FINANCE Compiled Guidance ABOUT THIS DOCUMENT This document compiles the Land Trust Alliance’s guidance for the accreditation indicator elements in the Finance category. With background information on and explanations for each practice element, these narratives provide guidance to help land trusts implement the practices and understand the requirements for accreditation.
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FINANCE
Compiled Guidance
ABOUT THIS DOCUMENT
This document compiles the Land Trust Alliance’s guidance for the accreditation indicator elements
in the Finance category. With background information on and explanations for each practice
element, these narratives provide guidance to help land trusts implement the practices and
understand the requirements for accreditation.
1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 2C1a. Federal Tax Exemption Accreditation indicator element and Terrafirma enrollment prerequisite ( )
Last revised December 16, 2019
STANDARD 2. COMPLIANCE WITH LAWS
C. Federal Tax Exemption 1. Maintain status as a tax exempt organization under section 501(c)(3) of
the Internal Revenue Code (IRC)
a. File a complete and accurate annual information return (Form 990 or equivalent) with the Internal Revenue Service
Accreditation indicator elements located at www.landtrustaccreditation.org
INTRODUCTION
The IRS requires most tax-exempt organizations, including land trusts, to file an annual return
officially called “Return of Organization Exempt From Income Tax” (IRS Form 990) in one of its three
versions. In addition to being required by the IRS, some state agencies that regulate charitable solicitations also require charities to file the Form 990 as part of their annual report. Unlike
personal income tax returns, returns are due by the 15th day of the fifth month after the close of an
organization’s tax year. For example, if a land trust’s tax year closes on December 31, its 990 is due
by the following May 15.
Which form a land trust must file generally depends on its financial activity:
• Organizations with annual gross receipts greater than or equal to $200,000 or total assets
greater than or equal to $500,000 must file the full Form 990
• Organizations with gross receipts of less than $200,000 and total assets less than $500,000
may file Form 990-EZ
• Organizations with annual gross receipts normally less than or equal to $50,000 may file
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All land trusts filing a Form 990 should read the current instructions to the form very carefully and
consult with a knowledgeable attorney or financial advisor.
THE CORE FORM
The Form 990, schedules and instructions consist of a 12-page core form and 16 related schedules.
The core Form 990 provides summary information about an organization’s mission, finances and
fundraising expenses. Trigger questions on the core form direct organizations to fill out more
detailed schedules. The complete instructions for the Form 990 can be found here.
Land trusts should take special note of the following parts of the core form:
Part I – Summary
The first page of the form – the first item any reader will see – allows organizations to provide a
succinct statement of their mission or most significant activities. In addition, land trusts will need to
indicate the total number of:
• Voting board members (not advisory members who do not vote)
• Independent voting board members (those who are not employees or contractors of the
organization or a related party)
• Employees
• Volunteers (a reasonable estimate is adequate)
Part II – Signature Block
The return must be signed by the current president, vice president, treasurer, assistant treasurer,
chief accounting officer or other corporate officer (such as a tax officer) who is authorized to sign as
of the date the return is filed.
Part III – Statement of Program Service Accomplishments
This section requires reporting regarding an organization’s program services and exempt purpose
achievements. Land trusts should be prepared to describe any new, significant program services or
program services that have changed since they last filed their Form 990 and to describe their three
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largest program services based on expenses. For most, but not all, land trusts, this section will be
limited to their land protection activities.
Part IV – Checklist of Required Schedules
This section guides the organization to particular schedules it must complete (see below). Note
particularly line 7 regarding conservation easements and line 29 regarding non-cash contributions
(which include gifts of land in fee). Line 11 asks several more detailed financial questions affecting Schedule D.
Part V – Statements Regarding Other IRS Filings and Tax Compliance
This section provides a useful guide to the other tax forms a land trust may need to complete, as
well as specific tax compliance questions regarding notification of donors who received goods or
services in exchange for their contributions, unrelated business income and the filing of Form 8282.
Part VI – Governance, Management, and Disclosure
The IRS is highly focused on governance issues for exempt organizations as an indicator of overall
compliance with the Code. All organizations filing the core form must complete Part VI. It is divided
into three sections requiring information on an organization’s governing body and management,
governance policies and disclosure practices. While many of the questions address policies and
practices that are not required by law, the IRS considers such policies and procedures “generally to
improve tax compliance” and most are included in Land Trust Standards and Practices. According to
the IRS, “the absence of appropriate policies and procedures can lead to opportunities for excess benefit transactions, inurement, operation for non-exempt purposes, or other activities
inconsistent with exempt status.”
Section A – Governing Body and Management
Organizations must report:
• The number of independent voting members of their governing board
• Whether any officer, director, trustee or key employee has a family or business relationship
with another officer, director, trustee or key employee
The IRS defines a key employee as one who meets all three of the following tests:
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1. Is compensated more than $150,000
2. Has responsibilities or influence similar to those of the board; manages a discrete segment
of the organization that represents 10 percent or more of the “activities, assets, income, or
expenses of the organization;” or has authority to determine 10 percent or more of the
organization’s capital expenditures, operating budget or employee compensation
3. Is one of the 20 employees that meet 1 and 2 with the highest reportable compensation
• Whether the organization kept minutes of meetings or of written actions taken by the
board or committees authorized to act on behalf of the board (such as the executive
committee). In line 8, contemporaneous means within 60 days of the meeting or action or by the time of the next meeting of the board or committee, whichever is later.
Section B – Policies
In this section, land trusts must report:
• If the organization has chapters or affiliates, whether it has written policies and procedures
governing its activities.
• Whether the organization provided a copy of its Form 990 to its governing board before it
was filed. If so, the organization must explain in Schedule O the review process or state that
no review was conducted (see below).
Organizations are also required to disclose whether or not they have certain policies, but they are
not required by the IRS. These policies include:
• Conflict of interest policy (Practice 4A1)
• Whistleblower policy (Practice 1A2)
• Document retention and destruction policy (Practice 9G1)
• Process for determining compensation of the organization’s executive director or top
management official (related to Practice 7E5)
An organization must also describe on Schedule O its practices for monitoring and managing
conflicts of interest and its process for determining compensation for key employees.
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Section C – Disclosure
In this section, the organization must:
• List the states in which it is required to file a Form 990. Depending on state law, this may
include states in which the land trust is located, conducts business or raises funds.
• Indicate how it makes its Forms 990 and 1023 (Application for Recognition of Exemption)
available to the public. All tax-exempt organizations must make copies of its past three
returns available to anyone who asks.
• Describe on Schedule O whether and how it makes its governing documents, conflict of
interest policy and financial statements available to the public. Land trusts are not required
to make these items available, but many organizations have found it helpful to post these
documents on their websites as part of their efforts to be accountable to donors and the public.
Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors
Part VII requires the listing of the organization’s current or former officers, directors, trustees, key
employees and highest compensated employees, and current independent contractors and reporting of certain compensation information relating to those people.
Part VIII – Statement of Revenue
Revenues are combined into a single section that is divided into three parts:
1. Contributions
2. Program service revenue
3. Other revenue
Form 990 separates contributions into these categories:
1. Contributions from the public received through federated campaigns
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4. Contributions from related organizations
5. Grants from governmental units
6. All other contributions
Any noncash contributions reported as part of the above must also be reported separately on line
1g and, if the total exceeds $25,000, the organization must complete Schedule M. Land trusts
should report gifts of land and conservation easements here if they do not use the zero-value
approach for conservation easements. See below for further discussion.
Part IX – Statement of Functional Expenses
Use your land trust’s normal accounting method to complete this section. Expenses are separated
into three categories:
1. Program services
2. Management and general
3. Fundraising expenses
For accreditation, a land trust must segregate its expenses for fundraising, program services
and management and general – it needs to track its expenses in these categories.
The instructions provide detailed information on the expenses that should be allocated to each
column. Areas that may be of particular interest to land trusts include:
• Advertising and promotional expenses (line 12) – includes amount for print and electronic
media advertising. Also includes Internet site link costs, signage costs and advertising costs
for an organization’s in-house fundraising campaigns.
• Office expenses (line 13) – this line includes office supplies, telephone and postage and
shipping, and is also to be used for bank fees and similar costs. Costs for printing items of a
general nature should be included here. Printing costs related to fundraising items should
be included with advertising (line 12).
• Information technology (line 14) – this line is to be used for hardware, software and
support services, and for infrastructure support, such as website design, virus protection
and other information security program and services.
7 Land Trust Alliance · Land Trust Standards and Practices · Practice 2C1a. Federal Tax Exemption Accreditation indicator element and Terrafirma enrollment prerequisite ( )
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Part X – Balance Sheet
The balance sheet is divided into assets, liabilities and net assets or fund balances. See below for a
discussion of how land trusts might treat conservation easements on their balance sheets.
Part XI – Reconciliation of Net Assets
This section summarizes and reconciles the organizations net assets for the year.
Part XII – Financial Statements and Reporting
This section asks for the type of accounting method used to prepare the Form 990, whether the
organization’s financial statements were compiled, reviewed or audited by an independent
accountant and, if so, whether the organization has a committee that is responsible for oversight of
the audit or review and selection of an independent accountant. The section also asks whether the
financial statements were issued on a consolidated basis, a separate basis or both.
For accreditation, the Form 990 statement of revenue, statement of functional expenses and
balance sheet need to generally reconcile with the land trust’s audited, reviewed or compiled
financial statements (see Practice 6C1) for the same time period.
RELATED SCHEDULES
Most land trusts completing the core form will also be required to complete:
• Schedule A – Public Charity Status and Public Support
• Schedule B – Schedule of Contributors
Other schedules that a land trust may be required to complete based on its activities include:
• Schedule C – Political Campaign and Lobbying Activities
If the land trust conducts lobbying or advocacy activities, it must complete this schedule. The
instructions provide a very thorough description of lobbying, advocacy and political activities. For
more information, see Practice 2C1c.
• Schedule D – Supplemental Financial Statements
This schedule must be completed by land trusts that have conservation easements or endowment
8 Land Trust Alliance · Land Trust Standards and Practices · Practice 2C1a. Federal Tax Exemption Accreditation indicator element and Terrafirma enrollment prerequisite ( )
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Schedule D – Part II – Conservation Easements
Part II includes nine questions on conservation easements. In addition to easements, land trusts
must also report on other real property interests that have “attributes similar to an easement and
are established for the purpose of conservation and preservation (for example, certain restrictive
covenants and equitable servitudes).”
