Not-for-Profit Entities: 2012/2013 Audit & Accounting Considerations

1. Not-for-Profit Entities: 2012/2013 Audit & Accounting Considerations A Governmental Audit Quality Center and Not-for-Profit Expert Panel Web Event November 1, 2012

2. Administrative Notes Troubleshooting Tips • No Audio? • Ensure that your computer speakers are turned on and that the volume is turned up. • Check to ensure that audio streaming is enabled on your computer • If the presentation slides stop advancing during the presentation you should: • Hit the red “Exit” button located to the right of the main screen; this will close out of the presentation and re-launch the webcast • If you are still having audio or other technical difficulty. • Check with your IT personnel at your firm. • Call the AICPA Service Center at 888.777.7077 2

3. Administrative Notes • We encourage you to submit your technical questions – please limit your questions to the content of today’s program. • You can submit your questions at any time during this Web event by clicking on the “Q &A” tab on the bottom of your screen. • You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab. • This event is being recorded and will be posted in an archived format to the GAQC Web site. 3

4. Continuing Professional Education To document your participation and obtain CPE, you must click “OK” on 75% of pop-up markers. There will be a total of 8 participation pop-up markers during the event (i.e., about 1 every 15 minutes). To track your progress on the pop-up markers, click on the Participation tab on lower portion of screen. At the end of today’s presentation we will provide steps for obtaining your CPE certificate. Contact the Service Center for help with obtaining CPE at 888.777.7077 or service@aicpa.org. If you are not receiving CPE for this event, ignore the pop-up markers if they appear. 4

5. Presenters Frank Jakosz, CPA Frost, Ruttenberg & Rothblatt, P.C. Stuart J. Miller, CPA Crowe Horwath LLP Andrea Wright, CPA Johnson Lambert LLP Moderating Chris Cole, CPA AICPA 5

6. AICPA Not-for-Profit Expert Panel The AICPA Not-for-Profit (NFP) Expert Panel is comprised of member volunteers who specialize in the practice of NFP accounting or auditing. Expert Panel Members represent the AICPA NFP community to: • Provide input to the Financial Accounting Standards Board (FASB) Not-for-Profit Advisory Council on emerging industry issues for NFPs. • Monitor and report on FASB standard setting projects and participate in the development of comment letters on standards that impact NFPs. • Propose and develop articles, white papers and publications that address practice issues for NFPs. • Expert Panel information, publications and meeting minutes can be found at http://www.aicpa.org/InterestAreas/FRC/IndustryInsights/Pages/Expert_Panel_Not_for_Profit_Entities.aspx

7. What We Will Cover NFP Trends Challenges relating to new auditing standards Challenges relating to the application of accounting standards in the NFP environment and recent FASB standard-setting activity GAQC Resources 7

8. NFP Trends

9. Payments in Lieu of Taxes (PILOT) • State and local governments’ attempt to raise additional revenues • Nature of entity • Ownership or use of property • Primarily affects higher education institutions • Replacement of foregone property tax revenues to local governments • Offsetting costs of providing services to institutions • Hospitals, churches and other NFPs

10. Payments in Lieu of Taxes (PILOT) • Historically, PILOT payments have been “voluntary” • Some cities attempting to change to mandatory payment for services • Increasing percentage of organizations making some form of payment • Variety of type of ‘payments’ and arrangements • Economic Impact Studies by organizations • Cost sharing /’good neighbor’ practices • Taking responsibility for waterways, fire stations, security equipment, etc.

11. Payments in Lieu of Taxes (PILOT) • Some accounting, reporting and audit issues • For services rendered? • Current or past • An amount to accrue and as of when? • Commitment disclosure? • Contribution?

