Making Cents of Your Accounting Services Firm – Views from Both Tax and Audit

1. Making Cents of Your Accounting Services Firm – Views from Both Tax and Audit Kristen Wicke, Sean Holcomb, Dena Jansen & Shannon Peterson Maxwell Locke & Ritter LLP February 28, 2012

2. What will we cover in this presentation? • Tax considerations • Board governance • Internal controls • Financial audit – • Overview of the audit process • What to be prepared to answer

3. Tax Considerations

4. Form 990 – Filing Thresholds • 2010 (and later) • 990-N e-postcard Gross receipts < $50,000 (no supporting orgs) • 990-EZ Gross receipts < $200,000 AND Total assets < $500,000 • 990 Gross receipts > $200,000 OR Total assets > $500,000

5. When, Where, How 990 filed • Due 15th day of 5th month following year end • Two 3-month extensions available • Electronic filing • 990-N must be filed through IRS website • E-filing required if file at least 250 returns of any type during the calendar year ending with or within the organization’s tax year AND total assets > $10 million • Note – IRS e-filing system for 990s is down until February 29th. All returns due (whether required to e-file or not) from January 1, 2012 – February 29, 2012 now have until March 30, 2012 to file

6. Public Disclosure • Original and amended annual information returns for previous 3 tax years available for public inspection • Form 1023 also subject to public inspection • Not all information subject to disclosure • Schedule B – names and addresses of contributors • Public Inspection Copy • Transparency

7. 2008 Form 990 Redesign - Governance • 12 page core form, 16 possible additional schedules • Increased focus on Governance • Part VI • “Good governance and accountability practices provide safeguards to help ensure that the organization’s assets will be used consistently with its exempt purpose.” • A big focus of the questions on the 990 is not to necessarily focus on policies, rules, and procedures required by the IRS, but assist those charged with governance that the financial policies and procedures of the NPO support sound governance and demonstrate to potential donors and the public the NPO’s compliance. • More documentation on policies and procedures required to be disclosed

8. 2008 Form 990 Redesign - Governance • Increased focus on Governance • IRS now using “check sheet” to capture governance practices and the related internal controls of organizations it examines. • Analyze data collected over long term to understand intersection between governance practices and tax compliance.

9. Board member relationships with each other and the Organization • Schedule L • Excess benefit transactions • Loans outstanding • Grants or assistance • Business transactions • Directly, with family members, or organizations owned • Form 990, Part VI, Section A, Line 2 • Did any officer, director, trustee or key employee have a family or business relationship with any other officer, director, trustee or key employee? • IRS looking for potential inurement/excess benefit/self-dealing

10. Compensation • Compensation • Part VII • Increased reporting – Officers, Directors, Trustees, Key Employees and Highest Compensated Employees • Officers/Directors/Trustees (Current and Former) – any amount • Key Employees - $150,000 • Highest Compensated Employees - $100,000 • From the organization AND related organizations • Description of compensation policies and procedures

11. Contributions • Quid pro quo – this for that • Donor makes donation and receives goods or services from organization • Contribution amount is amount by which the donation exceeds the fair market value (NOT cost) of the goods or services received from the nonprofit • Fundraising events • Exceptions • Token items, low-cost items, intangible religious benefits, membership benefits

12. Earmarked Contributions • See Chester D. Tripp, TC Memo 1963-244 • Donations earmarked for a particular person are not tax deductible • Must be to charitable class, not single individual • Organization must have final authority on use of funds

13. Public Charity Status • Would normally be the status indicated in the IRS determination letter • Can be different if organization feels that a different status more accurately reflects sources of support • IRS only changes its records if the organization files for a determination letter to confirm qualification for new public charity status

14. Pension Protection Act and 509(a)(3) • Congress imposed additional restrictions on certain types of supporting organizations and addressed certain abuses. • Change from 509(a)(3) to 509(a)(1) or 509(a)(2) governed by procedures of Revenue Procedure 2009-4 • Procedures under which a supporting organization could request a change in public charity classification for reasons related to the changes made by the PPA.

