2014-03-04 Educating & Presenting Financial Information to Board Members
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This document provides an overview and outline for a presentation titled "Educating & Presenting Financial Information to Board Members". The presentation covers fiduciary responsibilities of board members, financial oversight responsibilities, reporting standards for non-profit organizations, roles of the board, CEO and CFO, reporting to the board, audits, and a question and answer session. It includes over 40 slides covering these topics in detail over approximately 2 hours.
2014-03-04 Educating & Presenting Financial Information to Board Members
- 1. Educating & Presenting Financial Information to Board Members Bob Bloom March 4, 2014 Thrive. Grow. Achieve. RAFFA Learning Community
- 2. OVERVIEW • Introductions • Fiduciary Responsibilities (10) • Financial Oversight Responsibilities (10) • Reporting Standards Of Nonprofit Organizations (10) • Roles Of The Board, CEO And CFO (10) • Reporting To Your Board (45) • The Audit and the 990 (10) • Q&A (10) 1
- 3. FIDUCIARY RESPONSIBILITIES Legal and Compliance Requirements • Nonprofit Organizations (NPOs) must have a governing body overseeing affairs of organization • All states require NPOs incorporated in their state to have a board of directors • IRS Form 990 contains a series of questions concerning the board and its governance practice 2
- 4. FIDUCIARY RESPONSIBILITIES Core Concepts • Bears the primary responsibilities for ensuring that organizations fulfills it obligations to the law, its members, it donors, its staff and the public • Mission, strategic directions and broad policies are set by the board in conjunction with the CEO and senior staff • Must protect the assets of the organization and provide oversight to ensure its financial, human and material resources are used appropriately to further the organization’s mission 3
- 5. FIDUCIARY RESPONSIBILITIES • Board Member Responsibilities: – Display loyalty and exercise prudence – Act in good faith and be responsible – Keep informed in order to make appropriate decisions – Monitor the organization’s financial health – Ensure the appropriate checks and balances are in place – Monitor the organization’s risk management – Avoid micro-management - be governors, not managers 4
- 6. FINANCIAL OVERSIGHT RESPONSIBILITIES • Sound financial management is among the most important responsibilities of the board • Financial Oversight responsibilities: – Review and approve annual budget – Review timely financial reports at least quarterly – Monitor actual financial results against approved budget – Oversee annual audit process and review audited financial statements – Review Form 990 5
- 7. FINANCIAL OVERSIGHT RESPONSIBILITIES • Ensure current written financial policies exist and staff are adhering to the board approved policies • Ensure adequate internal controls are in place to deter and detect fraud and misappropriation of assets and financial reports – Separation of duties – no one person should perform duties of receiving, depositing and spending its funds – Physical security of assets – CEO/CFO are responsible for internal controls 6
- 8. FINANCIAL OVERSIGHT RESPONSIBILITIES Systems that Protect NPOs • Internal controls – Goal = protection of assets and deter fraud • Accounting policies and procedures – Accounting manual – Investment policies – Reserve/board designated endowment policies • External audits 7
- 9. FINANCIAL OVERSIGHT RESPONSIBILITIES • To assess and improve financial oversight practices: – How well do we review financial reports and monitor financial performance? – Are we making relevant comparisons – e.g., performance against budget and prior year’s information? – Do we need to upgrade the board’s financial expertise? – Has the organization established a reserve fund and related policies and guidelines? 8
- 10. REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS • In order for Board members to make educated decisions – must be: – Accurate & Complete • Enable management & board to make informed decisions – Timely • Keep current on financial status – In Context • Presented in relationship to the history - Goals & Programs of your nonprofit – Appropriate • Include financial information deemed important to management & board 9
