Board Leadership Seminar:

The Roles of the Finance and Audit Committees

October 13, 2015

Presented by: Nancy J. Snyder, CPA

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Recent changes and where we are now…

New York Nonprofit Revitalization Act effective 7/1/2014 (www.charitiesnys.com/nonprofit_rev_act.jsp)

Executive Order #38, June 30, 2014 fiscal year ends are first filers-excluding Nassau County

James Sheehan, Chief Charities Bureau(former NYS Medicaid Inspector General)

NPRA

Audit, review and compilation requirements revenue thresholds changed 7/1/14-6/30/17

Up to $250k - no audit or review required Between $250k and $500k - CPA review required More than $500k - CPA audit required

7/1/17-6/30/21 Up to $250k - no audit or review required Between $250k and $750k - CPA review required More than $750k - CPA audit required

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NPRA (Continued)

Audit, review and compilation requirements revenue thresholds changed (Continued) After 7/1/21

Up to $250k - No audit or review required Between $250k and $1M - CPA review required More than $1M – CPA audit required

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NPRA (Continued)

Every NFP must comply with NPRAConflicts of Interest for directors

Disclose prior to election Any director with an interest in a related

party transaction must disclose material facts to board or AC

No director with an interest in a related party transaction may be present in deliberation or voting

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NPRA (Continued)

Conflicts of Interest (Continued) No director may be involved in related party

transaction in which the director has an interest

Each director must submit to the secretary at the time of election, and annually thereafter a signed written statement identifying:Any entity which the director is an O, D, T, M, O, E

with which the organization has a relationship, and

Any transaction in which organization is a participant and in which the director might have a conflicting interest

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NPRA (Continued)

Conflicts of Interest (Continued) Secretary provides copies to AC Chair or

chair of board, if AC is full board Bylaws should reflect the policy-if not

updated might need to consider updating

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NPRA (Continued)Conflicts of interest for officers/key

employees Must disclose COI’s and related party

transactions Any officer or key employee with an interest

in a related party transaction must disclose material facts to board or AC

Conflicted officer or key employee cannot be present or participate in deliberation or vote

Persons who will benefit from compensation decisions may be present or participate in board deliberation or vote

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NPRA (Continued)

Whistleblower policy Any NFP with 20 or more employees and

$1M of revenue Provide for protection against retaliation Policy must include:

Procedures for reportingAdministrator of policy report to AC or boardCopy of policy be distributed to O, E and

volunteers who provide substantial services to NFP

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NPRA (Continued)

For any NFP required to have an audit, board or AC oversight of independent audit: Oversee the accounting and financial

reporting and the audit of f/s Annually retaining or renewing retention of

independent auditors Reviewing results of audit and m/l with

auditors

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NPRA (Continued)In addition, for NFP’s with revenue over

$1M, AC must also: Review audit scope and plan prior to audit

commencing Upon completion of the audit must review

and discuss the following with the auditors:Any material weaknesses in internal controls identifiedAny restrictions on the scope of the auditor’s activitiesAny significant disagreements between auditors and

mgmntAnnually consider performance of auditors If done by AC, AC must report to the board

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NPRA (Continued)The board or AC is responsible for

overseeing the implementation/compliance with COI policy or whistleblower policy adopted by the NFP

If NFP controls a group of corporations, the AC of controlling NFP may perform duties for controlled corporations

Only independent directors may participate in deliberations/voting related to above matters

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NPRA (Continued)

Related party/COI transactions: Board must:

Consider alternative transactionsApprove transaction by not less than a majority

vote of present membersContemporaneously document in writing basis for

board approval, including consideration of alternative transactions

AG has power to unwind if organization is in violation of requirements

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NPRA (Continued)

Independent directors: Directors that are not, or have not in the

last 3 years, been employed by or received more than $10,000 in compensation from the NFP or any affiliate, and have not had a substantial interst in any entity that made payments to or received payments from the NFP or affiliates exceeding the lesser of $25k or 2% of the entities gross revenue and whose relatives have also been free of such conflicts for the past 3 years.

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NPRA (Continued)Related party is defined as any D, O, or

KE of the organization or an affiliated organization, any relative of such individual, and any entity in which any such individual or relative has a 35% or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of 5%.

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EO No. 38Covered provider

Not a state, county or local governmental unit, tribal nation or subdivision/subsidiary thereof, and

Provided program services during the covered reporting period(CRP) and

Average state funds/state authorized payments(SAP) for CRP and prior year equals or exceeds $500k

Average state funds/SAP exceed 30% of in-state revenue for CRP and prior year

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EO No. 38Compensation

Covered executiveCompensated D, T, MP, O or KE whose salary and/or

benefits, in whole or in part, are administrative expenses, and executive compensation exceeds $199k(max of 10 EE’s)

EC includes all cash and noncash or benefits excluding mandated benefits and other benefits consistent with other EE’s

Waiver must be obtained if CP utilized SF/SAP of more than $199k

EC from all sources may exceed $199k if remains below 75th percentile of comparables and was board approved

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EO No. 38

Administrative Expenses Limitation Unless a waiver is granted, administrative

expenses must not exceed 25% for CRP beginning between 7/1/13 and 6/30/14(1/1/14-12/31/14), decreasing 5% each year for the following 2 CRP’s and remaining at 15%