Line 1. Purposes of conservation easements held by the organization.
Lines 2a-d. Total number and acreage of easements, number of easements on historic structures
and the number of those acquired after July 25, 2006.
Line 3. Number of conservation easements modified, transferred, released, extinguished or
terminated during the year. An easement is modified when its terms are amended or altered in any
manner. An easement is transferred when the land trust assigns, sells, releases, quitclaims or
otherwise disposes of the easement with or without consideration. An easement is released, extinguished or terminated when it is condemned, extinguished by court order, transferred to the
landowner or in any way rendered void and unenforceable, in whole or in part. For more
information on easement amendments, condemnation and extinguishment, see Practices 11H, 11I
and 11J.
Line 4. Number of states where property subject to conservation easement is located.
Line 5. Whether the organization has a written policy regarding the periodic monitoring, inspection,
handling of violations and enforcement of the easements it holds. If the land trust answers yes to
this question, it must summarize its policies in Part XIII (Supplemental Information). Monitoring
means that the land trust investigates the use or condition of the easement property to determine
if the landowner is adhering to the restrictions imposed by the terms of the easement to ensure that the conservation purpose of the easement is being achieved. Inspection means an onsite visit
to observe the property to carry out a monitoring purpose. Enforcement of an easement means
action taken by the land trust after it discovers a violation to compel a property owner to adhere to
the terms of the easement, including communications with the landowner to explain their
obligations with respect to the easement, arbitration or litigation. For more information on
easement monitoring and enforcement, see Practices 11C and 11E.
Line 6. Staff and volunteer hours devoted to monitoring, inspecting and enforcing easements
during the year.
Line 7. Amount of expenses incurred in monitoring, inspecting and enforcing easements during the
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Line 8. Whether façade easements acquired after July 25, 2006 satisfy the special rules with respect
to buildings in registered historic districts [see 170(h)(4)(B)(i) and170(h)(4)(B)(ii)].
Line 9. How the organization reports conservation easements in its revenue and expense statement
and balance sheet (see below).
Schedule D – Part V – Endowment Funds
This section asks organizations to provide the estimated percentage of their year-end balances that
were held as board-designated or quasi-endowment, permanent endowment or temporarily
restricted endowment. Organizations need to report current year and prior years’ information through a four-year look-back period. Land trusts must also report on endowments held by other
organizations on behalf of the land trust.
Schedule G – Supplemental Information Regarding Fundraising or Gaming Activities
This schedule must be completed by land trusts that received $15,000 or more in gross income
(including contributions) from fundraising events or paid more than $15,000 to outside professional
fundraisers. Organizations must provide detailed information on fundraising activities conducted by
outside individuals and firms and fundraising events, including food and beverage and
entertainment expenses for fundraising events. Land trusts must also list all states in which they are
registered or licensed to solicit contributions (see Practice 5A1).
Schedule J – Compensation Information
The land trust must complete Schedule J if it listed any former officer, director, trustee, key
employee or highest compensated employee on Part VII (see above); if any individual received
reportable and other (non-taxable) compensation greater than $150,000; or if any listed person received or accrued compensation from an unrelated organization for services rendered to the
organization.
Schedule L – Transactions with Interested Persons
This schedule must be completed if the organization engaged in any of the following transactions
with an officer, director, trustee, key employee or substantial contributor or a family member of
one of those individuals (all of whom are known as interested persons):
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1. Excess benefit transactions (in which the compensation exceeded the fair market value of
the service or product provided)
2. Loans, grants or other assistance
3. Business transactions (such as the purchase or sale of goods and services, including land or
conservation easements) with interested persons or their companies
Any land trust that may engage in such transactions with interested persons should read the
instructions to Schedule L carefully before completing the Form 990. See also Standard 4,
particularly Practice 4C, Transactions with Insiders.
Schedule M – Noncash Contributions
This schedule must be completed by land trusts that reported more than $25,000 of aggregate
noncash contributions or that received gifts of land or conservation easements, regardless of
whether it reported any revenues for such contributions on the core form. The schedule asks organizations to indicate the number of contributions, revenues reported and the method for
determining revenues for 24 specific types of noncash contributions. In addition, the schedule asks
several questions related to contributions of property that must be held for at least three years,
whether the organization has a gift acceptance policy and whether the organization uses third
parties or related organizations to solicit, process or sell noncash contributions.
Schedule N – Liquidation, Termination, Dissolution, or Significant Disposition of Assets
This schedule is used to report going out of business or disposing of more than 25 percent of an
organization’s assets through sale, exchange or other disposition.
Schedule O – Supplemental Information to Form 990 or 990-EZ
Land trusts should use this schedule to provide the IRS with narrative information required for
responses to specific questions on Form 990 or 990-EZ and to explain the organization’s operations
or responses to various questions.
For accreditation, a land trust’s Form 990 needs to be substantially complete, accurately report
its activities and have all relevant schedules, including those below.
o Schedule A: The land trust demonstrates it meets the public support test.
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It is sometimes challenging for a land trust that relies exclusively on mitigation fees to
have the IRS classify it as a public charity. Even though a mitigation land trust's Form
990 may indicate that all of its income counts toward “public support,” the land trust may be required to retain an independent certified public accountant that specializes in
tax-exempt accounting to closely examine the sources of income and recalculate its
public support. If a land trust does not have sufficient public support for the IRS to
classify it as a public charity, it is not eligible for accreditation.
o Schedule D: The land trust reports required information on its conservation easements
and fee properties.
o Schedule L: The land trust reports required financial transactions or arrangements with
conflicted parties.
o Schedule M: The land trust reports all noncash contributions, including any conservation
easement or fee property donations, as required.
o Schedule O: The land trust provides the necessary supplemental information.
HOW SHOULD A LAND TRUST ACCOUNT FOR ITS CONSERVATION EASEMENTS?
The question of how land trusts should value their easements for purposes of Form 990 reporting is
not an easy one to answer. In general, land trusts use two overall approaches:
1. Zero valuation. Most land trusts value their easements at zero or assign a nominal value
ranging from $1 to $50. They reason that a typical conservation easement provides the land
trust with no affirmative rights except to monitor and enforce the easement and thus
constitutes a liability. Some accountants also believe that donated conservation easements
meet the definition of a collection under FASB 116 and, therefore, it is proper to not recognize their contribution as revenue. For a land trust that attracts substantial easements
but little cash, this approach is helpful because meeting the IRS requirements for adequate
public support may be difficult otherwise. In one case of a land trust using this approach,
the IRS examining agent’s report simply states that “it was further determined that
conservation easements donated to the organization have no market value in the hands of
the organization and will not be considered as support.”
2. Fair market value. Some land trusts record their easements at their appraised value. Land
trusts that use this approach often book them as both income and expenses in the same year, but how easements are then shown on the balance sheet varies widely. Some
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maintain them as assets at their original value (or cost, if purchased), some write down the
value greatly and assign a nominal or zero value and others carry them as liabilities.
A land trust should work with an accountant well versed in nonprofit issues to establish the best
method for the organization to value its easements. Once a method is chosen, the land trust should
generally stay with that approach.
While there is no formal IRS guidance on this issue, in February 3, 2012 remarks at the annual Joint
Meeting of Area TE/GE Counsels, the IRS Form 990 project manager concurred with the Alliance’s longstanding position:
We clarify in Part VIII that qualified conservation contributions and contributions of
conservation easements must be reported consistently with the value the
organization reports from such contributions in its books, records and financial
statements. So we’re not telling filers how they need to report conservation
easements. We’re just telling them that they need to be consistent with their books
and records and across the 990. They should not report the value of conservation
easements differently in their Statement of Revenue, Schedule A, Schedule B, Schedule D or Schedule M. It should be consistent across the board.
HELP PREPARING YOUR 990
All Form 990s are available for public inspection through several different websites (such as the
Foundation Center and Guidestar), which include Form 990s filed in earlier years. Most foundations
and many larger donors know that they can learn a great deal about any nonprofit charitable
organization by simply downloading the organization’s Form 990. On the Form 990, they will see a
brief description about your mission and activities and a great deal of information about your
finances. Because the Form 990 is so easily available to potential supporters, even those you don’t
know are interested in your organization, it is important that it not only present clear and accurate information, but it also presents your land trust in the best possible light.
Submitting a complete, accurate and informative Form 990 is no easy task. If your land trust has
been audited or reviewed, your audit or review report probably has most, but not all, the
information needed to complete the Form 990. But how you describe your activities may be as
important to readers as seeing your statement of financial position (assets, liabilities and net
assets) or statement of activities (revenues and expenses). So you will want to have your Form 990
completed by someone who not only understands the IRS requirements and your financial
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information, but also understands how to communicate effectively with potential donors. Similar
skills will be required to prepare any state charity reports you are required to submit.
Unless your land trust is very fortunate, it is unlikely that you will find a fully qualified volunteer
prepared to complete your Form 990 and your state charity reports. Most land trusts conclude that
the cost of professional preparation of the Form 990 and the state reports is well worth the investment. You can ask your auditor or reviewer to estimate the cost of adding the preparation of
the Form 990 and state reports to an audit or review engagement. In almost all situations, it will be
less costly and more effective to have the same firm handle both your audit or review and your
Form 990 preparation. If you have not had an audit or review, your Form 990 preparer will need to
examine the accounting records, board minutes and other organizational documentation to ensure
that all required disclosures are included in the filings. Most preparers are happy to meet with the board to discuss any issues that come to their attention.
BOARD REVIEW OF THE FORM 990
Part VI of the IRS Form 990, Section B, 11a asks: “Has the organization provided a complete copy of
this Form 990 to all members of its governing body before filing the form?” And 11b: “Describe in
Schedule O the process, if any, used by the organization to review this Form 990.” While federal tax
law neither mandates nor provides instructions regarding the board's duty to receive a Form 990 or
to have a Form 990 review policy, disclosures on the Form 990 indicating that board members do
not receive the Form 990 before filing or do not review the form at any time may be perceived as a
significant weakness of the organization. With today's increased demands for transparency and accountability in the nonprofit sector, land trusts and their boards cannot underestimate the value
in proactively and properly addressing these questions.
