How Self-Assessments Can Help Boards and Audit Committees

Retirement Plans: 2009 Outlook IT’S HERE:The Redesigned Form 990

How Self-Assessments Can Help Boards and Audit Committees

Boards of directors and audit committees have a fiduciary and professionalresponsibility of oversight and governance to the organizations they serve. Today’sboards and audit committees must encompass a level of financial literacy, independence,and knowledge about risk management and internal control. Individual board and auditcommittee members must also be deeply committed, highly experienced, and fullyqualified to effectively carry out their varied responsibilities. Such governance activityapplies to for-profit businesses and nonprofit organizations as well as the public sector,including state and local governments, federal agencies, public utilities, hospitals, andcolleges and universities, to name a few. The objective of this article is to provideinformation about board of director and audit committee self-assessments to optimizeeffectiveness each year.

INCREASING REGULATORY REQUIREMENTSServing on a board of directors or an audit committee can be a rewarding experienceand provides the opportunity to positively influence the organization being served.However, individuals serving on boards and audit committees should understand the ever-increasing regulatoryrequirements and that liability could be lurking around every corner. This is true for private and public companies as wellas tax-exempt organizations.

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First Quarter 2009

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Retirement Plans: 2009 OutlookThe year 2008 will likely be remembered for a long timeand for many reasons. The economic recession andinvestment market results of historical proportions lefttheir mark on almost everyone’s retirement savings. Itsinfluence on retirement plan funding will last for years tocome. Recently, Congress has taken action that we thinkshould encourage retirement plan sponsors, and manyparticipants, to review their plans as they begin evaluatingcontributions and distributions in 2009 and beyond.

The Worker, Retiree and Employer Recovery Act of 2008was passed and signed into law in December and addressesseveral potential plan problems. Because of majorinvestment losses, the Act permits the use of a smoothingcalculation at an assumed interest rate instead of actualinvestment experience to determine the fundingobligations for defined benefit plans in 2009. These plans

IT’S HERE:The Redesigned Form 990

In last quarter’s Solutions, we discussed what a tax-exempt organization needs to accomplish beforethe close of its 2008 tax year in preparation forfiling the redesigned Form 990. Additionally,there are a significant amount of “To Do’s” thatthe tax-exempt organization must complete beforeits initial filing of the redesigned Form 990.

The following checklist details the policies thatneed to be implemented and the practices andprocedures that need to be set forth in writtendocuments before the close of the tax-exemptorganization’s 2008 tax-year. In addition, the

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International Taxation Specialist page 8

I N S I D E

SELF-ASSESSMENTS

For publicly traded companies, the Sarbanes-Oxley Act of 2002 (SOX), Section 301describes the regulatory requirements for audit committees of public companies. Since theadvent of SOX, audit committee members have been subjected to increased responsibilitiesand liabilities, and the Securities and Exchange Commission and other regulators areconducting more investigations of the actions taken by directors and officers.

For tax-exempt organizations, the redesigned Form 990, first effective for the 2008 tax year,sets forth the Internal Revenue Service’s significantly enhanced governance requirements forthe board of directors and audit committee of the tax-exempt organization. As such, it isessential that the board of directors and audit committee for a tax-exempt organization beoperating and functioning pursuant to the applicable rules.

ROLES OF THE BOARD OF DIRECTORSThe board of directors is an elected body of individuals with a common goal of providingeffective stewardship and governance to the organization they serve. The followingrepresents typical roles of a board for either for-profit or nonprofit entities:

• In partnership with the Chief Executive Officer (CEO) or Executive Director (ED) and management,determine, understand, and help guide the organization’s mission, purpose, and strategic objectives

• Select, support, and evaluate the CEO or ED in his or her performance• Ensure effective organizational planning and structure, including during transition• Ensure the continuity of the organization through the recruitment and development of adequate

resources• Review and approve the annual budgets• Review and approve major organizational decisions, commitments, and plans, including expenditures,

loans, and leases• Monitor and evaluate progress toward program and financial goals• Enhance the public image of the organization• Continually assess its own performance and effectiveness

ROLES OF THE AUDIT COMMITTEEThe audit committee is an integral component of public accountability and governance. Additionally, the audit committee’sresponsibilities vary depending on the organization’s size, complexity, and requirements. Audit committees should have a keenunderstanding of the organization’s business and the risks facing applicable operations of the organization. Audit committeesshould also focus on:

• Overseeing the accounting and financial reporting process and the financial statement audits of theorganizations they serve