12. Cause Related Marketing • May be known as: • Cause-related marketing programs • Cause-related marketing campaigns • How they work An agreement between a business and a nonprofit to raise money for a particular cause. The business expects to profit by selling more products and the nonprofit benefits both financially and by having a higher public profile as a result of its business partner’s marketing efforts. • An Example: American Express and the restore the Statue of Liberty campaign

13. Cause Related Marketing • The Accounting Considerations • Program • Fundraising • Management and general • All of the Above • Types of cause-related marketing programs (not all inclusive) • Fundraising/licensing component • Sponsorship/licensing component • Licensing with royalty payments • 3rd party charitable sales/licensing component • Unsolicited online component (social media) • Hybrid arrangements

14. New Market Tax Credit (NMTC) Program • Established by Congress in 2000 • Spur new or increased investments into operating businesses and real estate projects located in low-income communities. • Since inception, ~700 awards of ~ $33 billion in tax credits • More information: www.cdfifund.gov/what_we_do/programs_id.asp?programID=5

15. How it Works

16. NMTC –The Details • Investors to receive a tax credit against their federal taxes in exchange for making equity investments in specialized financial institutions (community development entities, or CDEs) • Must make investments in low-income communities; wide variety of allowable activities (loans, equity investments • NFPs that serve low-income communities may receive NMTC funding for capital projects • Funding from CDEs is often in the form of loans or equity investments in NFPs’ real estate projects. • The transactions and underlying agreements are complex and have specific audit risks that should be considered by the auditor of the NFP.

17. Audit Risks • Proper accounting for the loan or equity investment by the NFP in the investment fund • Proper accounting for the loan (note payable) or equity investment the NFP receives from the CDE • Risk that the NFP will not include appropriate disclosures related to the NMTC Program funding • Future funding commitments related to the loan/equity investment by the NFP to the investment fund • Standard disclosures related to loan or equity investment from the CDE • Disclosure of the put/call option at end of tax credit period • Accounting for the exercise of the put/call

18. LC3 organizations • What are they? • Low-profit limited liability companies • Business structure requirements • Must significantly further the accomplishment of one or more charitable or educational purposes • No significant purpose is the production of income or appreciated property • Must not be organized to accomplish any political or legislative purposes. • Mirrors definition of Program Related Investments (PRIs)

19. Challenges Relating to New Auditing Standards

20. SAS No.118 • American Institute of Certified Public Accountants Auditing Standards (SAS) No. 118: Other Information in Documents Containing Audited Financial Statements • This SAS addresses the auditor’s responsibility in relation to other information in documents containing audited financial statements and the auditor’s report thereon. • In the absence of any separate requirement in the particular circumstances of the engagement, the auditor’s opinion on the financial statements does not cover other information, and the auditor has no responsibility for determining whether such information is properly stated. • This SAS establishes the requirement for the auditor to read the other information of which the auditor is aware because the credibility of the audited financial statements may be undermined by material inconsistencies between the audited financial statements and other information. • Annual “Glossy” reports fall into this category

21. SAS No. 119 • American Institute of Certified Public Accountants Auditing Standards (SAS) No. 119: Supplementary Information in Relation to the Financial Statements As a Whole • This SAS addresses the auditor’s responsibility when engaged to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. • The information covered by this SAS is presented outside the basic financial statements and is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. • This SAS also may be applied, with the report wording adapted as necessary, when an auditor has been engaged to report on whether required supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. • The Schedule of Expenditures of Federal Awards (SEFA)falls under SAS No. 119 (Click here to access GAQC SEFA Practice Aids which have been updated for SAS No. 119 and are open to the public)

22. SAS No. 119 • SAS No. 119 establishes presumptively mandatory requirements that certain conditions are met in order to opine on whether supplementary information is fairly stated in relation to the financial statements as a whole. These conditions include that: • The supplementary information was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. • The supplementary information relates to the same period as the financial statements. • The financial statements were audited, and the auditor served as the principal auditor in that engagement. • Neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements. • The supplementary information will accompany the entity’s audited financial statements, or such audited financial statements will be made readily available by the entity.