Providing a Copy to the Board Prior to Filing
The Form 990 first asks if a copy of the final version of the Form 990 was provided to each board
member before it was filed. While an affirmative response may not provide much assurance that
the board is active in its oversight (as this question does not ask whether any board member who
received a copy actually reviewed the form either before or after filing), a negative response may
be perceived as an indicator of weak board oversight. Thus, although board members may fear that
a requirement for the board to receive the final Form 990 prior to filing may result in increased
personal exposure (especially if the form contains a misrepresentation or evidences the organization's failure to comply with applicable laws), they should be more concerned about the
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potential claims or appearance of poor governance associated with choosing to forgo the receipt of
this critically important and widely available public document.
Developing a Form 990 Review Policy
The Form 990 next asks for a description of the process, if any, the organization uses to review its
Form 990. Given the increasing importance of the Form 990 to authorities, stakeholders and media,
land trusts are strongly encouraged to develop a policy to help ensure the Form 990 becomes an asset, not a hindrance, to the organization.
Initially, the board should identify areas that deserve extra scrutiny, such as those related to the
land trust's mission and significant activities, financial health, executive compensation, insider
transactions, types of expenses (for example, administrative, fundraising, programmatic), unrelated
business activity, relationships among board members and officers, lobbying and electioneering
activity and conservation easement amendments.
Next, the board should strategically identify the various individuals or groups who will be
responsible for reviewing the Form 990. While all board members may want to generally review the
organization's Form 990, in part as evidence of meeting their fiduciary duty of care, it may be
advantageous to have a more manageable-sized board committee tasked with a critical review. This committee, if carefully chosen and sufficiently prepared, may provide important feedback in the
final preparation of the Form 990 and relay pertinent information back to the full board. It's not
uncommon for boards to delegate these duties to the audit committee. But the Form 990 is much
more than a financial report. Accordingly, the extensive narratives, particularly of program service
accomplishments and changes in activities, are some of the key areas that should be reviewed by
those individuals who are most familiar with the land trust's programs and have experience with fundraising, marketing and public relations.
Finally, boards should remember third parties can easily scrutinize the Form 990, and criticism can
spread quickly regardless of its validity. Therefore, it may be helpful to charge one or more persons
on the reviewing body to look specifically for weak points in the Form 990 prior to filing. Such weak
points may be mitigated by, among other things, providing additional context or an explanation of
the steps the land trust has since taken to address those weaknesses. If there are items in the 990
that cannot be effectively mitigated, the land trust should have a communications plan in place to
deal with press or community inquiries.
Although the Form 990 can be intimidating at first blush, its coverage of financials, programmatic
achievements, executive compensation and governance policies should be familiar territory for a
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STANDARD 3 BOARD ACCOUNTABILITY
A. Board Responsibility 2. The board provides oversight of the land trust’s finances and operations
by:
a. Reviewing and approving an annual budget
Accreditation indicator elements located at www.landtrustaccreditation.org
BOARD ROLE IN FINANCIAL AND OPERATIONAL OVERSIGHT
The board has the ultimate management and fiscal responsibility for the nonprofit corporation.
Board responsibilities include oversight of finances and fundraising, operations, programs, long-
range planning, staff and volunteer conduct and public relations. The board of an all-volunteer land
trust takes on many of the day-to-day program and operational tasks. The board of a large staffed
organization will focus on setting overall policies and management oversight. Regardless of size, a
board that understands and meets its basic responsibilities provides a firm foundation for the land
trust, builds public confidence, paves the way for financial success and allows the land trust to
focus its energies on creative, effective ways to accomplish its land conservation mission. A strong
and informed board leads to a strong and effective organization.
BOARD REVIEW AND APPROVAL OF THE BUDGET
The full board is ultimately responsible for the budget. Regardless of who prepares the budget, the
entire board should be fully informed of the assumptions and implications of the budget and should
review it, revise it if necessary and approve it. When board members approve the budget, they are
accepting the responsibility to raise the funds and oversee the expenditures during the next year. If
staff or a committee has prepared the work plan and budget, board members should ask questions
regarding the assumptions used in preparation and any items they do not understand and
1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 3A2c. Board Responsibility
Accreditation indicator element Last revised April 18, 2019
STANDARD 3. BOARD ACCOUNTABILITY
A. Board Responsibility 2. The board provides oversight of the land trust’s finances and operations by:
c. Receiving and reviewing financial reports and statements in a form and with a frequency appropriate for the scale of the land trust’s financial activity
Accreditation indicator elements located at www.landtrustaccreditation.org
BOARD ROLE IN FINANCIAL AND OPERATIONAL OVERSIGHT
The board has the ultimate management and fiscal responsibility for the nonprofit corporation.
Board responsibilities include oversight of finances and fundraising, operations, programs, long-
range planning, staff and volunteer conduct and public relations. The board of an all-volunteer land
trust takes on many of the day-to-day program and operational tasks. The board of a large staffed organization will focus on setting overall policies and management oversight. Regardless of size, a
board that understands and meets its basic responsibilities provides a firm foundation for the land
trust, builds public confidence, paves the way for financial success and allows the land trust to
focus its energies on creative, effective ways to accomplish its land conservation mission. A strong
and informed board leads to a strong and effective organization.
BOARD REVIEW OF FINANCIAL STATEMENTS
While the board may delegate responsibility for in-depth review of the financial statements to the
finance committee, the full board retains responsibility for ensuring the financial health of the land
trust. All board members should have access to the complete internal financial statements.
Whether the board or the finance committee takes responsibility for the in-depth review of the internal financial statements, all board members should receive and review a complete balance
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sheet (statement of financial position) and organization-wide income statement (statement of
activities) periodically throughout the year.
For accreditation, a land trust needs to provide its board with periodic financial reports that
show the following information so that the board can provide oversight of the organization’s
finances and operations.
o Unrestricted, board-designated and restricted net assets (such as a statement of financial
position or balance sheet)
o Actual expenses, revenue (unrestricted and restricted) and any revenue released from
restrictions as compared to budget (such as a statement of activities or budget-to-actual report)
The accreditation application needs to include the most recent financial reports provided to the
board, along with the minutes from the board meeting at which the board discussed the
reports.
Your board and finance committee must determine how frequently internal financial statements
should be produced and reviewed. Staffed land trusts will almost certainly want to produce
monthly financial reports, while all-volunteer land trusts should produce financial reports at least
quarterly. Some boards will prefer having the finance committee review the monthly statements
while presenting quarterly statements to the full board. This approach assumes that the finance
committee will alert board leaders if monthly financial reports reveal significant issues that the full board should discuss before the planned quarterly presentation of financial information. Many
boards of larger land trusts believe review of monthly financial reports is a critical board oversight
function.
Key Issues in Board Review of Financial Statements
Board members’ review of financial reports should focus on preparing them to answer eight basic
questions about the financial health and management of their land trust:
1. How financially strong is our land trust? Review of the balance sheet or statement of financial
position is the starting point for answering this question. The balance sheet presents the assets,
liabilities and net assets of the organization on a specific date. It may also present a comparison
of assets, liabilities and net assets at two different dates, for example, the end of the last fiscal
year and the end of the most recently completed month. As a starting point for effective review
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of the financial reports, board members will need to be clear about the method of accounting
used by their land trust (see Practice 6B for a discussion of accounting methods).
In land trusts following Generally Accepted Accounting Principles (GAAP), board members
should look first at the total net assets line. Net assets represent the net worth of the
organization at the date specified on the statement. It’s helpful to think of net worth as what would be left if the organization gathered in everything it owns of value (cash, investments,
land, buildings and so forth), collected all that is owed to it (receivables) and then paid off
everything it owes to others (wages, payroll taxes, payables, mortgages and so forth). Net
assets are roughly equivalent to owner’s equity in business financial statements. The net assets
provide a cushion to fall back on in hard times and can give your organization the reserves it
needs to be able to take risks in undertaking new activities.
If the net assets amount is shown in <brackets>, the organization has a negative net worth,
owing more than it owns. If it’s not shown in brackets, the organization has a positive net worth—at least on paper. Like businesses, nonprofits report their land, building and equipment
at the amount they cost when purchased (or their fair market value if received as gifts), less
accumulated depreciation. This book value can be far from market value, that is, what the land,
building or equipment could be sold for today. If the market value is much higher than the book
value, the net assets will understate your organization’s actual net worth. If the market value is
much lower than the book value, the net assets will overstate your actual net worth.
2. Can the organization meet its obligations on time? Simply having a positive net worth (net
assets) doesn’t guarantee that your organization can pay its employees, its payroll taxes and its vendors on time. Paying obligations depends upon the land trust’s cash position or liquidity and
the extent to which its funds have a restricted purpose. Look again at the balance sheet
(statement of financial position). Create a subtotal of all the cash accounts and any receivables
or investments that can readily be turned into cash. Next, look at the liabilities. Create a
subtotal for those liabilities, such as accrued wages, taxes and other accounts payable that the
land trust must pay within 12 months—this subtotal constitutes your current liabilities. Then compare your cash and cash equivalents subtotal to your current liabilities subtotal.
Does your organization have at least as much or more cash or items that it can readily turn into
cash than current liabilities? If so, it will probably be able to meet its obligations on time. If not,
it will have difficulty doing so. If it has significantly more cash than is required to meet current
liabilities, it is in a good position to take on additional obligations through expansion or taking
reasonable risks. Or, it may be time to invest some excess cash in longer term investments or
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If the balance sheet (statement of financial position) provides information about two points in
time—the end of the current month and the end of the previous month or previous fiscal
year—you can evaluate whether the cash position (that is, your cash available to meet obligations or invest) is improving or worsening. Compare the cash balances, the accounts
receivable and the accounts payable. If the accounts receivable are increasing, find out why.
Does the increase simply reflect a higher volume of service and higher amounts being billed,
more pledges for contributions being recorded or does the increase reflect difficulty collecting
what is owed to the organization? If the accounts payable are increasing, ask for an aging (a list
that shows which of the amounts have been owed for 30, 60, 90 or more days). Then determine why payments have not been made and what will be the consequence of further
delays.