Regulations specify definitions and criteria for determination as program and administrative expenses

http://executiveorder38.ny.gov

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Overall Duties of Board Members in New York State Care

Good faith & degree of diligence Monitor finances either directly or

through standing committees Loyalty

Conflict of Interest Policy Document any transactions involving

conflictsObedience

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The Current Environment

Single audit revisions/expanded testing-2015

FASB proposed changes to NPO Financial reporting

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The Form 990

12 page core form with 16 schedules of detail behind Not all schedules required for all

organizations Describe exempt accomplishments

and mission upfront and more opportunities throughout the form to explain activities

Significant disclosures throughout the form

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The Form 990(cont’d)

Number of voting members and number of independent voting members

Number of volunteers and employees Unrelated business revenue and UBTI Prior year and current year

information presented for revenue and expenses

Prior year and current year summary balance sheet

Sign page 1

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The Form 990(cont’d)

Statement of top 3 program service accomplishments - description, revenue and expenses(page 2)

Checklist of required schedules A-O, R (page 3/4)

Current compensation provided to former O, D, T,KE and 5 highest paid(5 year look-back)

Tax-exempt bonds >$100,000

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The Form 990(cont’d)

Excess benefit transactions Loans, grants or other assistance

to/from current or former O, D, T, KE or 5 highest paid(over $100,000)

Family members of O, D, T or KE direct or indirect business relationship with the organization

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The Form 990(cont’d)

Detail schedule of non-cash donation >$25,000 or any art, historical treasure etc.

Liquidations, terminations or ceasing of operations

Related party disclosures Other tax compliance-forms 1099, W-

2G, payroll, 990-T Donor advised funds

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The Form 990(cont’d)

Governing body & management:Answers contrary to conventional wisdom

may create a negative impressionChanges to organizing documentsMaterial diversion of organization’s

assetsMeeting minutes or the likeWas the board provided a copy of Form

990 before it was filed Describe the process, if any, the organization

uses to review Form 990

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The Form 990(cont’d)

Governing body & management (cont’d):Written conflict of interest policyWhistle blower policyDocument retention and destruction

policyRebuttable presumption for setting

compensation for CEO and othersDo you make your governing documents,

COI and financial statements available to the public and if so, how?

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The Form 990(cont’d)

Governing body & management (cont’d):If your f/s were compiled, reviewed or

audited do you have a committee that assumes responsibility for the f/s and selection of an independent accountant

Are you required to have an audit because of a Federal award?

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The Basics of Nonprofits – How They Differ From For-Profits

NPOs Broad spectrum of services

and programs Fulfill public charitable

mission Over 1.6 million in the US

including religious organizations

Donations can be tax-deductible

Board Generally Controls Exempt from most, but not

all, taxes Profits are called surplus or

change in net assets

For-Profits Segregated by industry

sectors Profits benefit

shareholders and owners/executives

Millions of entities, LLC’s, LLP’s, Partnerships, Sole Proprietors, Corporations, Trusts, etc.

Shareholders have the final say

Capital contributions/ investment returns are taxable

Subject to most Federal, State, and local taxes

Profits are called Net Income

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The Basic Differences in Financial Statements

NPOs Statement of Financial

Position – Assets, Liabilities, and Net Assets

Statement of Activities or Revenues and Expenses

Statement of Cash Flows Statement of Functional

Expenses by Program, may include revenue by program as well

Change in Net Assets are included in Statement of Activities

For-Profits Balance Sheet – Assets,

Liabilities, and Stockholders’/Owner’s Equity

Income Statement

Statement of Cash Flows No comparable

statement, generally information is in footnotes or supplemental schedules

Statement of Change in Stockholders’/Owner’s Equity

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What do you need to know about financial statements?

What are all these pages? Independent auditor’s report Balance Sheet Statement of activities and change in net

assets Statement of functional

expenses(sometimes includes revenue) Statement of cash flows Footnotes Other supplemental schedules

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Key Financial Indicators Variance analysis

Actual - budget Current - prior year

Liquidity – measure adequacy of current assets to meet current obligations

Current ratio = current assets/current liabilities

Days cash on hand = cash balance divided by daily expenses

Days in A/R = accounts receivable divided by daily revenue balance

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Key Financial Indicators (Cont’d)

Key Account Balances Cash balance Line-of-credit balance

Leverage ratio measures how much protection the organization’s assets provide for the debt held by creditors

Liabilities to net assets

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Key Financial Indicators (Cont’d)

Other

Program vs. M&G vs. Fundraising expenses as a % of total expenses

Fundraising dollars raised to dollars spent Mature-$2.5-$3 raised/spent Minimum goal $1.25-$1.50 raised/spent

Diversification of revenue sources Revenue as a % of total assets Programs that generate surpluses vs. deficits

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Profit Importance “Rainy day” funds Capital investment Debt repayment Program Expansion/Subsidies Reserves for future funding

changes/challenges “No money, no mission”

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Resources for NPO’s AICPA Nonprofit Audit Committee Toolkit

www.cpa2biz.com NYS AG’s Website www.charitiesnys.com Guidestar www.guidestar.org Boardsource www.boardsource.org Association of Certified Fraud Examiners

www.cfenet.com Association of Audit Committee Members www.aacmi.org IRS www.irs.gov/charities-&-non-profits Center for Community Engagement

www.cce-rochester.org Executive Order #38 http://executiveorder38.ny.gov