23. SAS No. 119 • SAS 119 establishes a presumptively mandatory requirement that the auditor obtain the agreement of management that it acknowledges and understands its responsibilities: • For the fair presentation of the supplementary information in accordance with the applicable criteria. • To provide the auditor with certain written representations. • To include the auditor’s report on the supplementary information in any document that contains the supplementary information and that indicates that the auditor has reported on such supplementary information. • To present the supplementary information with the audited financial statements or, if the supplementary information will not be presented with the audited financial statements, to make the audited financial statements readily available to the intended users of the supplementary information no later than the date of the auditor’s report.

24. SAS No. 120 • SAS No.120, Required Supplementary Information, the auditor’s responsibilities with respect to information that a designated accounting standard setter requires to accompany the basic f/s. • Defines “designated accounting standard setter: as a body designated by the AICPA council to establish GAAP (i.e., the FASB, GASB, IASB and the Federal Accounting Standards Advisory Board) • Defines “required supplementary information” as information required to accompany an entity’s basic f/s; • Establishes the auditor’s objectives when a designated accounting standards setter requires information to accompany the basic f/s; • Requires auditors to apply certain specified procedures to the required supplementary information; and • Establishes the reporting requirements with respect to required supplemental information. • Applicable to GASB type schedules

25. Clarity changes (other than group audits) • SAS 122- supersedes all prior standards • First redrafting of US GAAS since 1972 • Effective for audits of years ending on or after December 15, 2012 with early adoption not permitted • Re-codification and renumbering of AU sections • New format • Introduction-scope, effective date • Objective • Definitions • Requirements • Unconditional (must) • Presumptively mandatory (should) • Application and other explanatory material

26. Forming an opinion and reporting on financial statements • Requires auditor to describe management’s responsibility for the preparation and fair presentation of the financial statements in greater detail • Requires use of headings throughout auditor’s report • Prior to issuance, communicate with those charged with governance the circumstances that lead to expected modification to the auditor’s opinion and the proposed wording of the modification. • Modification to the Opinion in the Auditor’s report

27. Explanatory paragraph replaced • Emphasis-of-matter paragraph • Going concern • Consistency of financial statements • Subsequent events (could also be other-matters paragraph) • Other-matters paragraph • Required supplementary information • Reporting in compliance with contracts or regulations • Restricting the use of the auditor’s report • Other information in documents containing audited financial statements • GAQC currently working to update all report illustrations in the AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits

28. Special purpose framework • Formerly Known as “other comprehensive basis of accounting” or OCBOA • Cash • Tax • Regulatory (statutory) • Management required to agree to include equivalent disclosures by GAAP as part of engagement terms

29. Special Purpose Framework • Two new AICPA publications (both include the latest clarity standards): • Accounting and Financial Reporting Guidelines for Cash and Tax Basis Financial Statements • Applying OCBOA in State and Local Government Financial Statements • GAQC holding separate Web event (open to the public) titled, The New AICPA OCBOA Publications: What They Are and How They Apply to Governments and Not-for-Profits, to be held on Wednesday, November 7, 2012, from 1:00PM - 3:00PM (Eastern Time) – click here to learn more.

30. Client acceptance and continuance • If scope limitation imposed by management or those changed with governance of an entity that is not required to have an audit by law or regulation such that the auditor anticipates issuing a disclaimer- auditor should not accept the engagement

31. Consideration of Laws and Regulations • Auditor is required to inspect correspondence with regulatory authorities • Introduction of inherent limitations of an audit vs. no assurance

32. Communications • With those charged with governance • Ineffective communication may be scope limitation or a deficiency- see AU-C 260 • Internal control-New requirements • Communicate orally or in writing to management other deficiencies in internal control identified during the audit that have no been communicated to management by other parties, that are in the auditor’s judgment warrant management’s attention • Include in written communication an explanation of the potential effects of material weaknesses and significant deficiencies

33. Audit evidence • Legal letters • External confirmations • Opening balances • Unable to perform procedures on sample item • Substantive analytical procedures- required documentation • Estimates • Related party transactions • Specialists Materiality and AU-C 320 • Performance Materiality- adjustment of materiality set at the financial statement level to the assertion level

34. Use of Specialists • Management’s specialists (AU-C 500) • Specialists whose work is used by the entity in preparing the financial statements • Auditor’s specialists (AU-C 620) • Specialists whose work is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.