15. IRS Examinations • FY 2010 Examinations – 11,449 • FY 2010 Compliance Checks – 3,893 • Examinations are up, compliance checks are down

16. Board Governance

17. Definition of “Those Charged With Governance” Those charged with governance. The person(s) or organization(s); i.e., • A corporate trustee with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity • This includes overseeing the financial reporting process • Those charged with governance may include management personnel; for example, executive director or chief financial officer

18. Financial Reporting Responsibility of the Board • The Board is the ultimate governance body for the organization • The Board sets the organization’s business and ethical standards - “the tone at the top” • The Board sets the policies, oversight, and direction of the organization’s activities • The Board selects the organization’s management, monitors management, and changes management when necessary

19. The Audit Committee • Responsibilities: • Can be a number of responsibilities assigned to the board in oversight capacity, but none of the responsibilities of management should be assigned to the audit committee • Should be unique to the NPO’s needs and its culture - “one size does not fit all” • Should not be so great and so detailed the audit committee may lose sight of its major objectives or start to perform its duties at “too high of a level”

20. Audit Committee Responsibilities Responsibilities typically include: • Appointing, compensating, retaining, and evaluating the external auditor • Overseeing the external audit plan • Discussing the annual audited financial statements • Overseeing the external audit process and audit results • Monitoring internal control over financial reporting • Discussing interim financial statements and the external auditor’s review of those statements • Monitoring the external auditor’s independence • Approving audit and non-audit services

21. Audit Committee Responsibilities (continued) • Establishing and monitoring the NPO’s whistleblower procedures • The Board of Directors also frequently assigns additional responsibilities to the audit committee involving the oversight of the company’s: • Code of ethical conduct • Conflicts of interest • Related parties • Special investigations involving possible fraud and related problems • Compliance with laws, rules, and regulations • Communications from attorneys about potential violations of law • Litigation matters

22. Conflict of Interest Policy It is a traditional role of the Board to monitor conflicts of interest and related party transactions. • Steps to consider: • Identify and review at pre-determined frequency related parties to the organization • Maintain current listings of management, BOD and their relationships (e.g. company ownership, employer, etc.) • Follow policy for annual representations and actions at BOD meetings (i.e. abstaining from related party transaction decisions) • Have current Conflict of Interest Policy that is presented and available to management and BOD • National Council of Nonprofits has example templates available at http://www.councilofnonprofits.org/conflict-of-interest • Maintain listing of related party transactions for disclosure • Generally accepted accounting principles allows for materiality to be applied, but often in practice, conservative approach taken and includes full disclosure.

23. Educating Those Charged With Governance • Consider conducting an orientation session for new Board or finance or audit committee members • Certain basic information required: • Information about the entity and environment in which it operates - regulatory and economic • Biographies of senior management • Minutes of the previous year or years • Committees, including structure and duties • Self assessment conducted by the NPO or by a third party • Prior financial statements and tax filings • Prior communication letters from the external auditor • History of non-attest work performed by the external auditor • Information regarding legal counsel and previous communications from legal counsel

24. Management Responsibilities Traditionally management provides financial reporting information for BOD analysis and oversight • What to include? • Financial statements and supporting detail to provide BOD with understanding of activity and any new, significant or unusual transactions • How frequently? • No accounting requirement for frequency of reporting • Look to organizational documents to see if any required frequency or level of reporting • Some investment policies will require quarterly reporting of specific investment information • Monthly reporting would be ideal frequency to provide consistent opportunities for analysis and oversight • What action should be taken? • Management should be prepared to respond to inquiries and address any requests for action and report back at next meeting (or earlier if requested)

25. Internal Controls

26. Internal Controls • Internal controls are the process, affected by the NPO’s board, management, audit committee (if one is in place), and other entity personnel, and designed to provide reasonable assurance about the NPO’s • Financial reporting reliability • Compliance with applicable laws and regulations • Effectiveness and efficiency of operations • Efficient and effective internal controls starts with their design

27. Internal Controls (continued) • Management and those charged with governance • have the responsibility for overseeing the risks and controls over financial reporting • overseeing the tax, legal, and certain other regulatory and compliance matters; i.e., grants, environmental, etc. • Management and those charged with governance can delegate the performance, but not the responsibility of any of these areas • The external audit is not and cannot be an internal control.