- 11. REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Principle Financial Documents • Annual audited financial statements • Monthly/Quarterly unaudited financial statements prepared by staff, in accordance with GAAP, or cash basis • Annual Budget • Other ad hoc or unique financial reports – Budget vs. actual reports (vs. prior year to date) – Cash flow projections – Departmental financial statements – Dashboard 10
- 12. REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Other Important Financial Reports • IRS Form 990 • Major Financial Commitments – Loans, Purchases, Acquisitions • Investment Statements & Policies • Reserve Policies – Operating – Capital – Program initiatives 11
- 13. ROLES – EFFECTIVE BOARD LEADERSHIP • A shared understanding of the organization’s mission and vision • A clear sense of roles and responsibilities • Trust 12
- 14. ROLES – SHARED MISSION • Establish guiding principles, policies and mission for the organization • Regular review of the strategic plan and mission (keep them fresh and relevant) • Establish metrics for success 13
- 15. ROLES – GOVERN MORE/MANAGE LESS More On Less On 1. Policy issues 1. Policy language 2. Components of corporate strategy 2. 3. Relationship between budgets and priorities Specifications of a particular program or service 3. Terms and conditions of services or contracts 4. Being a strategic asset 4. An operational overseer and evaluator 5. Governing the organization 5. Monitoring the management 14
- 16. ROLES • Budgeting: preparation, proposal, approval? • Meetings: setting agenda, facilitates the meeting? • Committee work: structure, oversees, support? • Board development: lead role, define need, supporting programs? • Board evaluation: set metrics, require evaluation, create and facilitate process? • Staff evaluations: hire, evaluate, compensate CEO, all others? • Pr, communications: promote the organization, official spokesperson? • Fundraising: guide board, develop policies, support efforts, coordinates all efforts? 15
- 17. GOVERNING BOARD RESPONSIBILITIES • Has overall responsibility for determining organization mission, and policy setting • Hires and evaluates the executive • Ensures that adequate resources are available • Approves budget; monitors financial results • Sets investment policy; monitors results • Set operating policies; monitors progress; evaluates outcomes • Responds to executive’s information • Monitors compliance • Establishes strong internal control environment; monitors adequacy of controls (auditor involved); follows up implementation of recommendations 16
- 18. EXECUTIVE OFFICER RESPONSIBILITIES • Executive Board policy, including detail planning, establishes measurement standards • Hires, monitors, and evaluates staff & volunteers (including finance); delegates as appropriate • Uses resources as directed by Board; participates in resource development • Creates budget to implement Board policy; provides adequate and timely financial information to Board • Manages investments and other assets as directed (may delegate to some extent); safeguards assets (including adequate insurance) • Implements operating policies • Keeps Board informed, especially when problems impend • Ensures compliance with laws & regulations (including tax, donor restrictions, OMB) • Operates strong internal control system; administers ethical standards; implements auditor recommendations 17
- 19. FINANCIAL OFFICER RESPONSIBILITIES • Is aware of organization mission and policies • Hires and monitors financial staff • Assists Executive as requested • Assists Executive in creation of budget; monitors progress; alerts Executive to impending problems • Keeps detailed investment records; monitors performance • Assists Executive as requested; keeps financial records • Keeps Executive informed (also Board, as requested by Executive) • Monitors compliance with laws and regulations • Designs and operates internal control system; implements auditor recommendations 18