35. Group Audits • AU-C Section 600: Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) • .11 For purposes of GAAS, the following terms have the meanings attributed as follows: • Component. An entity or business activity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements. • Component auditor. An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. A component auditor may be part of the group engagement partner’s firm, a network firm of the group engagement partner’s firm, or another firm.

36. Group Audits • AU-C Section 600: Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) • .07 Audit risk is a function of the risk of material misstatement of the financial statements and the risk that the auditor will not detect such misstatements. In a group audit, detection risk includes the risk that a component auditor may not detect a misstatement in the financial information of a component that could cause a material misstatement of the group financial statements and the risk that the group engagement team may not detect this misstatement.

37. Group Audits • Materiality • .31 The group engagement team should determine the following: • Materiality, including performance materiality, for the group financial statements as a whole when establishing the overall group audit strategy. • Whether, in the specific circumstances of the group, particular classes of transactions, account balances, or disclosures in the group financial statements exist for which misstatements of lesser amounts than materiality for the group financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the group financial statements. In such circumstances, the group engagement team should determine materiality to be applied to those particular classes of transactions, account balances, or disclosures. • Component materiality for those components on which the group engagement team will perform, or request a component auditor to perform, an audit or review. Component materiality should be determined taking into account all components, regardless of whether reference is made in the auditor’s report on the group financial statements to the audit of a component auditor. To reduce the risk that the aggregate of uncorrected and undetected misstatements in the group financial statements exceeds the materiality for the group financial statements as a whole, component materiality should be lower than the materiality for the group financial statements as a whole, and component performance materiality should be lower than performance materiality for the group financial statements as a whole. • The threshold above which misstatements cannot be regarded as clearly trivial to the group financial statements.

38. Case in Point • We have a client that has 30 locations/entities in 10 different countries. All 30 entities are about the same size and we have calculated overall materiality to be $1,000,000. Tolerable Misstatement equals $750,000. • Accounts receivable equals $700,000 per location/entity, thus AR = $21,000,000. • Conclusion A: AR is immaterial at each location based on OM and TM, therefore the risk of material misstatement is minimal and we will pass further testing. • Conclusion B: AR is immaterial at each individual location, but material to the overall financial statements so we will test AR at 20 of the 30 locations and apply analytics to the other locations based on our risk assessment process.

39. Group Audits – Effective with new clarified audit standards What is a Group Audit? • Factors to consider: • Governance structure • Management structure • How centralized is financial reporting • Centralized operations • Physical locations • Control environment • Nature of activity • Uniqueness of entity • Other indicators: • Physical location of assets • Financial information provided by others • Existence of multiple G/L or other financial information • If risk assessments vary or legal or regulatory differences exist

40. Group Audits • When will a group audit exist based on the previous indicators? • When another audit firm is used to perform part of the audit (always) • When auditors in the same firm but different offices audit different sections of an audit based on any of the indicators (generally) • Chicago office audits the primary government • Springfield office audits the foundation which is a discretely presented component unit • When a client entity has two distinct operating locations that operate independently (generally) • Example – The University has 2 different campuses that are operated and are accounted for separately as well as combined. This would be a group audit • When the client has blended component units which are legally separate entities audited by the same Crowe office (generally) • Group audits will be prevalent within governmental engagements.

41. SAS No. 126 • Statement on Auditing Standards No. 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern • Issue Date: July 2012 • Effective Date: This Statement on Auditing Standards is effective for audits of financial statements for periods ending on or after December 15, 2012. • Supersede SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern

42. SAS No. 126 • SAS No. 126 addresses the auditor’s responsibilities in an audit of financial statements with respect to evaluating whether there is substantial doubt about the entity's ability to continue as a going concern. • This SAS applies to all audits of financial statements regardless of whether the financial statements are prepared in accordance with a general purpose or a special purpose framework. • This SAS does not apply to an audit of financial statements based on the assumption of liquidation (for example, when [a] an entity is in the process of liquidation, [b] the owners have decided to commence dissolution or liquidation, or [c] legal proceedings, including bankruptcy, have reached a point at which dissolution or liquidation is probable).