The current ratio, calculated by dividing total assets that can readily be turned into cash by
current liabilities, is a measure of the adequacy of your cash position but it is limited to a point
in time. Some lenders require a minimum current ratio of 1.25, meaning that you have $1.25 in
assets available to cover each $1 in liabilities. A better tool for making sure that your land trust
will be able to meet its obligations on time is the cash flow projection. This projection helps you
predict how much cash will be available and how much cash you will need to meet obligations for each of the next 12 months. If your cash flow projections shows that the land trust will not
have enough cash to meet its obligations in future months, you will need to develop a plan to
increase the cash that will be available or reduce the amount of cash that the land trust needs.
3. Are there limitations on what the land trust can do with its resources? While having a positive
net worth is clearly better than having a negative net worth, simply noting that the net assets
line on the balance sheet is positive doesn’t tell the whole story. Board members will need to
ask a few more questions.
Are there restrictions on any portion of your nonprofit’s assets? Your net assets should be
summarized into two categories: net assets without donor restrictions and net assets with
donor restrictions. You must distinguish between the net assets over which the board has complete discretion from those that must be used in compliance with donor restrictions.
The term restricted refers to a limitation placed on the use of a gift by a donor or funding
source. For example, a donor may say “use my contribution only for an outreach program,” or a
foundation award may state that the funds may be used only “to meet the costs of restoring a
specific streambed” described in your proposal to the foundation. For some gifts, the donor
intends that the organization will invest the funds and use the income generated through
investment either for specific purposes or for general support of the organization’s activities.
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Such gifts are frequently referred to as endowment gifts. No matter the purposes of the gifts,
the land trust must track the portion of your net assets that are subject to each type of donor
restriction. This tracking includes the purpose for which the funds may be used or the timing for their use, as well as any restrictions making the gift an endowment or restrictions that land or
other assets be held permanently for specific purposes.
As you think about the land trust’s overall sustainability, the net assets with and without donor
restrictions represent different types of financial strengths. The net assets without donor
restrictions comprise a cushion that your board has full authority to direct. Parts of it may be
immediately available, while other parts are invested in fixed assets or have been designated by
the board to function as reserves.
Your net assets with donor restrictions comprise resources that will be available for use in
future periods, but donor restrictions will limit how or when your organization may use them.
In most cases, donors that restrict the use of their gifts to specific projects or activities or use in specific time periods give with the intention that the land trust will spend their gift. In contrast,
the portion of your net assets that donors have restricted to function as an endowment will not
generally be available for the land trust to spend. Instead, the donor’s restriction expresses
their intention that the land trust will invest their gift and only the income generated through
that investment will be available, either with or without further restriction from the donor. Net
assets subject to this type of donor restriction do contribute to overall financial strength by representing a future source of investment income to support your work.
If your internal financial statements do not separate net assets into assets with and without
donor restrictions, you will need to ask whether a portion of the net assets is subject to donor
restrictions. You will also want to learn what portion of your net assets without donor
restrictions the board has designated for specific purposes, such as stewardship or an operating
reserve. You may want to consider getting help to modify your internal statements so that the
donor-restricted and board-designated portions of the net assets are presented clearly.
To fully understand your land trust’s financial health, you will also need to understand both the
extent to which your board has full or limited ability to direct the use of the net assets. If the
net assets are not donor-restricted, the board has full authority to direct their use. If the net assets are subject to donor restrictions, the board may direct their use only in accord with the
restrictions. If the donor restrictions are permanent, the board must focus on its responsibility
to invest the resources or care for the restricted assets wisely with the understanding that the
restrictions are intended to continue in perpetuity.
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Once you are clear about this major distinction between net assets without donor restrictions
and net assets with donor restrictions, you will want to focus your attention on the net assets
without donor restrictions to consider the extent to which they are available to meet the land trust’s operating costs.
Not all of your net assets without donor restrictions will be readily available to support your
operations. The land trust will have invested some of these net assets in land, buildings and
equipment (fixed assets). The board may have designated another portion of these net assets
to function as reserves – for stewardship, for operations or for other purposes. To understand
what portion of your net assets without donor restrictions is available to meet operating needs,
you will need to subtract the portion of your total net assets that have been invested in land,
buildings and equipment (fixed assets) and also subtract the portion of the net assets without restrictions that the board has designated for specific purposes, such as stewardship reserves
or operating reserves. The remaining net assets without donor restrictions are available for
operations.
The portion of the net assets invested in fixed assets will not be immediately available to
support operations. The land trust would have to sell its fixed assets or borrow against them in
order to obtain cash for operations use. As you look at the land trust’s investment in fixed
assets, think about how essential these assets are to the organization’s ability to conduct its
operations.
Many land trusts show the portion of the net assets invested in property, plant and equipment
(sometimes listed as fixed assets or capital assets) on a separate line in the net assets without donor restrictions section on their balance sheet. If your statements do not show this line, you
can still determine the portion of the land trust’s net assets that represent investment in fixed
assets by finding all the asset accounts (land, buildings, equipment, leasehold improvements
and so forth) and finding all the liability accounts related to these fixed assets (mortgages
payable used to finance the purchase of property and buildings or notes payable associated
with major equipment purchases). To compute the portion of total net assets invested in fixed assets, subtract the liabilities you identified from the assets.
Next, consider whether the board has set aside any portion of the net assets without donor
restrictions for specific purposes. Many land trust boards also designate a portion of the net
assets without donor restrictions to function as a stewardship or a legal defense reserve. The
combination of the board-designated net assets for stewardship and any net assets with donor
restrictions for stewardship is an important component of your financial health because, taken
together, they indicate the extent to which the land trust has financial capacity to withstand
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stewardship challenges and maintain its commitment to ensuring the protection of the land in
perpetuity.
Some boards decide to set aside a specific portion of these net assets to function very much
like an endowment. The board wants to invest these funds so that investment earnings may be
used to support ongoing operations or, in some cases, specific programs or costs. Such funds are described as board-designated long-term reserves. In the past, some boards referred to
these funds as board-designated quasi-endowment funds, but this terminology often creates
confusion because the appropriate use of the term endowment is for donor-restricted gifts.
Because the board has created the quasi-endowment fund through its action, board action may
change the fund’s use. This contrasts sharply with the endowment funds with donor
restrictions, which the board cannot change.
If your board has designated a portion of the net assets without donor restrictions as a board
designated quasi-endowment, these funds will not be immediately available for operations. Instead, your board will need to give very serious consideration to changing the designation
and using these resources for current operations.
If your board is considering designating any portion of the net assets without donor restrictions
for any purpose, it is important to remember that no board can tie the hands of a future board.
What the board has designated can be undesignated by future board actions. Board
designation of some portion of the net assets without donor restrictions can be very helpful as
a way to document the board’s intention to set aside reserves for specific purposes, such as
stewardship or special initiatives. If your board is considering creating such a designation, you will want to be sure that your board minutes record the exact nature of the designation,
including the circumstances in which the funds may be used and any special board action that
will be required to release funds from the board-designated reserves.
4. Is our land trust complying with donor restrictions? In some land trusts, a substantial part of the
gifts and grants received carry restrictions attached by donors or grant funders. The restrictions
may be either fairly general (use this gift only for the outreach program) or very specific (use
this money only to buy trail guides for the outreach program). The statement of activities
(income statement) should show when the donor has established restrictions and when the land trust has fulfilled some of those restrictions by incurring the costs that the gift was
restricted to cover.
If your land trust uses the standard GAAP reporting format, you will see a distinction between
gifts with and without donor restrictions and grants on the statement reporting income and
expenses. The gifts or grants that your organization received with donor restrictions will be
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presented in a column titled gifts with donor restrictions or in a separate section of the
statement, clearly labeled as gifts or grants with restrictions. In both approaches, you’ll also see
a line at the bottom of the income section that reports on amounts “released” from restrictions and added to unrestricted income. This line indicates that you have complied with the donors’
restrictions and used their funds according to their wishes.
Some land trusts choose not to use the GAAP format for their internal financial reports. If your
land trust is not using the GAAP format, you should still be able to see evidence that you are
tracking donor restrictions by looking at the balance sheet. There you will see a line item
labeled deferred revenue—grants and restricted gifts received in advance in the liabilities
section. This line item reports on funds that the nonprofit has received with restrictions that it
has not yet used for the restricted purposes. When the land trust does use the funds for the purposes directed by the donor or grantor, the deferred revenue line item in the liabilities
section will be reduced and the grant income line item on the statement of activities (income
statement) will be increased by the same amount. This entry reflects the fact that the land trust
has earned the right to use the restricted funds by incurring costs that meet the donor’s
restrictions.
Understanding how nonprofits report on receiving and using restricted funds can be
challenging, in part because different nonprofits use different methods for presenting this
information. If you are not clear how you can see the receipt and use of funds with donor restrictions on your land trust’s financial statements, it will be worthwhile asking an accountant
to explain your current system and help you think through whether a different method would
work better for your organization.
5. Is the organization breaking even? To answer this question, you’ll have to see the statement of
activities (income statement). This statement reports on revenues and expenses over a period
of time—a month, a quarter or a year. Expect to see both revenues and expenses broken down
into separate line item categories describing the type of revenue (grants, contributions, fees,
interest and so forth) and the types of expenses (salaries, taxes, rent, supplies and so forth).
There are two important ways to look at this information. First, look at the bottom line—the
net income, which may also be called the excess (deficit) of revenues over expenses or the increase (decrease) in net assets. If revenues exceed expenses, the net income will be positive.
If expenses exceed revenues, the net income will be negative and shown in brackets. This
positive or negative net income for the period you are looking at is really the explanation of
whether the net worth (net assets) of the organization has grown or shrunk. A positive net
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income will result in an increase in the net assets (net worth). A negative net income will result
in a decrease in the net assets (net worth).
Another important way to look at revenue and expense information is in comparison to the
land trust’s budget for the time period. Hopefully, the land trust has a complete annual budget
that shows all the planned sources of income and all the planned types of expenses (see Practice 6A1). You will want to compare the actual revenues and expenses reported on the
statement of activity (income statement) to the planned revenues and expenses presented in
the budget. Your questions will be, “Are things going as we had planned? Are we generating the
income we thought we would? Are we controlling costs within the limits set in the budget?”