• Appointing, compensating and overseeing the external auditor• Providing oversight regarding an effective risk management process and sound internal controls by

working with the organization’s management team and the internal audit function leader• Continually assessing its own performance and effectiveness through annual self-assessments

ANNUAL SELF-ASSESSMENTSThe goal of a board or audit committee is to assess and monitor quality throughout the organization, especially in areasinvolving risk. These areas include the board and audit committee themselves. Although board members and audit

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“..individualsserving on Boards

and AuditCommittees should

understand the ever-increasing regulatory

requirements andthat liability couldbe lurking around

every corner.”

committees understand their fiduciary responsibilities, they do not always know the best practices in order to achieve optimaloversight and governance for their organizations. One of the many things that boards and audit committees do fairlyconsistently is measure or evaluate results of operations through various metrics and discussions with key managementpersonnel. The old adage of “what gets measured, or at least monitored, gets improved” comes into play here. This is where“self-assessment” comes into the picture.

Self-assessments can help the board and audit committee identify and implement better procedures in a wide range of areas,from meeting preparation to topics of discussion at the meetings. If done properly, a self-assessment can help open the lines ofcommunication and promote a sense of “team” among board and audit committee members. Self-assessments can also help toprovide the external auditors with further information about the overall control environment or tone at the top of theorganization.

However, self-assessments do not come without risk. If such a self-assessment focuses on individual performance, it cansometimes generate ill will and undermine the board’s and audit committee’s ability to work effectively together. Conducting athorough self-assessment and implementing recommended changes can also be somewhat time consuming. Some of theserisks, however, can be mitigated with proper structure of the self-assessment process, phrasing of evaluation questions to bringabout helpful suggestions and not perceived criticism, and ensuring timely follow-up of identified suggestions.

WHAT IS INVOLVED IN A SELF-ASSESSMENT?There are many ways to conduct a self-assessment. It is a suggested leading practice to document the self-assessment protocoland to have it approved by the board or audit committee before performing the self-assessment. The core of the processfocuses around a properly phrased questionnaire that is disseminated to the committee members. Some committees useinterviews, checklists, opinion polls, or performance evaluations as an alternative to a questionnaire. The questionnaire shouldfocus on issues requiring qualitative judgment to identify areas for discussion and improvement. The following are among themany topics that should be included in the questionnaire:

• The board’s and audit committee’s effectiveness in carrying out their responsibilities• Agendas for the meetings• Processes for identifying problems, agreeing upon solutions, and tracking implementation• Identification of metrics to monitor and evaluate• Number and timing of meetings• Quality of discussions at the meetings• The board’s and audit committee’s understanding of the organization’s risk management process and

internal controls, including those around information technology• Understanding budgets, the reasons for any changes in accounting principles, and significant variances in

financial statements between periods

Some questionnaires are reflected as a series of statements that respondents are asked to “stronglyagree, agree, disagree, or strongly disagree.” Others will have a rating scale that includes “strong,adequate, or not as strong” to explain their views on a question. In addition to documenting andunderstanding their own views, feedback from management, including the CEO and CFO, theexternal auditors, and general counsel provides valuable insight into the board’s and audit committee’sability to provide effective and meaningful governance.

The subsequent follow-up and discussions around potential opportunities to improve upon the rolethat the board and audit committee plays is as important as completing the questionnaire and/orobtaining valuable feedback. All board and audit committee members want to do what is best fortheir organizations. A proper self-assessment can increase the board’s and audit committee’seffectiveness, benefitting the organization and its stakeholders. For information on how to enhancethe effectiveness of your board of directors and audit committee, please contact Jim Jimenez at (949) 271-2600 or jjimenez@windes.com.

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Jim Jimenez, CPAPartner

Audit & Assurance Services

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can accrue benefit obligations throughout a plan year and, because of this, we areurging all defined benefit plan sponsors to review the impact of their 2008investment experience as quickly as possible with their actuary and other planadvisors. If a change is needed in the plan design to balance benefit obligations withfunding objectives, that amendment must be prepared and adopted as soon aspossible. Otherwise, significant contributions may be required to meet the minimumfunding standard for the plan.

Another provision of the Recovery Act relates to required minimum distributions(RMDs) in 2009, due to participants who are over age 70-½. Many plan and IRAparticipants who are taking annual required withdrawals from their accounts areconcerned about depleting their accounts too rapidly after the investment lossesincurred in 2008. Under the Recovery Act, no RMD from IRAs or definedcontribution plans is required for 2009. Careful review of this provision isneeded. The waiver does not lift RMD requirements for 2008 that may have beendeferred by election to April 1, 2009, nor does the waiver extend to calendar yearsafter 2009.