28. Financial Audit: An overview

29. The Audit Process • Planning • Engagement letter • Fraud procedures – discussions with management and governing body • Preliminary analytics – will include inquiries, comparisons of current year to prior year or budget to actual • Internal controls – gain or update understanding of significant processes (revenues/ receipts, expenses/disbursements, payroll, etc.) and possibly testing for operating effectiveness • ALWAYS highlight new/changed items to avoid surprises

30. The Audit Process (continued) • Fieldwork • Specific account balance/activity testing • Materiality concept • Sampling or substantive analytics • Reporting • Financial statements are management’s but auditors can assist in preparation • Footnote disclosures • SAS 114 letter - Required communications to those charged with governance • SAS 115 letter – known as Management Letter or Internal Control Letter

31. Prepared By Client (“PBC”) Items Common items requested by auditors during: • Planning • Copies of any NEW or UPDATED agreements (e.g. lease, debt, bank accounts or lines of credit) • Copies of any NEW or UPDATED organizational documents (e.g. by-laws, employee handbooks, financial policies and procedures) • CHANGES or UPDATES to internal controls documentation • CHANGES or UPDATES to organizational operations (e.g. org chart, rate structures, investment policies) • Minutes – all meeting minutes for full Board and potentially Finance or Audit Committee if applicable for entire fiscal year through report issuance

32. Prepared By Client (“PBC”) Items Common items requested by auditors during: • Fieldwork • Bank account statements and reconciliations to G/L • Investment statements and reconciliations to G/L • Rollforward activity for promises to give (include information on discounts and allowances for long term promises) • Details of G/L balances that agree to G/L (A/R, Prepaids, A/P, Accrued Expenses) • Property and equipment – rollforward of activity with support for activity • Debt statements and any correspondence to support debt covenants, if applicable • Net asset rollforward – by restriction classification (unrestricted, temporarily or permanently) • Endowment specific rollforward • Support for amounts released from restrictions • If sampling - will request specific items (checks, invoices, etc.) • If performing substantive analytics – will request explanations for variances over their determined threshold

33. Prepared By Client (“PBC”) Items Common items requested by auditors during: • Reporting • Support for footnote disclosures: • Accounts receivable and/or promises to give • Investments – by type and fair value level • Property and equipment • Debt • Retirement plans • Commitments and contingencies – leases, litigation • Endowments • Related parties – BOD transactions, any other known related parties, actual amounts and any amounts outstanding owed or due • Subsequent events – continue through report issuance • Management representation letter

34. Resources • IRS Web Site - www.irs.gov • Stayexempt.org - additional training and instructions • GuideStar – web site for tax returns of Non-profits - www2.guidestar.org • AICPA Not-for-Profit Audit Committee Toolkit – See also Appendix A for other specific resources http://www.aicpa.org/interestareas/businessindustryandgovernment/resources/notforprofitresourcecenter/pages/aicpanot-for-profitauditcommitteetoolkitdownloads.aspx

35. Questions? MAXWELL LOCKE & RITTER LLP Phone: (512) 370 3200 Fax: (512) 370 3250 Austin: 401 Congress Avenue, Suite 1100 Austin, TX 78701 Round Rock: 303 East Main Street Round Rock, TX 78664 Affiliated Company ML&R WEALTH MANAGEMENT LLC “A Registered Investment Advisor” This firm is not a CPA firm