You will also want to look at your revenues and expenses in comparison to those you had in
prior years. This can be particularly helpful when you have some revenues or expenses
categories that do not occur evenly throughout the year. For example, if you have major
fundraising activities every year in December, simply comparing your fundraising income and expense to your annual budget in October won’t really tell you if you’re on track. It will be more
helpful to compare your current year to past years and especially helpful to think about what
percentage of fundraising income was generated by October in previous years, compared to
the percentage of your annual budget for fundraising income that has been generated by
October this year.
Another useful approach for dealing with revenue and expense items that do not occur evenly
throughout the year is to break your annual budget into monthly or quarterly segments. You
can then compare your year-to-date income and expenses to your budget plan for this point in your fiscal year.
6. Is our land trust using its resources wisely? This is perhaps the most important question of all.
To answer it, you must be clear about your mission and the strategies you have agreed upon to
achieve it, and the financial statements must give you enough information to be able tell the
purpose of the expenses, as well as their descriptive character. For example, looking at a report
that shows that the land trust spent x dollars in salaries for the year tells us the character of the
expenses (that is, salaries) but doesn’t tell us the purpose (that is, were the salaries spent for
working on acquisitions, stewardship, outreach, fundraising or for administrative functions?). We can get some information about the purpose of expenses through a functional presentation
on the statement of activities or through a separate statement of functional expenses. The
functional presentation will distinguish expenses for program, administrative and fundraising
purposes and, if the organization has several different programs, distinguish the costs
associated with each.
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With functional expense data you can consider whether the land trust seems to be spending its
resources in accordance with its mission and the priorities you established in your strategic
plan. If you have prepared your budget in the functional format, distinguishing the purpose (fundraising, management, acquisition, outreach and so forth) for which you will expend funds,
you will want to see financial reports that compare the actual expenses for each of these
functions to budgeted expenses for each function.
You may want to ask to have some supplemental information included on your financial reports
to help you monitor key indicators of both program and financial performance. For example,
you may ask to see the information about the progress of various acquisition projects as they
move through the pipeline from initial exploration to technical evaluation to price negotiation
to fundraising and, finally, to closing. Alternatively, you may want to monitor the number of donors or the percentage of members who renew their membership. Or, you may want to track
the number of easements monitored in comparison to your goals for the year or in comparison
to prior years.
The concept of combining some key financial information with some other key program or
fundraising indicators is frequently referred to as a dashboard. To develop a useful dashboard,
you will have to identify the variables that make the most difference in your financial
outcomes. For many land trusts, these will include the number of donors, donor retention rate
and average gift size as key indicators for fundraising and number of easements monitored or acquisition deals initiated and closed as indicators of program success. To be effective,
dashboard designers must carefully pick the information to be included to avoid distracting
readers with too many variables.
7. Should we rely on the accuracy of our internal financial reports? While most readers of financial
statements will have to rely on someone with greater accounting knowledge to evaluate the
quality of the accounting provided by the organization, there is one simple test to spot obvious
problems with your land trust’s accounting.
To do the test, you must have the financial statements for two consecutive periods (January
and February, for example). Take the total net assets from the first of the two periods and add
the net income (change in net assets) reported for the second period. The answer should be the same number as shown for the total net assets at the end of the second of the two periods.
If it’s not, seek help from someone knowledgeable about accounting because your books may
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Key Balance Sheet Information for Review
The most effective review of the items described below will require that the balance sheet be
presented in comparative format with the balances of all accounts at the end of the prior
month being presented in comparison to the balances in those accounts at the end of the
current month.
• Cash. Determine whether the cash-on-hand balance has increased or decreased compared
to the prior month. Ask for a translation of both cash balances into a days of cash estimate
to facilitate determining whether the cash balance is adequate to meet the land trust’s needs. Ask for an identification of the minimum cash balance required to meet the need for
cash in a typical month. If the cash balance or the days of cash on hand have declined
significantly, inquire why this is happening and when the land trust will reverse the trend.
Ask to review the cash flow projection to be sure it is consistent with what you are told.
• Contracts receivable. Compare the current contracts receivable balance to that of the prior
month. If the contracts receivable balance has gone up significantly, ask for a schedule of
the specific contracts included in the receivables balance and request that the balances at
both dates be presented in the aged format, which shows what portion of the receivable is 30 days from current, 60 days, 90 days and more than 90 days. Be aware that in many
cases, funder delays in paying land trust reimbursement requests are related to problems
with the invoices that have been submitted. Ask if the funder has requested revised
invoices or provided any other feedback on the cause of the delay in making payment.
• Accounts payable. Notice whether accounts payable have increased in comparison to the
prior month. If so, ask for a schedule that displays the largest amounts payable by vendor.
Ask that the schedule show whether each payment is overdue and, if so, by how many days
(30, 60, 90 and more than 90 days). Investigate why the land trust is not paying its bills on time. Pay particular attention to any outstanding payable amounts to health insurance
providers or retirement plans. Be aware that there may be legal consequences for failure to
pay these bills on time.
• Payroll taxes payable. While it is unusual today to see land trusts fail to pay payroll taxes on
time, including the portion withheld from the employee’s paycheck and the portion that is
the employers’ share, it does still happen. This is an extremely serious situation because
payroll tax authorities can impose harsh penalties, and board members may, in certain
circumstances, be held personally responsible for unpaid amounts. Ask for a certification that no payroll tax payments are overdue.
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• Net assets without donor restrictions. Compare the net assets without donor restrictions at
the end of the prior month to those at the end of the current month. Notice whether the
balance increased or decreased. An increase in net assets without donor restrictions means that the land trust had unrestricted income greater than expenses during the month. A
decrease in this category of assets means that the land trust had expenses greater than
income in that month. Compare the change in net assets without donor restrictions
calculated from the balance sheet numbers with that reported on the income statement
(statement of activities). The two numbers should be identical. If not, it may indicate an
error in the preparation of the statements. Ask for an explanation of any differences. If your land trust has experienced an overall loss from the year-to-date activity – year-to-date
income has fallen short of year-to-date expenses – ask for a year-end projection that shows
a plan for managing the finances to avoid a year-end loss.
More Questions for Boards of Smaller Land Trusts
Beyond the financial health questions discussed above, boards of smaller land trusts that rely
heavily on a single volunteer or staff member without formal bookkeeping training to handle
almost all financial functions will need to examine the financial reports in much greater detail. You
will want to assign specific board members responsibilities for performing each of the monitoring steps discussed below. In addition, you will need to be sure all who take on parts of these
responsibilities are communicating regularly with each other and that one person has ultimate
responsibility for resolving any identified problems.
Steps to Be Sure the Reports Are Accurate
• Verify that bank reconciliations have been completed for all cash accounts each month and
that the balances shown on the financial statements agree with the reconciled balances.
• If you have accounts payable and accounts receivable, be certain that there are lists of all
the individual amounts owed or owing that add up to the totals shown on the financial
statements.
• If you have acquired equipment, land or buildings, be sure the assets section of your
balance sheet reflects these items.
• Perform the test of the connection between the statement of activities and the balance
sheet described in the previous section. The change in net assets (net income) shown on
the statement of activities should be the same as the change in net assets computed by
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comparing the net assets at the beginning and end of the period reported on the statement
of financial position (balance sheet).
• Review the revenue and expense line items carefully. First, compare them to the budget
and be sure any significant differences between the actual revenues and expenses and the
budget make sense to you. If they don’t, ask the person doing the books to show you the detailed listing of transactions posted to the accounts that have unexpected balances.
Review the transactions to see if something has been listed in an improper category.
Review the revenue and expense line items to be sure that expenses have been correctly
categorized in relation to different projects or funding sources
How Will the Board Recognize Whether Action is Needed to Protect the Land Trust’s Financial Health?
If your financial reports show a series of losses or if you are aware that the land trust lacks cash
when needed to meet payroll and pay bills on time or if you are concerned that you may not be
tracking donor restrictions properly, you may want to take your review a bit further, including the
following steps:
• Review the revenue line items that have fallen short of the planned level shown in the
budget. Consider if the land trust can realistically make up the shortfall in the remaining portions of the year. Avoid wishful thinking! Base your evaluation on specific plans with
specific estimates.
• If part of your funding is dependent upon the number of trees planted or acres inspected or
on the number of people participating in a program, check the numbers in these areas
carefully. If you are not achieving your targets, figure out why.
• Review all significant expense items that are significantly greater than the projected level.
Determine whether your annual budget estimate will still prove correct (for example, you
have just expended amounts in this category at a more rapid rate than planned, but the
annual estimate is correct). Don’t waste time worrying amount small expense items like
office supplies because, in most cases, the only way to have a significant impact on total expenses is by reducing personnel or professional service expenses.
• Based on your analysis, consider whether you will need to pursue additional strategies to
generate the revenue you need or whether you should make reductions in your spending
level.
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• Review all financial reports you are preparing for funders that have provided restricted
grants with great care. Be sure they are based on the numbers in your general ledger and
those numbers are correct.
• Be sure you are familiar with the requirements of your agreements with restricted funders.
Do you have to obtain their permission to move amounts from one line item to another? If so, your analysis of the reports should focus on identifying any requests for changes you
will need to submit to the funder.
• Are any of your grants or contracts “use it or lose it” agreements where your land trust
won’t receive funds unless you expend them on specified items? In a “use it or lose it”
contract, reducing costs so that you underspend the contract is not helpful to your
organization. Instead, if it appears that you are underspending, consider what additional
resources the project needs or whether you can make a case to include more of your
overall operating costs into the contract budget. Once you have developed a strategy, then you will have to seek approval from the funder.
• Write down your major assumptions regarding the financial statements. Compare these
assumptions to your next month’s financial statements. This will provide rapid feedback
about how realistic you are being.
• Consider preparing a year-end projection of revenues and expenses. Create the projection
by starting with your year-to-date revenue and expenses in each line item and then
estimating what additional income will be generated and what expenses will be incurred
during the remaining months in the fiscal year. Combine the actual year-to-date
information in each line item with your best estimate of what will happen in the remaining
months of the fiscal year to create the total year-end projection.
Remember, the longer you wait to make revisions in your plan, the more dramatic the revisions
may need to be because you will have less time to benefit from their effect.