As an example, participants who reached age 70-1/2 in 2008 must take a distributionfor that year. They may have deferred it to April 1, 2009, but the 2008 distributionmust be made. They would not, however, need to take a 2009 RMD (which theywould have otherwise been required to take by December 31, 2009). Similarly, participants whose required beginning date isApril 1, 2010 (because they reached 70-1/2 in 2009) have no RMD for 2009. Therefore, no RMD need be distributed byApril 1, 2010, but they must take their regular 2010 distribution by December 31, 2010. The waiver also applies to RMDsmade to beneficiaries under the five-year rule (by extending the five-year period by one year).

Another major area of concern to 403(b) plan sponsors in 2008 has been deferred for a year. For years, many tax-exemptemployers – nonprofit organizations and educational institutions – who sponsored a retirement plan have operated their planswithout the complete plan documentation required of for-profit plan sponsors. These plans were generally funded withinsurance annuities that included restrictions required for a tax-qualified retirement account; however, a formal plan documentwas never drafted or adopted. These plans are permitted under Section 403(b) of the Internal Revenue Code and have similarfunding limitations for plan participants and non-discrimination requirements applicable to employer contributions to regularqualified plans.

The Pension Protection Act of 2006 initially required all nonprofit employer plan sponsors to adopt a plan document thatdetails all design features required for qualified status by January 1, 2009. On December 11, 2008, the IRS extended thedeadline by which a written 403(b) plan document must be adopted to December 31, 2009, with a three-part relief:

1. Written Plan Document - The written plan document that is intended to satisfy the requirements of CodeSection 403(b) regulations must be formally adopted by December 31, 2009, with an effective date ofJanuary 1, 2009

2. Operational Compliance - In 2009, a 403(b) plan sponsor must operate the plan under a “reasonableinterpretation” of Code Section 403(b) and the final 403(b) regulations

3. Retroactive Correction of Operational Failures - A 403(b) plan sponsor must make its “best efforts” toretroactively correct any operational “failures” to conform to the terms of its written 403(b) plandocument in a manner consistent with the correction principles set forth in the IRS’ Employee PlansCompliance Resolution System (EPCRS). A formal EPCRS filing is not required to correctinconsistencies between plan operations and compliance with a plan document

This relief is significant in that it takes the December 31, 2008 plan document compliance pressure off of 403(b) plansponsors. However, operational compliance under the “reasonable interpretation” standard is required as of January 1, 2009,and all nonprofit plan sponsors should review their plans to be certain all required testing and contribution limitations havebeen properly met.

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There are two other important issues we think need to be reviewed early in 2009 by all retirement plan sponsors. The first isthe long-awaited regulations on fee disclosure to employees and plan participants. Employers and their third-partyadministrators now must gather and include all types of expenses and costs as part of the annual administration and IRS Form5500. The goal of this regulation is for sponsors of defined contribution plans that offer participant-directed investments,including section 401(k) and 403(b) plans, to provide additional transparency of all plan costs and income, both directly andindirectly paid to all parties involved in the administration of the plan. This is a clear indication that plan sponsors are beingheld to a higher standard of due diligence in monitoring everyday operations of plans and are well advised to secure andreview this information to meet this disclosure obligation.

The new disclosure requirements are likely to affect plan sponsors in the following four ways:

1. Collection and review of information from Service Providers - Plan sponsors will be required to obtainfull and complete information concerning all of the administrative and investment-related fees chargedto their plan.

2. Revise Service Contracts - The service contracts would need to be revised to require the service providerto provide the information that the sponsor must disclose and to update it with any material changes tothe required information. This would include the obligation to provide information necessary forcompletion of IRS Form 5500 and information necessary for the plan sponsor to comply with the newdisclosure obligations to plan participants and their beneficiaries.

3. Disclosure to Plan Participants - Plan sponsors would be required to provide general plan andadministrative expense information and individual expense information, in an easy-to-read comparativeformat, on or before the date of eligibility and at least annually thereafter. In addition, the actual dollaramounts charged to each account would have to be disclosed at least quarterly with the individualbenefit statement.

4. Plan Oversight - Receipt and distribution of the additional information would not relieve plan sponsorsof the requirement to monitor services arrangements and the performance of service providers. Theproposed guidance emphasizes the basic proposition that participant disclosure does not relieve afiduciary from the responsibility to prudently select and monitor investment managers and investmentalternatives offered.

As we go to press, the Department of Labor withdrew their regulations related to disclosing service provider compensationand conflicts of interest. However, the above provisions generally will be included in pending 2009 legislation.

