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COLORADO NONPROFIT FINANCIAL PEERS. RYAN SELLS | JUNE 13, 2013. Topic Summary.
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COLORADO NONPROFIT FINANCIAL PEERS RYAN SELLS | JUNE 13, 2013
Topic Summary This timely discussion will help you stay up-to-date with current accounting pronouncements, as well as what’s on the horizon. We’ll share key performance indicators to help you evaluate the financial health of your organization, and some recommendations for strengthening your internal controls. We’ll present our top 10 list of mistakes made by audit clients to help you prepare for a more efficient and effective audit.
Ryan Sells Ryan Sells, CPA is a partner at the largest Denver-based accounting and consulting firm, EKS&H. They provide audit, tax, and advisory services to over 100 local and national nonprofit organizations. Ryan believes that financially strong, effectively managed nonprofits are more likely to have an impact and accomplish their mission, and he enjoys advising them towards achieving their goals. rsells@eksh.com 303-846-3393
Classification of Sales Proceeds of Donated Financial Assets(EITF Issue 12-A) • Cash receipts from sale of donated securities that are immediately converted to cash should be reported as operating activities (or financing if restricted to LT purpose) in the SOFC, rather than investing • Consistent with cash contributions Effective FYE after 6/15/13
Services Received from Personnel of an Affiliate(EITF Issue 12-B) • Services received from an affiliate (parent/sub or common control) for which the affiliate doesn’t charge should be recognized in the recipient NFP’s F/S • Measured at actual costs incurred by the affiliate • Contributed services criteria no longer applicable Effective FYE after 6/15/14
Obligations from Joint and Several Liability Arrangements(EITF Issue 12-D) • Requires measurement of obligations for which the amount is fixed as of the reporting date as the sum of: 1) amount the entity agreed to pay on the basis of its arrangement among its co-obligors 2) any additional amounts the entity expects to pay on behalf of its co-obligors • Nature and amount of obligation should be disclosed Effective FYE after 12/15/14 for non public entities
Leases • Right of use model (asset/liability recorded) • Proposed guidance re-exposed & re-deliberated • Final standard will contain guidance for both lessees and lessors • How to prepare: • Inventory leases • Assess capitalization threshold • Monitor developments at FASB.org • Understand impact to financial statements (debt/equity ratios) Effective date 2017 or 2018 at the earliest
Financial Statement Presentation Project • Improve net asset classifications • Operating measures / performance indicator • Liquidity information • Cash flows • Improvements to NFP note disclosures • Research the use of commentary & analysis (MD&A) in conjunction with NFP GAAP statements to ‘tell a financial story’
Charity Navigator Ratings • Information is compiled from 990’s filed by the charity • Not always GAAP • Variation in practice for reporting certain items (e.g. functional allocation of expense) • Currently, no evaluation of program quality or outcomes • Measure of financial health, accountability and transparency of charities to help donors make informed decisions
Charity Navigator Ratings • How are higher ratings achieved? • Financial: • More spent on programs, less on administrative and fundraising expenses • Adjusted based on sub-sector • Avoiding deficits • Raising funds efficiently • Growing revenue and program expense • Maintaining a strong working capital ratio $ $ $
Charity Navigator Ratings • How are higher ratings achieved? (cont.) • Accountability and transparency:
Reliability of Revenue • Ideally, support should be from multiple sources
Surpluses • Funders want to partner with organizations that have the financial strength to deliver • Foundations often pass over funding requests from organizations with 2 or more years of losses
Low Debt to Equity Ratio Liabilities Equity Debt to Equity Ratio Debt
Reserves • Operating reserves • To smooth the peaks and valleys of the normal budget/cash flow cycle • Sustainability / rainy day funds • To deal with the unexpected • Strategic initiative / opportunity funds
Internal Control • May hamper efficiency, but absolutely necessary • Protects the reputation of the organization • Protects YOU • Trust is not internal control • If your size limits your ability to segregate duties, implement mitigating controls • Consider involving board members • Technology • Facilitates the work of the fraudster • Don’t be over-reliant on systems controls
Internal Control (cont.) • Things to look for • Nonrecurring adjustments • One person insisting on performing incompatible duties • People not taking time off • Fraudsters need to cover their tracks • Review supporting detail • Check images • Invoices / PO’s • Don’t return to person performing the duty
Space • Auditors appreciate when they have a comfortable environment with adequate space • Don’t worry, we won’t stay longer! 10
Scheduling • Consider: • Close cycle • Board meetings • Staff vacations 9
Lack of Internal Communication • Audit is not limited to accounting department • Nearly all functions have a financial component • Keep Informed: • Executive Director • Finance/Audit Committee • Board 8
Not Following GAAP • Generally Accepted Accounting Principles • Clearing accounts • Deferring temporarily restricted balances • Accruing prepaids / deferring accounts receivable • Improper functional allocation 7
Not Providing All Information • Provide all significant agreements, even if they’re effective after year end • Disclose all transactions with related parties 6
Overriding Internal Control • Design controls to be effective and practical, then enforce them • Occasionally circumventing controls = control not reliable 5
Failure to Comply with Requirements • Bank covenants • Donor restrictions • If not possible to meet, communicate early! 4
Being Unaware of Grant Requirements • Federal Grant recipients • Noncompliance requires additional reporting • Potentially a risk to further funding 3
Inability to Explain Balances or Activity • Delegation ok, but oversight is necessary • Know your numbers 2
Failure to Prepare for the Audit • Having a robust monthly close and reconciliation process will make audit preparation a cinch • Auditor should provide a client request list 1