43. SAS No. 126 • The following are the most significant changes to the requirements in prior standards: • SAS-126 requires the auditor to obtain written representations from management if conditions or events have been identified that indicate there could be substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. • SAS-126 requires the auditor to reassess the going-concern status of the entity by performing certain procedures when determining whether to eliminate the going-concern emphasis-of-matter paragraph from a reissued report.

44. FASB Project • The Liquidation Basis of Accounting and Going Concern (Formerly Disclosures about Risks and Uncertainties) • Phase I: The objective of this phase of the project is to provide guidance about how and when an entity should apply the liquidation basis of accounting. • Phase II: The objective of this phase of the project is to provide guidance about (a) whether and how an entity should assess its ability to continue as a going concern and (b) if so, the nature and extent of any related disclosure requirements.

45. Clarity section of AICPA.org Standards Videos Mapping from extant to new standards More Listen to archived GAQC member web events Implementing the Clarified SASs in a Governmental and Not-For Profit Audit Environment: What, When, and How? Understanding the Potential Impacts of the New Group Audits SAS on Your Governmental and NPO Audit Engagements Getting to Know the AICPA Clarity Standards

46. OMB Circular A-133 Compliance Supplement • Final issuance Supplement issued in July 2012 • Includes 243 individual programs • Accessing the Final Supplement • Upon issuance, go to OMB's Web site at "Grant Management Circulars" link: www.whitehouse.gov/omb/grants/(scroll down to the "Audit Requirements" section) • Both current and prior Supplements available (use the correct version!) • OMB previously provided a draft Supplement for Audit “Planning” Purposes • Previously posted on GAQC Web page and open • Do not use the draft now that the final is issued

47. OMB Circular A-133 Compliance Supplement • Program changes by the numbers • New, deleted, changed programs • Updated Matrix in Part 2 for programmatic changes • Review Appendix V for details of all changes made • Don’t overlook Appendix VII • Effect of Recovery Act Awards on major program determination Guidance • List of Recovery Act programs not covered by Parts 4 or 5 but that could be subject to a single audit and list of Recovery Act programs not subject to single audit • Late Filings and Low-Risk Auditee Status • Treatment of Large Loan and Loan Guarantee Programs

48. OMB Circular A-133 Compliance Supplement • GAQC members can listen to an archived Web event titled, 2012 OMB Compliance Supplement and Related Best Practice Tips • The event is held annually and provides participants with an overview of important information in the latest Compliance Supplement and also provides tips for ensuring that auditors are avoiding common pitfalls associated with using the Supplement.

49. Technical Update – Government Auditing Standards • Final 2011 edition issued • Main change relates to independence, especially when performing nonaudit services • Very few changes made from interim version previously posted • Effective date same as AICPA clarity • For financial audits for periods ending on or after 12/15/12 • No early implementation • However, auditors need to be independent for entire audit period • New Yellow Book independence requirements for nonaudit services may need to be considered as early as 1/1/12

50. Technical Update – Government Auditing Standards • Resources for 2011 Yellow Book (should be referred to in other AICPA offerings – all open to the public) • Archived GAQC Web event, The New 2011 Yellow Book: What You Need to Know Now, provides a more in-depth discussion on 2011 Yellow Book • GAQC practice aid titled, 2011 Yellow Book Independence—Nonaudit Services Documentation Practice Aid(free PDF version for AICPA members) • Archived GAQC Web event, Understanding the AICPA's Yellow Book Independence Practice Aid for Performing Nonaudit Services • Ethics comparison of AICPA standards versus GAO