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STANDARD 3 BOARD ACCOUNTABILITY
A. Board Responsibility 2. The board provides oversight of the land trust’s finances and operations
by
d. Reviewing the externally prepared financial audit review or compilation
Accreditation indicator elements located at www.landtrustaccreditation.org
BOARD ROLE IN FINANCIAL AND OPERATIONAL OVERSIGHT
The board has the ultimate management and fiscal responsibility for the nonprofit corporation.
Board responsibilities include oversight of finances and fundraising, operations, programs, long-
range planning, staff and volunteer conduct and public relations. The board of an all-volunteer land
trust takes on many of the day-to-day program and operational tasks. The board of a large staffed
organization will focus on setting overall policies and management oversight. Regardless of size, a
board that understands and meets its basic responsibilities provides a firm foundation for the land
trust, builds public confidence, paves the way for financial success and allows the land trust to
focus its energies on creative, effective ways to accomplish its land conservation mission. A strong
and informed board leads to a strong and effective organization.
BOARD REVIEW OF LAND TRUST AUDIT, REVIEW OR COMPILATION
Practice 6C1 will help a land trust board decide whether to engage a CPA to provide an audit,
review or compilation. It also covers the purpose and value of each of those different types of
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Your analysis of opportunities should include an environmental scan that helps you understand the
potential for increasing support from this income stream. For example, in reflecting on more formal
foundation support (as opposed to foundation support that functions as a component of individual
giving), seek information about any anticipated changes in priorities, limitations on the period of
support and anticipated changes in foundation staff or board members for any of the foundations
providing significant support to your land trust.
Meaningful analysis of opportunities for growing individual donor support needs to be segmented
and reflect your understanding of the extent of your access to each segment. For example, if major
donor gifts are a significant segment of your support, look at your prospect lists and review donor
lists from other organizations with similar appeal to understand the potential for expanding this
segment.
Your analysis of the threats associated with each stream will mirror your opportunity analysis but
may include some specific threats that your land trust must overcome – for example, reputational
issues, relationship breakdowns, compliance issues and so forth. Understanding the age breakdown
of your individual donor base and prospect pool is also an important factor in predicting future
revenues. Quite often, major donors skew older, and you should have a plan in place to ensure
sufficient new donors are being cultivated to replace attrition.
Once you have completed your SWOT analysis of each of your current significant income streams,
you can begin evaluating other types of income that your land trust has not yet accessed. Use the
same SWOT analysis framework, focusing on your organization’s strengths and weaknesses in
relation to accessing, building and retaining each of the income streams.
With all of these analyses in hand, you will have much of the information you need to identify the
income streams that offer the most promising opportunities to diversify your land trust’s income
mix. In your review, look for both current income streams that could be expanded and new streams
that could be developed productively. For each of these promising streams, take a deeper look at
your land trust’s capacity to expand or develop the stream, focusing intently on staff and board
capacity and identifying additional investments that will need to be made. In almost all cases,
additional investment of time or money will be needed to significantly increase the resources
provided by any income stream.
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Simply resolving to do better – whether it involves increasing the number of members or the
number of major donors – without making additional investment of time or money or redirecting
the use of existing resources – is unlikely to succeed. Consequently, you’ll want to develop a three
to five year financial projection for growing each of the income streams you’ve identified as
promising. To create this financial projection, lay out the steps that staff and board will need to
take and create a realistic timeline for when those steps can be completed. Also, identify the
resources needed to support completing those steps.
Next, think about how your land trust can pay for the additional costs involved in enhancing any of
the income streams. Some land trusts may be able to identify foundation funders or donors willing
to make special contributions to support such capacity-building efforts. Other land trusts may have
reserves, which the board is prepared to dedicate to meeting these costs. But many land trusts will
not have either of these sources available and will need to consider strategies for redirecting the
current use of resources (staff, board and volunteers). If you are considering redirecting your
current resources, be sure that your financial projections include the impact of the shift of efforts.
For example, if you decide to focus more resources on building major donor relationship and
reduce the amount of effort you direct to multiple fundraising events, you will need to anticipate
some reduction (or lack of growth) in the income your fundraising events will generate.
It’s important that you focus on two work products from this effort. First, your analysis should
identify income streams that you will focus your efforts to expand or develop. Second, you should
create a three- to five-year financial projection of both the income and the costs, supported by a
detailed work plan and timeline. With these financial projections and work plans in hand, you will
be able to establish reasonable targets for how your mix of income streams will shift over the
three- to five-year timeframe.
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STANDARD 6. FINANCIAL OVERSIGHT
A. Fiscal Health 4. Build and maintain sufficient operating reserves to sustain operations
Accreditation indicator elements located at www.landtrustaccreditation.org
WHAT ARE OPERATING RESERVES
There are two distinct ways to think about this question. For those focused on their land trust’s
long-term financial health and sustainability, the concept of operating reserves most closely
parallels the portion of the land trust’s total net assets that is available for operations. Those
confronting difficult challenges in having cash available when needed to meet payroll and other
operating expenses will probably focus more urgent attention on cash and very short-term
investment account balances and cash flow projections. Both perspectives are useful. While land trusts should establish dedicated or restricted funds for long-term stewardship and legal defense
costs (see Practice 6A5), operating reserves allow an organization to meet day-to-day obligations
during a period of financial distress.
For accreditation, operating reserves are defined as the land trust’s unrestricted net assets at
the end of the fiscal year, but excludes land, property and equipment and any funds designated
for specific purposes, such as stewardship and defense. Any restricted net assets or board-
designated funds specifically restricted or dedicated to an operating reserve are also included
as counting toward the operating reserve.
Why Do Land Trusts Need Operating Reserves?
It’s important to remember that the economy naturally goes through cycles of expansion and
contraction, which land trusts need to be prepared to take advantage of and to withstand. Land trusts with strong operating reserves were in a much better position to manage the Great
Recession of 2008 than those who failed to set aside adequate reserves. Apart from being prepared
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for the inevitable downturns in the economy, there are a number of other reasons why your land
trust needs operating reserves:
• While you will do your best to make accurate projections of the amount of cash you will
receive from various sources during the year, your estimates may fall short.
• Bad things sometimes happen to good people and good organizations. Whether a major
weather event cancels your big fundraiser or a major donor experiences a sudden financial
reversal, you need a cushion to sustain your work despite adversity.
• You want to be sure to meet your payroll and to pay your bills on time.
• You don’t want staff or board members to be distracted from important work by dealing
with cash problems, trying last minute strategies to increase the availability of cash or
asking staff or creditors to wait for payment.
• You want to move forward with the work you outlined in your strategic plan and annual
budget and not suffer disruptions by cutting expenses to preserve cash.
• You want to be able to invest some of your cash in long-term investments, which will
generally yield a higher return. To make such investments and sustain them, you will need reserves sufficient to cover your operations when cash flows in more slowly than
anticipated or expenses significantly exceed your budget plan.
• You want to avoid the possibility that you will misuse donor-restricted funds. If you have
inadequate operating reserves in times of financial crisis, you may be tempted to spend
funds with donor restrictions for unrestricted purposes, putting the donor’s project or the
organization at risk.
Operating Reserves from a Financial Statement Viewpoint
To understand and evaluate your land trust’s operating reserves, you will need to focus attention
initially on the net assets without donor restrictions. Once you’ve completed your analysis of this
component of net assets, you may want to consider whether some portion of the net assets with
donor restrictions may be also be a component of your operating reserves.
Your land trust’s net assets without donor restrictions reflect the accumulation of positive net
income without donor restrictions (and the impact of any net losses) over the years of its existence. Each time your land trust’s income without donor restrictions exceeds its expenses, your net assets
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without donor restrictions grow. And, each time your income without donor restrictions falls short
of your expenses, the unrestricted net assets are reduced.
Within the broad category of net assets without donor restrictions, there are several subcategories
that will be important in considering the question of operating reserves. Start by looking at your
audited or reviewed financial statements, focusing on the balance sheet (also known as the statement of financial position). If your land trust doesn’t have an audit or review, plan to share the
following discussion with the financial professional who is helping you prepare your financial
statements and ask that they make the following distinctions to aid your analysis.
To determine the ideal amount of operating reserves, begin by identifying the portion of your net
assets already available to function as operating reserves. This figure will be the portion of your net
assets without donor restrictions that is not invested in fixed assets nor is board designated for
other specific purposes, such as stewardship reserves. Once you know what operating reserves
your land trust already has, the board should determine your target for operating reserves, typically stated as a percentage of your annual operating budget.
TOTAL NET ASSETS WITHOUT RESTRICTIONS –
(PORTION OF NET ASSETS WITHOUT RESTRICTIONS INVESTED IN FIXED ASSETS + PORTION IN
BOARD-DESIGNATED FUNDS)
= ASSETS AVAILABLE TO MEET OPERATING EXPENSES
Your audited or reviewed statements or the year-end statements prepared by a financial
professional may or may not break down the net assets without restrictions into components on
the balance sheet itself. If your statements don’t show that breakdown, you may find them in the notes to the financial statements. (Starting with 2018 financial statements, however, board-
designated net assets must be disclosed, either in the notes to financial statements or on the
balance sheet.) If you don’t find the breakdown in the notes to the financial statements or your
land trust does not have an audit or review, you may need to work with a financial professional to
determine what portion of your net assets without donor restrictions is actually available for
operations.
For accreditation, a land trust’s annual audited, reviewed or compiled financial statements
must include the footnotes and disclosures and show unrestricted, board-designated and restricted net assets. These statements will help you calculate your operating reserve. See
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Once you have determined the portion of your net assets without donor restrictions that are
available for operations, you will want to consider whether your analysis of operating reserves
should expand to include portions of your net assets with donor restrictions (see Practice 5B3 for examples). To do this analysis, you will need to consult your records of what specific restrictions
apply to each part of your net assets with donor restrictions. Your land trust should maintain a
schedule of this information to be sure that you are honoring donor restrictions properly. You may
also find the schedule displayed in the notes to financial statements included in your audit or
review report.
Review the list of restrictions on the components of your net assets with donor restrictions to sort
the total into two parts. What part of your total net assets with donor restrictions reflects funds
that may be used in future periods to meet ongoing operating expenses? Distinguish this part from the portion of your net assets with donor restrictions that require the funds be used for capital
purchases or unusual projects that would not be part of your normal ongoing operations, especially
if a component of the net assets with donor restrictions reflects grants you have accepted on behalf
of sponsored projects or other organizations.