The second item of note is the arrival of the amendment process that we have discussed in several previous issues of Solutions. Thetime frame for adopting updated documents to conform to the provisions of The Economic Tax Recovery Reconciliation Act of2001 (EGTRRA) is currently under way.

All prototype and volume submitter plan sponsors, such as Windes & McClaughry, have received master approval letters from theIRS for EGTRRA conforming documents. This is the first major restatement required of all plans since the cycle known as GUST,and many prototype sponsors are already delivering documents to their clients for review and execution. This amendment is criticalto protect the tax-qualified status of all plans, and the updated document must be adopted no later than April 30, 2010.

As with similar amendments in the past, tax reform seems to outpace the process of incorporating updated provisions inretirement plan documents, but all plan sponsors now face this restatement on a six-year revolving cycle. When your third-party plan administrator (TPA) or prototype plan sponsor provides you with the amendment forreview and execution, take time to complete it. This will also be an opportune time to consider plandesign modifications or changes and to restate all of the plan documentation and participantdisclosure materials.

In recent years, many changes have been made to retirement plan reporting and disclosures.Quarterly notice requirements to participants were added last year, and now the fee disclosures andupdating documents have kept most TPAs very busy. However, the ability to defer taxation onsignificant contributions to a qualified plan is, in our view, one of the best ways to help provideresources for retirement income security. The points reviewed here are important areas that should beaddressed in the next several months as they may relate to your plan or individual account. Formore information on retirement plans, please contact Dorrie Hernandez at (562) 435-1191 ordhernandez@windes.com.

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Dolores M. HernandezSenior Manager

Employee Benefit Services

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checklist also outlines the “To Do’s” that need to be accomplishedwell in advance of when the tax-exempt organization files itsredesigned Form 990.

REQUIRED POLICIES

Conflict of interest policy• Procedures to determine when a conflict of interest exists• Details appropriate response when conflicts are identified• Requires annual disclosure of conflicts of interest• Ensures potential excess benefit transactions are scrutinized• Requires periodic review of any transactions with insiders

Whistleblower policy• Procedures for addressing complaints from employees regarding financial improprieties or misuse of the organization’s

resources

Document retention and destruction policy• Guidelines for maintaining and documenting storage and destruction of electronic and hard-copy files• Outlines back-up procedures and archiving of documents

Joint venture policy (only if applicable)• Procedures to evaluate relationships with taxable entities and safeguard the exempt status of the tax-exempt

organization

Expense reimbursement policy• Require receipts (substantiation) for any expenses to be reimbursed• Document business purpose of any reimbursable expenses (for example, first-class travel / spousal travel / club

memberships / personal services)• Document business usage of any corporate assets (e.g. cell phones / laptops)

Non-standard gift acceptance policy• Requires review of any non-standard gifts• Provides for substantiation of cash contributions in excess of $250• Provides for periodic monitoring or compliance under state charitable solicitation laws

Charity care policy (hospitals)• Provide free or discounted care to medically indigent• Does not include a per-patient limit on care funded out of reserve for indigent patients

Written debt collection policy (hospitals)• Provisions on the collection practices to be followed for patients who are known to qualify for charity care or financial

assistance

Policy regarding chapters and affiliates• Ensure activities and operations of affiliates are consistent with those of the parent organization

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REQUIRED PRACTICES AND PROCEDURES• Need to prepare a written document that sets forth the procedures by which the Board of Directors will review the

Form 990 before it is filed

• Document insider compensation determination processes and compliance with the intermediate sanction’s 3-prongrebuttable presumption of reasonableness

• Procedures for making required documents publicly and readily available

• Prepare written agreements with professional fund-raisers (provide donors and the general public with informationregarding fund-raising costs and practices)

• Document procedures regarding grantee’s eligibility to receive grants (document selection criteria used to awardgrants or assistance)

• Document procedures regarding limited amount of lobbying that can be conducted

• Hospitals – prepare annual community benefit report that is publicly available

• Hospitals – document the patient intake process that informs and educates patients about their eligibility forassistance under government programs on the hospital’s charity care policy

TO DO’S• Estimate the total number of volunteers utilized during the year

• Identify any new program service activities conducted during the yearand any program service activities eliminated during the year

• Identify revenue and expenses for three largest program service activities

• Ensure that all 1099s are filed when required and obtain TaxpayerIdentification Numbers for all non-employee services in excess of $600

• Prepare documentation to support classification of workers asindependent contractors

