2014-03-04 educating & presenting financial information to board members

Educating & Presenting Financial Information to

Board Members

Bob Bloom March 4, 2014

RAFFA Learning Community

Thrive. Grow. Achieve.

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)

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Presenter

Presentation Notes

BB introduction RAFFA

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

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Presentation Notes

Why do we care


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

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• 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

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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

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• 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

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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

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• 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?

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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

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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

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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

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ROLES – EFFECTIVE BOARD LEADERSHIP

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• A shared understanding of the organization’s mission and vision

• A clear sense of roles and responsibilities

• Trust

Presenter

Presentation Notes

-Perhaps more than anything else, board leadership is about achieving a common sense among board members and staff of where the organization is going. Without a shared understanding and a passion for the mission, vision and values of the organization, the members of the board can not purposefully set, accomplish or oversee organization goals. Even members of the board that have served together for years may have very different ideas about the organization and its desired future. Take the time to convene mission-focused board retreats and engage in activities to develop consensus - The board and top management need a shared understanding of the very different roles they play in leading the organization. What is policy and what is process? Or what is governance and what is management. Carver model…. And shift since Sarbanes That line – c-3 boards go below it to policy – WHY --- c-6 management tends to go above it, usurping the board’s critical role. -TRUST Lack of trust often means a lack of transparency that is no more than ever necessary to fulfill fiduciary responsibilities. You build trust through open communications. If you are a CEO it means keeping your chair informed on a regular basis about opportunities, challenges and problems but you must feel that the board is there to cooperate and advise and then to set policies that are in the best interest of the organization.

ROLES – SHARED MISSION

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• 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

Presenter

Presentation Notes

13 -The Board chair in cooperation with the CEO should work with the board to establish this overall strategic plan. - The CEO and the staff should be the ones carrying it out on a day to day basis employing at time detailed planning to do so. In addition, they need to provide the administrative support for the board’s policy making activities… providing drafts or guidelines for consideration by the board works.

ROLES – GOVERN MORE/MANAGE LESS

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More On 1. Policy issues 2. Components of

corporate strategy 3. Relationship

between budgets and priorities

4. Being a strategic asset

5. Governing the organization

Less On 1. Policy language 2. Specifications of a

particular program or service

3. Terms and conditions of services or contracts

4. An operational overseer and evaluator

5. Monitoring the management

ROLES

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• 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?

Presenter

Presentation Notes

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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

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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

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

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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

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IDEAS FOR PRODUCTIVE MEETINGS

• Mission-based meetings • Have the right presiding officer • Frequency/Cycles • Preparation: Agenda/Consent

Agenda/Reports • Minutes • Evaluation/Feedback • ENJOY!

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Presenter

Presentation Notes

Board decisions should be made in response to this basic question– will doing this help to fulfill our mission better than an alternative that may be available? Consistently remind the board about mission Must be a leader who is respected by the members and the staff – assertive enough to keep the meetings focused on the agenda yet accommodating enough to make everyone feel welcome and to ensure everyone is involved The number of meetings each year will depend on many factors including geography and function. Board structure – through committee , exec committee --- Do you need to keep a close eye on the organization. Don’t simply follow tradition fewer board meetings means more communications (written reports, proposals for actions, info on upcoming matters, general updates on program). [Explain IRS new 990 form first draft and what happened to “how many board meetings a year do you have” CYCLES – routine functions can be spread throughout the year and time allocated accordingly. Budget approval or operating plan, audit report are obvious ones. Review of insurance, report from nominating committee may be less obvious. Annual meeting may be to form new committees or vote on new officers. Bring in a speaker once a year – bring in a representative from the constituency you serve. Anyone know what a consent agenda is? Written set of proposals identified by the chair that required board action but not discussion or debate – minutes, financial reports, resolutions thanking supporter, dates of future meetings. Send it out in advance, put in as one of the first items on the agenda, chair should ask if there are any items that will need discussion, remove these items and vote and move on AGENDA – Important items – keep to the front of the meeting. – give them appropriate time Reports (finance, committee, CEO, staff, program, legal, etc) should be circulated in advance. Be careful not to have all these written reports be then given orally. Summarize and give your board time to ask questions and to discuss them. Remember the board has a right to be informed and to ask pertinent questions --- and you as the CEO or the Board Chair have the obligation to ensure they do so Another great idea is to provide Dashboards – a synopsis of vital signs of the org (often in graphic form) – include historic comparisons and/or industry benchmarks Create a compendium of Board approved policies -- good orientation for new members – Board book Minutes should report what was done – not what was said. Their purpose is to provide an official record of board actions. Once approved, they become a legal documents and any policies approved become the official policies. As such wording of any motion is critical. Stay away from very detailed minutes quoting what everyone has said. Be concise but accurate. Evaluations Best way to ensure quality meetings is to evaluate them and determine the ways to improve them. Have the board spend a few minutes at the end of each meeting reviewing the meeting to identify what went well and what din not. If no one speaks have them submit written evaluations. Be certain to clarify that the evaluations are not to be personal or critical but constructive ENJOY THE PROCESS – respect, humor -- schedule time for social to build relationships and friendships