The portion of your net assets with donor restrictions that will be available to meet regular
operating expenses (including funds that may be restricted to one of your ongoing operating
efforts, like community engagement or restoration), may be considered a part of your operating
reserve because it constitutes resources that you have already obtained that will be available for future use to continue your operations.
Bank or money market accounts explicitly labeled operating reserves are not necessary to
demonstrate that a land trust has operating reserves.
Operating Reserves for Small Land Trusts
Small land trusts may initially find it easier to think about operating reserves in terms of cash that
they have placed in specific bank or investment accounts to use as a rainy day fund. As land trusts
grow and begin to receive multiple restricted funding sources and engage in more complex
projects, this approach begins to provide inadequate information to support full understanding of
the land trust’s financial positon.
Signs that a land trust is outgrowing the bank account approach to tracking operating reserves
include:
• Making multiple transfers in and out of the reserves account to try to reimburse the main
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• Proliferation of multiple special accounts to attempt to track multiple board directions
regarding use of reserves
• Increasingly complex and time-consuming reconciliation procedures to try to attribute
interest or investment earning to the right account and to bring records of additions and
withdrawals into agreement with records of income and expenses
These signs are all indicators that a land trust needs to move its focus from managing multiple cash
and investment accounts to establishing an accounting system that can track and report the portion of the overall net assets that is actually available for future operations, as well as track the receipt
and use of restricted gifts and grants.
THE IMPORTANCE OF HAVING CASH AVAILABLE
Of course, it is essential that your land trust have cash available to meet its current operating
expenses. Several steps will help ensure that your land trust does have cash available when
needed:
• Prepare cash flow projections. Your monthly cash flow projection should predict the cash
that will flow in for operations and the cash that will need to flow out to meet operating
expenses. The cash flow projection will begin with the estimated cash you will have
available at the beginning of the next 12 months. Predict each month’s flows in and out,
and the resulting cash balance at the end of that month. Then, continue projecting the flows in and out throughout the next 12 months. The cash flow projection will predict the
total amount of cash you will need for operations over the next 12 months, essential
information for managing your cash effectively.
• Establish an investment policy (see Practice 3A2e) that clearly identifies what types of
deposits and investments will be permissible for cash and which may be required within
specified periods, short term, mid-term and long term. In general, investment policies
require depositing cash that must be available to meet short-term demands in bank
accounts or money market funds that permit rapid withdrawal without potential loss in value or penalty. Funds that can be held for mid-term and long-term uses may be placed in
longer-term investment vehicles.
• An investment policy that sets guidelines for short-term, mid-term and long-term
investments should make clear that not all operating reserves need to be held in the same
physical account. In fact, your short-term cash accounts may include both operating cash
reserves and cash that will be used in the short term for capital purposes or other special
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short-term uses. And your mid-term accounts may include both portions of your operating
reserves and funds provided by donor-restricted gifts for purchases that will not be
executed within the current year.
• If you have structured your accounting system properly, you will always have clear records
of the components of your equity or net assets that show which parts are restricted, which parts have been designated by the board for special purposes and so forth. This type of
system will prove a more accurate and efficient way of tracking the different restrictions
and board designations, including board-designated operating reserves, than attempting to
use banks or investment firms as your tool for keeping it all straight.
DETERMINING THE LEVEL OF OPERATING RESERVES YOUR LAND TRUST NEEDS
Your board should establish a clear policy regarding the level of operating reserves your land trust
needs. Initially, this amount may be a target, a goal that you will work to achieve and that you will
consider each time you adopt your annual budget. Later, after you have built the operating
reserves to the desired level, clarity on your operating reserve needs will help you determine when your land trust should engage in longer-term investment strategies.
Clarity will also allow the board to determine whether your land trust has sufficient financial
strength to be able to invest in its own capacity building, using a portion of the net assets without
donor restrictions that exceed operating reserve needs to fund a new position or a special initiative
as part of a capacity-building effort.
In almost all cases, operating reserve targets should be set as a percentage of operating expenses,
rather than established as specific dollar amount. The level of operating reserves needed expands
as operating expenses grow; a dollar target that was adequate during the early days of the land
trust may be quite inadequate after expansion.
There is no clear agreement on the “right” level of operating reserves for every land trust. Within
the nonprofit sector, a traditional target is a minimum of three to six months of operating expenses
(25 to 50 percent of the annual operating budget). Clearly, organizations that operate in a volatile funding environment or with definite seasonality in cash flow (for example, receiving 75 percent of
all contributions in the fourth quarter of the year) will need higher reserve levels than those that
have essentially guaranteed income for operations. Factors to consider in evaluating the volatility
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• Substantial dependence on a single funder or very narrow group of funders. Whether an
individual donor, a foundation or a government agency: have you put all your eggs in one
basket? (See Practice 6A3 for more on the importance of diversifying your funding sources.)
• Leadership transition periods. You’ll need higher reserves to protect your land trust if many
donors and funding sources adopt a wait-and-see attitude when leadership on the board or staff changes significantly.
• Periods of rapid growth. Operating reserves must increase to reflect the growth of ongoing
operating costs after periods in which restricted funding has powered expansion.
• Fallow periods after periods of successful acquisition campaigns. Land trusts that have
completed major campaigns to acquire new properties often find that they need time to
absorb the new acquisitions and may experience drop-offs in operating support from
donors who shifted their focus to the capital campaign.
Boards that consider adopting operating reserve targets greater than 50 percent of their annual
operating budget often have specific concerns they are seeking to address (for example, the desire
to prepare for a leadership transition). In some circumstances, these concerns may be better
addressed by establishing board-designated net assets for a specific purpose, such as a leadership
transition or fundraising capacity building, rather than raising the target for operating reserves.
For accreditation, a land trust must show operating reserves at the close of its last fiscal
year that are sufficient to cover three months of operating expenses. If a land trust does not have at least three months of operating reserves, its application must include a report of the board’s evaluation of the land trust’s operating reserve needs and its plan for addressing those needs. (The board’s evaluation would take into consideration any unique circumstances, such as operating reserve funds held on the land trust’s behalf by a community foundation or specific operating reserve needs unique to the organization.) The plan to address needed operating reserves must be feasible and include specific funding targets and specific strategies with timelines for raising the amount identified in the evaluation. Starting with the 2018 financial statements, the Financial Accounting Standards Board requires a nonprofit’s financial reports to include information about the availability of financial assets to meet the organization’s cash needs for one year of general expenditures (the “liquidity disclosures”). This analysis counts all board-designated funds as being available for operations; as such, it is not equivalent to the calculation used to determine if an applicant for accreditation has an operating reserve to cover three months of operating
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expenses. The calculation for accreditation excludes board-designated funds, such as for stewardship and defense, in recognition of the responsibilities land trusts have to uphold, steward and defend its conservation lands and conservation easements in perpetuity.
Strategies to Build and Maintain Operating Reserves
For many boards, there is little disagreement about the target level for operating reserves; the big
question is how to build them.
The first step in answering this question is to begin by identifying the portion of your net assets
already available to function as operating reserves (see the discussion above). Once you know the
difference between the level you have and the level the board desires as your operating reserve
target, you’re ready to consider the strategies you will use to close the gap.
Potential strategies include:
• Make sure that each annual operating budget the board approves includes plans for
operating income to exceed operating expenses, generating an operating surplus.
• Continuously monitor your actual income and expenses compared to your budget plan.
Take the need to generate the planned operating surplus as seriously as you take achieving
the income projected in the budget and controlling expenses so that they do not exceed
the budgeted level.
• Review your current fundraising strategies to determine whether you may be unnecessarily
encouraging donors to restrict their gifts to special programs and projects, rather than making a compelling case for general support.
• Review your budget and cost allocation practices. If you typically ask restricted or special
project funders to cover only the direct cost of providing a service, operating a program or
acquiring a new property, consider using cost allocation to determine the full cost of
delivering that service or program or acquiring that property and ask funders to cover the
full cost. For example, if you are seeking funding for a specific restoration project, include a
fair share of the cost of your management, office expenses and so forth, as well as the
direct costs for staff who will do the restoration work, supplies and transportation, for example. The truth is you couldn’t do that special project or complete that acquisition if
you didn’t have overall management, financial recordkeeping, a space to work in and other
shared costs. By securing restricted donors to cover the full cost of doing a project, you will
be generating dollars that can be used to cover core operating costs. This strategy will
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mean that more of your contributions without donor restrictions may be available to create
an operating surplus.
• Make a special request to your closest donors (often board members or former board
members) to explain the need for building operating reserves and to ask them to make a
special contribution explicitly for that purpose.
• Establish a board policy to direct all bequests without donor restrictions below (or above) a
specified threshold to build operating reserves.
Once you achieve your target level of operating reserves, you’ll want to reevaluate their adequacy
each year as part of your budget process. If your operating expenses will increase in the coming year, clarify the strategy you will use to build the additional reserves needed to maintain your
target level as a percentage of operating expenses.
Maintaining operating reserves is also challenging, in part, because the whole point of building
operating reserves is to be able to withstand adversity. This means that when your income
generation falls short or unavoidable but unexpected expenses occur, you will use your operating
reserves to meet your needs and avoid disrupting your work. On your financial statements, you’ll
see this use of the operating reserves as a net decrease in net assets without donor restrictions (net
loss). If you used a formal board-designated operating reserve segment in your net assets without donor restrictions, you’ll see the amount in this segment drop to reflect that you have used up
some of the net assets you had set aside as operating reserves. While this outcome is frustrating
(especially if it’s been difficult to build your operating reserves) it’s important to remember that
this is actually the reason you established operating reserves. It is not necessarily a terrible thing to
see those reserves drop temporarily. Of course, you’ll want to rebuild the reserves as quickly as is
reasonable.
Important strategies to maintain operating reserves once you’ve achieved your target include:
• Budget for an operating surplus – even a small planned surplus will give you a cushion
against shortfalls and unexpected expenses.
• Monitor your actual revenues and expenses in comparison to your budget plan and treat
the operating surplus you’ve included in the budget as a significant commitment that must
be met if at all possible.
• Approach some of your closest donors who may be open to a “help us grow and be
sustainable” campaign that helps you continue to increase operating reserves in anticipation of overall growth. You may find that some of your long-term supporters are
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deeply committed to ensuring your sustainability. Acknowledging their continuing role as
sustainers may help set the stage for future endowment gifts.
