aside time on your calendar devoted to auditor questions and audit prepwork.
2. Implement good segregation of duties among your staff. The more checks & balances you have the less likely you are to have errors or issues.
1. Don’t do anything fraudulent or misleading during the year. (Always a plus). Tell the truth.

The key to success is communication and preparedness. If you apply these steps you should see a reduction in the amount of friction an audit can cause.

Preparers of financial statements for nongovernmental entities are rquired to follow the accounting guidance contained in FASB Accounting Standards Codification 855, Subsequent Events (FASB ASC 855) and the accounting guidance contained in AU section 560 would no longer be applicable to audits of nongovernmental or state and local governmental entities. 

FASB ASC 855 requires that the auditor’s report date should not be earlier than the date on which the auditor obtained sufficient appropriate audit evidence to support their opinion (i.e. the date to which subsequent events were evaluated). Therefore, the auditor’s report date cannot be earlier than management’s subsequent event footnote date.

In summation: the specific management representations relating to information concerning subsequent events should be made as of the date of the auditor’s report.

A Chronicle of Philanthropy survey has found that nearly 3 in 10 of the leaders of the nation’s largest charities and foundations have taken pay cuts in the past year due to the recession. The Chronicle studied compensation at 325 large nonprofit organizations. In 2008 nonprofit executives saw a sharp increase in pay as opposed to a sharp drop in pay for for-profit executives. A lot of organizations are not cutting or freezing executive pay for fear that the executive will leave or not considering how the downturn in the economy will impact them. If an organization is struggling in the economic downturn and the executive is receiving pay raises, it could send a mixed message to donors.

The above is a summary of an article titled “Nearly 30% of Nonprofit Leaders Took a Pay Cut This Year; Pay in 2008 Grew Quickly” from The Chronicle of Philanthropy authored by Noelle Barton and Ben Gose, which can be found at the following website: http://philanthropy.com/free/articles/v21/i22/22000107.htm.

The following excerpt is provided, by permission, from Melanie Herman, Executive Director of the Nonprofit Risk Management Center, Leesburg, VA:

In Jeffrey Rosenthal’s fascinating book “Struck by Lightning: the Curious World of Probabilities, Rosenthal explores the science of probabilities. He compells his readers to remember that risk management is accompanied by “randomness”. Many aspects of our lives are governed by events not completely within our control and uncertainty is here to stay. Nonprofit leaders have two options regarding uncertainty: #1 – Let uncertainty get the better of us and our tax-exempt organizations or #2 – Learn to understand and perhaps appreciation randomness and act accordingly.

According to Rosenthal, “by thinking logically about the likelihood of various outcomes, we can better make decisions and understand our lives more deeply.”  So what does thinking logically have to do with governance and managing risk? Read the rest of this entry »

The IRS recognized the need for transition relief related to information included in Form 5500 by some 403(b) plans. It was noted that some of the filings would be rejected under ERISA because the filing would be incomplete due to the administrator’s inability to identify all participant contracts and accounts that should be included in plan assets. The filing would also be rejected if the audited financial statements contained an adverse, qualified or disclaimed opinion (other than disclaimers related to limited scope audit provisions in 29 C.F.R. 2520.103-8 or 103-12).

Administrators of 403(b) plans do not need to treat annuity contracts and custodial accounts as part of the employer’s plan assets for purposes of ERISA’s annual reporting requirements (further, the employer is not required to count the individual as a participant under the plan for Form 5500 reporting purposes) provided that:

1. The contract/account was issued to a current or former employee before 1/1/09
2. The employer ceased to have any obligation to make contributions and has ceased making contributions to the contract/account before 1/1/09
3. All of the rights and benefits under the contract/account are legally enforceable against the insurer or custodian by the individual owner without any involvement by the employer
4. The individual owner of the contract account is fully vested

The Department will not reject a Form 5500 on the basis of qualified, adverse or disclaimed opinion if the accountant expressly states that the sole reason for such an opinion was because such pre-2009 contracts/accounts were not covered by the audit or included in the plan’s financial statements.

The above information obtained from Field Assistance Bulletin 2009-02.

According to a survey conducted by Human Service Council (HSC) and Baruch College: School of Public Affairs in New York City, human services organizations in the New York City metropolitan area are being squeezed from both sides of service and funding. Human services organizations are seeing increases in demand for services and decreases in government funding, donations and endowments which all relate to the present state of the economy. For 84% of the organizations responding to the survey, public funding accounts for more than 40% of their operating budgets.

According to the organizations that responded to the survey, 60% are having difficulty managing cash flow, 30% have no lines of credit, and 67% have no endowment. Of the organizations that responded that had endowments, 73% saw decreases in their endowment. 53% of these organizations were forced to cut staff in order to cut costs. Some of these organizations have had to cut programs and those that have not are considering this option to cut costs.

While these statistics were gathered from organizations in the New York City metropoliation area, the current economic crisis is putting a great deal of strain on human service organizations around the country that rely a great deal on public funding.

The information above was summarized from the article “Governments Cutting Back on Social Service Spending” from NPT Weekly, a publication of The NonProfit Times. For more information, see www.nptimes.com. 

In December 2008, President Bush signed The Worker, Retiree, and Employer Recovery Act of 2008 into law. The law waived the required minimum distributions for 2009 from IRAs and employer sponsored defined contribution requirement plans because of the large drop in the stock market and declining retirement values.

Generally, a required minimum distributions is an annual amount that must be withdrawn from an IRA or an employer sponsored plan beginning with the year the account owner reaches 70 ½.

The IRS said that in many cases, because the law was signed so late in the year, and many individuals and plan sponsors were confused about how to comply with the new rules, IRA owners and plan participants received distributions they were not required to take or did not want.

Retirees who made a withdrawal from an IRA, 401(k) or other qualifying retirement plan have until 11/30/09, or within 60 days of the distribution, whichever is later) to put the money back in the plan tax-free.

Notice 2009-82 assures plan administrators that Read the rest of this entry »

Has your nonprofit organization ever considered lobbying activities? An organization exempt from taxation under section 501(c)(3) will lose its tax-exempt status and its qualification to receive deductible charitable contributions if a substantial part of its activities are carried on to influence legislation.

However, there are circumstances where lobbying is allowed for certain eligible 501(c)(3)s. Read the rest of this entry »