REPORTING TO YOUR BOARD

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• Foundation – Financial Report

• Community Based Organization – Financial Report

• Non Profit Organization – Consolidated Financial Statement

• Association – Budget

• Private School – Dashboard – Statement of Activities

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• 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

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• 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

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Cash Flow Projection

• Monthly changes in cash for operations

• Receipts – Grants – Contributions – Membership fees

• Disbursements – Salary – Rent – Operating expenses – Debt service – Capital expenditures

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• 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

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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

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POINT THIS OUT 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

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POINT THIS OUT TO YOUR BOARD

THE AUDIT AND THE 990

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THE AUDIT

• Audit Committee Roles and Responsibilities – The Audit Committee Charter

• Do We Change Auditors? • Partner Rotation • Dealing with New Auditors

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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

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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

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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

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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

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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

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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

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• 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

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NEW AUDITORS – WHAT WILL BE REQUIRED (continued)

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

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* or with your current auditors

QUESTIONS & ANSWERS

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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)

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Presenter

Presentation Notes

AGENDA – Important items – keep to the front of the meeting. – give them appropriate time Reports (finance, committee, CEO, staff, program, legal, etc) should be circulated in advance. Be careful not to have all these written reports be then given orally. Summarize and give your board time to ask questions and to discuss them. Remember the board has a right to be informed and to ask pertinent questions --- and you as the CEO or the Board Chair have the obligation to ensure they do so Another great idea is to provide Dashboards – a synopsis of vital signs of the org (often in graphic form) – include historic comparisons and/or industry benchmarks Create a compendium of Board approved policies -- good orientation for new members – Board book Minutes should report what was done – not what was said. Their purpose is to provide an official record of board actions. Once approved, they become a legal documents and any policies approved become the official policies. As such wording of any motion is critical. Stay away from very detailed minutes quoting what everyone has said. Be concise but accurate. Evaluations Best way to ensure quality meetings is to evaluate them and determine the ways to improve them. Have the board spend a few minutes at the end of each meeting reviewing the meeting to identify what went well and what din not. If no one speaks have them submit written evaluations. Be certain to clarify that the evaluations are not to be personal or critical but constructive ENJOY THE PROCESS – respect, humor -- schedule time for social to build relationships and friendships

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/professional-scientific/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

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Presenter

Presentation Notes

http://www.irs.gov/pub/irs-tege/governance_practices.pdf

© 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

For information for and about nonprofits visit

www.iknow.org

To become or find a nonprofit board member visit

www.boardnetusa.org

CONTACT INFORMATION

A. Robert Bloom Phone: 202-822-5000 Raffa, P.C. Fax: 202-822-0669 1899 L Street, NW, Suite 900 Direct: 202-955-6709 Washington, DC 20036 e-mail: [email protected] Visit our Web Site at: www.raffa.com

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THANK YOU!

2014-03-04 educating & presenting financial information to board members

Documents

financial performance

financial status

organizations financial

financial oversight

boards financial expertise

management board

board approved policies

important responsibilities