UPMIFA Impact on Fundraising, Boards, and Internal Controls in Not-for-Profit Organizations

1. UPMIFA Impact on Fundraising, Boards, and Internal Controls in Not-for-Profit Organizations Marshall R. Lehman, CPA 612-381-8810 mlehman@lblco.com www.lblco.com

2. AboutLurie Besikof Lapidus & Company, LLP • Since 1940 • Local CPA and Consulting firm • Over 130 staff and partners • Accounting and auditing, tax, benefits, technology, leadership consulting and management • Provide volunteer time, pro bono hours, gifts to over 80 community organizations and friends annually • Our mission includes providing “support and care for our community” • We Care Beyond the Numbers

3. Our Non Profits Organization Team Marshall R. Lehman – accounting and auditing Rebecca Manthei – accounting and auditing Michele Gomer – accounting and auditing Linda Conway – Form 990 and NPO governance Mida Nichelson - Form 990 and NPO governance Douglas R. Wagman – Private foundations, trusts and estates Jennifer J. Peitz – Private foundations, trusts and estates We may all be contacted through contactus@lblco.comor 612-377-4404

4. Today’s Topics • UPMIFA, endowment funds, and gift instruments • When is a Pledge or Promise to Give recognized • Fraud and nonprofit organizations • Internal control issues and recommendations Please ask questions at any time

5. UPMIFA – Uniform Prudent Management of Institutional Funds Act • UPMIFA became MN law in August 2008 • Applies to Institutional Funds held by charitable organizations for charitable purposes. • Whether currently expendable or subject to restrictions • UPMIFA does not apply to: • Board-designated endowments • Funds held by trustee that is not an institution • Eliminates concept of ‘historical cost value’ • Updates the Prudence Standard

6. UPMIFA – Uniform Prudent Management of Institutional Funds Act • Provides more flexible, modernized approach to endowment expenditures • Adopts additional procedures to allow for release of endowment restrictions • VERY IMPORTANT – donor intent can override UPMIFA • A donor stipulation in a gift instrument governs. • If a donor document says thou shall not…..or only spend if…then you must follow those stipulations, and not use the broader UPMIFA interpretations.

7. UPMIFA Requires a Duty of Care with Investments • Charitable organization must consider the following when determining spending levels: • General economic conditions • Inflation and deflation • Tax consequences, if any • Role investment plays in the portfolio • Total return • Other resources • Current need vs. capital preservation • Asset’s special purpose with regard to the organization

8. UPMIFA and Spending Policies • Incorporate UPMIFA language in organization spending policy • “In making a determination to appropriate or accumulate from any endowment funds, <org name> shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following factors: • (1) The duration and preservation of the endowment fund; • (2) The purposes of the institution and the endowment fund; • (3) General economic conditions; • (4) The possible effect of inflation or deflation; • (5) The expected total return from income and the appreciation of investments; • (6) Other resources of the institution; and • (7) The investment policy of the institution.”

9. Donor commitment or pledge statement; Donor purpose and restrictions; Payment date or scheduled payment dates; Fund name and how referenced by organization; Endowment policies; Reference to endowment management policies, including possibility of pooling with other funds, and including reference to prudent investing standards; Reference to endowment spending policies; Reference to gift acceptance policies; Policy in event of inadequate funding; Policy to offset related expenses; Intent for pledge to be binding upon donor’s estate; Recognition by organization; Reporting and stewardship; Additional gifts; Possibility for release or modification of any restrictions; Method for amendment to gift instrument. UPMIFA and Gift Instruments

10. UPMIFA and Release or Modification of Restrictions • If donor consents in writing, an institution may release or modify a restriction contained in a gift instrument. • Must still be used for the charitable purpose of the organization. • Court procedures exist to facilitate a gift instrument modification. (Minn Statute 501B.31)

11. UPMIFA and Release or Modification of Restrictions • If institution determines a restriction is unlawful, impracticable, impossible to achieve, or wasteful, then • The institution, 60 days after notifying attorney general, may release or modify the restriction in whole or in part, if • The fund subject to the restriction is < $50,000 • More than 20 years have elapsed since the fund was established; and • The institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.

12. UPMIFA Checklist • Has my organization reviewed our….. • Statement of Investment Policy? • Endowment Spending Policy? • Gift Instruments? • Gift Acceptance Policy? • Financial Disclosures?

13. Pledges and Promises to Give • NFPs may enter into written or oral agreements with donors involving future nonreciprocal transfers of cash, other assets, and services. These items are sometimes referred to as pledges, a term accounting literature avoids because it may be misinterpreted. Such agreements between NFPs and potential donors should be reported as contribution revenue and receivables if such agreements are, in substance, unconditional promises to give, even if the promises are not legally enforceable. (source 5.79 of AICPA NFP audit guide)

14. Unconditional Promises to Give • An unconditional promise to give shall be recognized when it is received. However, to be recognized there must be sufficient evidence in the form of verifiable documentation that a promise was made and received. • Verifiable oral promises could be verifiable through a recording; written registers/logs; follow- up written confirmation • A communication that does not indicate clearly whether it is a promise is considered an unconditional promise to give if it indicates an unconditional intention to give that is legally enforceable. Legal enforceability refers to the availability of legal remedies, not the intent to use them. • Solicitations for donations that clearly include wording such as information to be used for budget purposes only or that clearly and explicitly allow resource providers to rescind their indications that they will give are intentions to give rather than promises to give and shall not be reported as contributions.