- 20. PITFALLS OR OPPORTUNITIES • Chose members for values and skills rather than friendship or connections • Avoid conflicts and personal agendas • Perform self assessments • Reward motivation; recognized enthusiasm and outstanding performance 19
- 21. IDEAS FOR PRODUCTIVE MEETINGS • Mission-based meetings • Have the right presiding officer • Frequency/Cycles • Preparation: Agenda/Consent Agenda/Reports • Minutes • Evaluation/Feedback • ENJOY! 20
- 22. REPORTING TO YOUR BOARD 21
- 23. REPORTING TO YOUR BOARD • Foundation – Financial Report • Community Based Organization – Financial Report • Non Profit Organization – Consolidated Financial Statement • Association – Budget • Private School – Dashboard – Statement of Activities 22
- 24. REPORTING TO YOUR BOARD • Be transparent • Be consistent from period to period • Reconcile cash to GAAP • Check your work before you distribute • Be a good messenger – send materials out well before the Board meeting, never last minute • Tell the whole story • Be direct 23
- 25. REPORTING TO YOUR BOARD • PROJECTIONS – 1, 3 OR 5 YEAR PLANS – Enrollments / memberships / registrants / students / performances – Contracts, proposals, pipeline, booked business in future – Contributions / capital campaign / annual funds • METRICS – Current ratio, investment returns , investment policy, spending – Program % of total expenses – Enrollments / memberships / registrants / students / performances / average cc contribution / average contribution – Employees – Square footage – Departments 24
- 26. REPORTING TO YOUR BOARD Cash Flow Projection • Monthly changes in cash for operations • Receipts – Grants – Contributions – Membership fees • Disbursements – – – – – Salary Rent Operating expenses Debt service Capital expenditures 25
- 27. REPORTING TO YOUR BOARD • Operating revenue and expenses (vs. budget) – Unrestricted revenue – Plus: Release from restricted net assets to unrestricted net assets – Detailed expenses (in comparison to budget) • Departmental revenue and expenses – Details by Department (or Groups) for Budget Purposes • Revenues by department • Expenses by department – Direct expenses – Indirect allocated expenses – Allocation of depreciation 26
- 28. REPORTING TO YOUR BOARD Characteristics of Financially Healthy Nonprofits • Ready source of cash (good liquidity) • Sufficient resources to ensure stable programming • Good revenue mix (earned income vs. contributions) • Positive net asset balances that continue to grow each year • If there is a deficit, surplus of prior years cover it • Reasonable “overhead” • Timely reporting (mgm’t and board hold themselves accountable for financial stability) • Operating reserves or a working plan to establish one • Committed to income-based spending POINT THIS OUT TO YOUR BOARD 27
- 29. REPORTING TO YOUR BOARD Signs of Financial Trouble • Spends more money than received or earned • Payables are growing faster than operations • Old accounts receivables • Poor cash flow – consistently asking for grant advances • Poor or late financial reporting • Growing or unreasonable overhead or costs of fundraising • Restricted net assets are in excess of liquid assets • Mgm’t and Board focus is lack of funds • Net asset balances continue to decrease each year POINT THIS OUT TO YOUR BOARD 28
- 30. THE AUDIT AND THE 990 29
- 31. THE AUDIT • Audit Committee Roles and Responsibilities – The Audit Committee Charter • Do We Change Auditors? • Partner Rotation • Dealing with New Auditors 30
- 32. AUDIT COMMITTEE CHARTER • • • • • • • • • • • • Purpose Authority Composition Meetings Responsibilities Financial Reporting Internal Controls Internal Audit External Audit Compliance Reporting Responsibilities Other Responsibilities SEE ATTACHED AUDIT COMMITTEE TOOLKIT 31
- 33. DO WE CHANGE AUDITORS? • NPOs change auditors for 3 reasons: – Services – Fees – Policy • Common misconception – Sarbanes Oxley Does NOT mandate change of Auditors • How do services break down: – Not enough partner/manager involvement – Too much turnover at ALL levels – Lack of responsiveness to your needs – Not experienced with NPOs 32