• Prepare documentation of business purpose for all perks (listed onSchedule J, Line 1a) provided to insiders

• Identify noncash contributions in excess of $5,000 for which tax-exemptorganization disposed of within three years after receiving (Form 8282 filing requirements), if applicable, andseparately track all different types of noncash contributions

• Document meetings of Board of Directors committees with authority to act

• Identify all key employees under the expanded definition (regardless of whether they earn over $150,000 ofreportable compensation or not); identify all officers (e.g. Executive Director / Chief Financial Officer)

• Break out the revenue and expenses from gaming activities from the general fund-raising activities

• Identify any situations where the tax-exempt organization paid a penalty or fine during the applicable year

• Update Chart of Accounts (and audited financial statements) to include the expense categories listed on Part IX ofthe redesigned Form 990

• Identify all related organizations (to be reportable on Schedule R); identify all transactions between the filing tax-exempt organization and those related organizations

• Identify all of the organization’s insiders (Board of Directors, officers, key employees) for the past five years; identifyall insiders with whom the filing tax-exempt organization entered into financial transactions (maintain writtendocumentation of all loans between an insider and the tax-exempt organization)

• Identify all blood or business relationships amongst all of your insiders

• Convert the Schedule A public support test calculation from the cash method to the accrual method of accounting

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Member of: American Institute of Certified PublicAccountants

California Society of Certified PublicAccountants

SOLUTIONSEditorRonald C. Kulek, CPA

©2009 Windes & McClaughry.All rights reserved.

Editorial BoardCarolyn K. De BacaDolores M. HernandezKeith K. Higgins Craig M. ImaSuzy B. MeyerBella P. Wang, CPA

SOLUTIONS is publishedquarterly for the clients,business associates, andfriends of Windes &McClaughry AccountancyCorporation. The infor-mation presented in thisnewsletter is intended asgeneral information andmay not apply in every case.Please contact Windes &McClaughry for specificadvice about your particularsituation.

LONG BEACH OFFICE

Landmark Square • 111 West Ocean Boulevard Twenty-Second Floor • Long Beach, CA 90802Post Office Box 87 • Long Beach, CA 90801-0087Telephone: (562) 435-1191 • FAX: (562) 495-1665

IRVINE OFFICE

Von Karman Towers • 18201 Von Karman AvenueSuite 1060 • Irvine, CA 92612Telephone: (949) 271-2600 • FAX: (949) 660-5681

TORRANCE OFFICE

Del Amo Financial Center • 21515 Hawthorne BoulevardSuite 200 • Torrance, CA 90503 Telephone: (310) 316-8130 • FAX: (310) 540-1650

• Ensure that all required documents are readily available for public disclosure (990 / 990-T / 1023 / Determination Letter /organizational documents)

• Ensure that organization is preparing Form W-2G, when required

• Register with California Attorney General if conducting raffles and undertake back-upwithholding, if necessary

• Ensure compliance with all California rules regarding the conducting of gaming events within thestate of California

• Ensure collection of all necessary information when making grants to foreign entities orindividuals or when conducting foreign activities

• Ensure collection of all necessary information when making grants (or scholarship payments) todomestic entities or individuals

There is a tremendous amount of work that needs to be completed if your tax-exempt organization hasnot substantially commenced preparations for the redesigned Form 990. For more information on theredesigned Form 990, please contact Brian Yacker at (562) 435-1191 or byacker@windes.com.

Brian Yacker, CPA, JDPartner

Tax & Accounting Services

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Comments Email: solutions@windes.com

Bella P. Wang, CPA, MSSenior Manager

Tax & Accounting Services

INTERNATIONAL TAXATION SPECIALISTINTERNATIONAL TAXATION SPECIALISTCongratulations to Bella Wang, senior manager in our Tax and Accounting Services practice, for recentlyachieving the Graduate Certificate in International Taxation from Golden Gate University, where sheearned her Masters in Taxation in 2004. With this certificate, Bella has expanded her expertise in theinternational tax area, which includes assisting clients with international tax planning and compliance,consulting on a broad range of inbound and outbound tax issues, helping clients to understand theimplications of international tax developments and minimize their worldwide tax burdens, as well asadvising on international mergers and acquisition transactions. Bella will continue to serve as Windes& McClaughry’s international tax specialist, coordinating tax and accounting services in, and out of,California for the Baker Tilly International network. Baker Tilly International is a network of high-quality, independent accountancy and business services firms, all of whom are committed to providingthe best possible service to clients both in their own market places and across the world. Windes &McClaughry is an independent member of Baker Tilly International.