15. Conditional Promises to Give • Conditional promises to give, which depend on the occurrence of a specified future and uncertain event to bind the promisor, shall be recognized when the conditions on which they depend are substantially met, that is, when the conditional promise becomes unconditional. • Imposing a condition creates a barrier that must be overcome before the recipient of the transferred assets has an unconditional right to retain those promised assets. • For example, a transfer of cash with a promise to contribute that cash “if” a like amount of new gifts are raised from others within 30 days and a provision that the cash be returned if the gifts are not raised imposes a condition on which a promised gift depends.

16. Conditional Promises to Give • A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. • A transfer of assets with a conditional promise to contribute them shall be accounted for as a refundable advance until the conditions have been substantially met or explicitly waived by the donor. Some entities transfer cash or other assets with both donor-imposed restrictions and stipulations that impose a condition on which a gift depends. If a restriction and a condition exist, the transfer shall be accounted for as a refundable advance until the condition on which it depends is substantially met.

17. Conditional Promises to Give • Determining whether a promise is conditional or unconditional can be difficult if it contains donor stipulations that do not clearly state whether the right to receive payment or delivery of the promised assets depends on meeting those stipulations. It may be difficult to determine whether those stipulations are conditions or restrictions. In cases of ambiguous donor stipulations, a promise containing stipulations that are not clearly unconditional shall be presumed to be a conditional promise.

18. Conditional Promises to Give • Absence of a specified time for transfer of cash or other assets, by itself, does not necessarily lead to a determination that a promise to give is ambiguous. If the parties fail to express the time or place of performance and performance is unconditional, performance within a reasonable time after making a promise is an appropriate expectation; similarly, if a promise is conditional, performance within a reasonable time after fulfilling the condition is an appropriate expectation. Promises to give that are silent about payment terms but otherwise are clearly unconditional shall be accounted for as unconditional promises to give.

19. Intentions to Give • NFPs may receive communications that are intentions to give, rather than promises to give. • For example, communications from individuals indicating that the NFP has been included in the individual's will as a beneficiary are intentions to give. • Such communications are not unconditional promises to give, because individuals retain the ability to modify their wills during their lifetimes. • Solicitations for donations that clearly include wording such as “information to be used for budget purposes only” or that clearly and explicitly allow resource providers to rescind their indications that they will give are intentions to give rather than promises to give and should not be reported as contributions.

20. Elements of Fraud PRESSURE • Financial need • Debt • Lifestyle • Medical bills • Affairs • Gambling • Substance abuse • Layoff of spouse • OPPORTUNITY • Errors go undetected • No one looks at backup • Exceptions are made • Lax with credit cards • Lack of segregation of duties • RATIONALIZATION • “I’ll pay it back.” • “They won’t miss it.” • “I’m underpaid.” • “They make enough money.” • “I didn’t get a raise.” • “They’re doing layoffs, and I could be next.”

21. Profile of a PotentialFraudster • Long time employee • Dependable employees • Never asks for help • Works long hours • Never takes a vacation

22. Key Elements of Fraud Prevention • Prevention is the key • Realize that fraud threats are real and can happen in ANY organization • Hire the right people • Create a culture of high ethics – set the tone at the top • Eliminate opportunities to commit fraud • Have a fraud policy • Have monitoring devices in place

23. How Frauds are Most Often Detected • Tip 40% • Management review 15% • Internal audit 14% • By accident 8% • Account reconciliation 6% • Document examination 5% • External audit 5% • Surveillance/monitoring 3% • Source – 2010 Report to the Nations on Occupational Fraud and Abuse

24. Segregation of Duties • More than one person required to complete a task • No employee should be in a position to both perpetrate and conceal errors or fraud in the normal course of their duties

25. Examples of How to Segregate Duties • 1-person accounting staff • Bookkeeper • 2-person accounting staff • Bookkeeper • Controller • 3-person accounting staff • Bookkeeper • Accounting Clerk • Controller

26. How to Segregate Duties 1-Person Accounting Staff

27. How to Segregate Duties2-Person Accounting Staff

28. How to Segregate Duties3-Person Accounting Staff

29. Cash Disbursements • Executive Director or Treasurer open the bank statements and review all cancelled checks for proper vendors and signatures (typically someone who does not record checks) • Check signor keep track of check numbers and ensure none are missing when signing. Also reviewer of bank reconciliation must look for checks clearing out of sequence. • Cancel invoices to avoid duplicate payment • Compare monthly budget to actual • Consider using “Positive Pay”

30. Cash Receipts • Stamp checks “for deposit only” immediately • Document all checks received and compare to deposit slip (check log) • Consider a lock box at bank • Consider having 2 people open the mail if significant cash receipts (especially contributions) are being received • Make copies of checks • Write thank you letter and be sure to tell donors to expect them • Monthly listing of donations received to the board (or parties who are raising funds) • Deposit checks daily if possible

31. Payroll • Best control is to segregate: • Access to payroll master file • Payroll processing • Executive Director should review payroll register before and after processing • Compare to employee listing • Review payroll changes/edit report

32. Bank Reconciliations • Prepared monthly • Review of bank reconciliation • Must be done in conjunction with examination of original bank statement • What to look for • Spot check debit memo charges • Out of sequence checks • Duplicate checks • Reconciling items that carry from month to month

33. Safeguards with Limited Staff • Organizational chart is up to date • Ethics and policies have been documented and adopted • Documented internal control procedures • Employees who handle cash and checks are bonded • Budgets are used and variances investigated

34. Questions?