- 34. DO WE CHANGE AUDITORS (continued) • Not enough Partner/Manager involvement – lack of responsiveness • Firm is not experienced with NPOs • Firm can not make decisions • Too much turnover • Too many surprises • Fees 33
- 35. PARTNER ROTATION • Sarbanes Oxley: §203 requires (for public companies) that the lead audit partner and audit partner responsible for reviewing the audit (concurring partner) to rotate off the audit every five years • Other partners will be permitted to serve a maximum of seven consecutive years with a two year time out period. Such audit partners include partners of registrant company, parent company and those who lead audit of a subsidiary whose assets and revenue constitute 20% or more of the consolidated total 34
- 36. CHANGING AUDITORS • Audit Committee should adopt a policy to evaluate auditor • Policy could mirror Sarbanes Oxley and mandate partner or manager rotation • Could evaluate auditors every 5 to 10 years • Could mandate change of auditors every 5 years, or 10 years • Be flexible 35
- 37. NEW AUDITORS – WHAT WILL BE REQUIRED • At Preliminary - Risk Assessment – Understanding the entity and environment – General applications IT controls – Process memos or flowcharts: • Cash receipts cycle • Cash disbursement cycle • Payroll cycle • Investment cycle • Fixed asset cycle • Financial statement preparation and closing cycle • Walkthroughs of each cycle – sample transactions cradle to grave 36
- 38. NEW AUDITORS – WHAT WILL BE REQUIRED (continued) • Control testing of: – Cash receipts – Cash disbursements – Payroll • At Year End – – Substantiation of Accounts – Evaluation – Analytical and Reasonableness – Disclosure • Review of Financial Statements and disclosures 37
- 39. NEW AUDITORS* – RECOMMENDATIONS • Be prepared on time – establish a time line • Good communication with auditor throughout the year • Good communication with Audit Committee • Close your books and prepare interim GAAP FS, on a monthly/quarterly basis • Keep your key schedules current – Cash, AR, Investments, fixed assets, AP/AE, other liabilities and net assets. • Perform a pre-audit • Discuss fees and change orders in advance * or with your current auditors 38
- 41. APPENDICES Appendix I – Sample Whistleblower Policy (Raffa) WB Toolkit (AICPA)/WB Firms (Raffa) Sample Conflict of Interest Policy (excerpt from Board Source) Appendix II – Tips for Creating and Elements of a Good Document Retention Policy (Unknown) Appendix III – Best Practices Checklist (Independent Sector) Appendix IV – Checklist for Accountability (Independent Sector) Appendix V – Executive Summary of the US Senate Finance Committee Report (The Panel on the Nonprofit Sector) Appendix VI – State Governance Proposals and Bills (National Council of Nonprofit Associations) Appendix VII – CA Nonprofit Integrity Act (Chronicle of Philanthropy) Appendix VIII– Parts of Audit Committee Toolkit (Raffa) 24 40
- 42. APPENDICES Appendix IX - Trust is not an internal control, By Olson, Cheryl R, October 1, 2003, Publication: The CPA Journal, Wednesday, October 1 2003 Source: http://www.allbusiness.com/professionalscientific/accounting-tax/1157058-1.html#ixzz1XAHNyuew Appendix X – Committee of Sponsoring Organizations of the Treadway Commission – Internal Control Integrated Framework, Guidance on Monitoring Internal Control Systems Appendix XI – Not-for-Profit/Exempt Organizations Blog: Non-Profit Lawyers & Attorneys: Proskauer Rose Law Firm: Tax & Corporate Law for 501c(3) Organizations – Is the Foreign Corrupt Practices Act on your Radar Screen, By Emily Stern, posted August 18, 2010 http://www.irs.gov/pub/irs-tege/governance_practices.pdf 24 41
- 43. CONTACT INFORMATION A. Robert Bloom Raffa, P.C. 1899 L Street, NW, Suite 900 Washington, DC 20036 Visit our Web Site at: For information for and about nonprofits visit www.iknow.org Phone: Fax: Direct: e-mail: 202-822-5000 202-822-0669 202-955-6709 bbloom@raffa.com www.raffa.com To become or find a nonprofit board member visit www.boardnetusa.org © RAFFA, P.C., September 2011 This information may not be reproduced without written permission from Raffa, P.C., 1899 L Street, NW, Suite 900, Washington, DC 20036 (202) 822-5000 42
- 44. THANK YOU! 43