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STANDARD 6. FINANCIAL OVERSIGHT
A. Fiscal Health 5. Build and maintain dedicated or restricted funds sufficient to cover the long term costs of stewarding and defending the land trust’s land and conservation easements.
a. If funds are insufficient adopt a plan to secure these funds and a policy committing the funds to this purpose
Accreditation indicator elements located at www.landtrustaccreditation.org
INTRODUCTION
When a land trust accepts an easement or land, it promises the landowner, land trust members and
funders, the community, the IRS and the general public that it will uphold that easement and
conserve that land forever. Making such promises requires the land trust to prepare on many
levels, including financially. Before accepting each property or easement, a land trust must carefully
plan for how it will care for the land or defend the easement and pay for its stewardship — not just
this year but also in 5, 50 or 500 years.
In addition to upholding its commitments, land trusts have legal obligations to consider with regard
to easement stewardship. In section 1.170A-14(c) of the Treasury regulations, the IRS establishes
basic expectations for organizations that accept qualified, tax-deductible conservation easements:
To be considered an eligible donee under this section, an organization must be a qualified
organization, have a commitment to protect the conservation purposes of the donation,
and have the resources to enforce the restrictions. A conservation group organized or
operated primarily or substantially for one of the conservation purposes specified in
170(h)(4)(A) will be considered to have the commitment required by the preceding
sentence. A qualified organization need not set aside funds to enforce the restrictions that
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designated or restricted funds, lease income, earned income or diverse and secure sources
of annual operating income.
For accreditation, a land trust can choose the way to count the number of conservation fee properties it holds. One way is to count the number of preserves. Preserves can be aggregates of various parcels; parcels do not need to be physically connected as long as they fall under a master management plan, and the landscape is relatively uniform and there are no significant threats on the intervening parcels. The second way is to use the method required by Terrafirma (see http://www.terrafirma.org/faq/counting for details).
RAISING STEWARDSHIP FUNDS AFTER ACQUISITION
It can be discouraging to realize that the income from an endowment or general stewardship fund
does not cover the annual costs of land or easement stewardship. However, this situation is
common. In these cases, the land trust is, in fact, subsidizing these activities through its operating
budget, and some land trusts have consciously decided that this is an appropriate way for them to
operate. For many older land trusts, early acquisitions did not come with any (or just minimal)
stewardship funding or, most commonly, the anticipated costs of stewardship were exceeded by
the actual expenses as time progressed and costs increased. As a result, they either continue to
subsidize stewardship or take steps to increase their endowment or dedicated fund.
When a land trust acknowledges that it has a shortfall between its endowment (or dedicated fund)
and its stewardship costs, it is time to develop a realistic plan to address it. This situation calls for a
serious fundraising plan (see Practice 5B3), which will take more than small sums of money to
address.
Each land trust should assess what model best suits the organization, create a financial plan using
the model and track costs and periodically consult with financial advisors to ensure that the
financial plan reflects actual stewardship costs and is scaled for the appropriate time horizon
(remember, planning for forever is much different than planning for retirement!).
Practices 11A and 12A require land trusts to estimate the cost of stewarding an easement or
property at the point of acquisition (it is also the easiest time to raise funds for stewardship). If
funding cannot be secured at the time of acquisition, the land trust should have a plan, including
specific funding targets and timelines, to obtain those funds within five years.
For accreditation, a land trust can have a plan to raise the additional necessary funds if it
does not yet fully meet the stewardship funding requirements at first-time application.
Similarly, if the land trust has half the defense funding requirements at either first-time or
renewal application, it can provide a plan to raise the remaining funds. The plan must have
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specific funding targets and timelines for raising the funds so that the land trust will have
the required funds by the time it applies for its next renewal.
The following is a list of likely sources of funding for stewardship of easements and land trust
properties; the needs and sources may vary greatly between easements and fee-owned property so
the section below should be read in conjunction with the easement- and fee-specific information
later in this narrative.
Landowner Contributions
Many land trusts have relied on contributions from land and easement donors as the primary
source to build a stewardship fund, but this practice is changing. With experience, land trusts are
learning that stewardship activities can be more expensive than initially estimated and that
landowners are not the only source of funds. Many land trusts are also catching up their
stewardship funds to make up for insufficient growth in earlier years and cultivating other sources
to add significant amounts to the funds.
Most land trusts do ask their donors to consider making a contribution to the stewardship fund,
either as a one-time gift or as a contribution made over time. Some seek only part of the calculated
contribution from the owner and tap other sources to add the full amount required with each fee
property or conservation easement. If the landowner is willing to pay but unable to pay the full
amount up front, the land trust may want to consider creating a pledge schedule. The pledge
schedule might include phased payments over a period of years or payments tied to future income,
such as from a planned timber sale.
Note that a requested contribution and a required contribution have different federal income tax
implications for the landowner. If the landowner is responding to a request for funding and is not
obligated by contract to contribute the funds, their voluntary donation may be tax deductible, and
the land trust would provide a gift acknowledgement letter (see Practice 5B2). However, if the land
trust requires the contribution or indicates that it cannot accept the easement or fee property
unless it receives the contribution, the landowner’s stewardship contribution would likely not be
deductible as a charitable gift, and the land trust should not acknowledge it as such. Land trusts
should be clear about whether they are requesting or requiring stewardship contributions and
inform the landowner about the implication for tax deductibility. Some land trusts now refer to
these required contributions as transaction fees in order to clarify that providing these funds is not
optional and is not considered a charitable contribution.
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If a land trust has funds that are donor-restricted for use on a specific property, then these
funds are not counted toward the total amount available for defense and the land trust can
exclude the property from the Calculator. For example, the donors of the Smith property
provided $125,000 for the stewardship and defense of solely that property and not the land
trust’s 20 other properties. When the land trust runs the Calculator, the Smith property
should not be counted as a property in the Calculator (the total number of properties
would be 20, not 21). Then, the $125,000 restricted to the Smith property will not be
counted toward the total moneys the land trust has available to cover the defense needs of
the remaining properties.
Land trusts have no way of knowing when they will need to litigate to protect an easement or
conserved property, how long litigation may take or how much it may cost. The Land Trust Alliance
created Terrafirma as a charitable risk pool owned by participating land trusts that insures its
members against the legal costs of defending conservation. Even if a land trust has Terrafirma
insurance coverage, it must still build its legal defense funds. Terrafirma is an additional safety net,
not a substitute for sufficient reserves and sound practices. Land trusts should think of Terrafirma
as standing behind them to protect their resources from catastrophic legal expenses and to help
them avoid unnecessary litigation through solid practices, early dispute resolution and smart risk
management.
1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 6C1. External Financial Evaluation Accreditation indicator element Last revised November 16, 2018
STANDARD 6. FINANCIAL OVERSIGHT
C. External Financial Evaluation 1. Obtain an annual financial audit, review or compilation by an independent certified public accountant or a qualified accounting professional, in a manner appropriate for the scale of the land trust
Accreditation indicator elements located at www.landtrustaccreditation.org
IMPORTANCE OF EXTERNAL FINANCIAL EVALUATION
Financial oversight is a critical board role. As the governing body, your land trust’s board holds
ultimate responsibility for ensuring that land trust resources are used only to accomplish your
mission, your assets are safeguarded, you’ve complied with all laws and regulations and have
honored all agreements with donors regarding the use of their funds. Boards must have reliable
financial information to fulfill these critical oversight roles.
Yet land trust board members typically lack the time and, in many cases, the expertise needed to
directly determine whether the financial reports they are given to review actually provide a fair
picture of the land trust’s financial condition and the financial impact of its activities. The good
news is that there are accounting professionals who are able to offer a variety of services designed
to help the board be sure that they can rely on the financial information they receive. The bad news
is that the variety of different services that accounting professionals offer can create confusion and
misunderstanding. The following sections are designed to help your board clarify the professional
help it needs and determine the most effective way to obtain it.
The primary purpose of obtaining professional accounting services is to provide information for
management and the board, as well as external stakeholders such as potential funders. The extent
to which your land trust obtains the maximum possible value from your external financial
evaluation depends upon your skill in selecting the right certified public accountant (CPA) or other
qualified accounting professional for your organization. The American Institute of Certified Public
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Accountants has an excellent toolkit to help nonprofit boards obtain the greatest possible value for
audits and other engagements with CPAs. Many of the tools in their toolkit are also useful for
boards that decide to secure a review instead of an audit. You may download the AICPA Audit
Committee Toolkit for a small fee.
OVERVIEW OF TYPES OF OUTSIDE ASSISTANCE
Audits, reviews and compilations provide an opportunity for a knowledgeable professional to
provide feedback on your financial statements, accounting systems and practices. However, there
are significant differences among them and the assurances each provides. Audits, reviews and
compilations have significantly different purposes, involve different procedures and, importantly,
provide very different levels of assurance regarding the reliability of your financial statements.
Although audits and reviews are different, in one respect they are the same: only a licensed CPA
may refer to work they perform as either an audit or review in accordance with standards issued by
the American Institute of Certified Public Accountants. A CPA who does not manage your books on
a day-to-day basis must always conduct financial reviews or audits. A knowledgeable professional
who is not a CPA, on the other hand, may complete compilations.
CPAs must be clear in agreements with clients about the nature and scope of each engagement.
Once you have selected a CPA to perform financial examination services for your land trust, they
will draft an engagement letter to spell out exactly what they will do and what your responsibilities
will be. It is very important for a knowledgeable land trust staff or board member to review the
engagement letter to be sure that it matches your understanding of the assignment.
FRAUD DETECTION
A standard audit or review of financial statements focuses on the reliability of the financial
statements taken as a whole, not the discovery and documentation of fraud. Neither audits,
reviews nor compilations are designed specifically to uncover fraud or malfeasance. Where a CPA
detects evidence of impropriety, they will communicate the facts to the appropriate level of
management and may recommend steps to increase the level of scrutiny. If your board has specific
concerns about possible dishonest acts or willful misrepresentation of your financial position, you
should work with a forensic accountant who can offer fraud audit services.
It is also important to understand that while the CPA performing your audit or review will ask
questions about your accounting policies and procedures and your controls, the purpose of an
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audit or review is not to provide a formal evaluation of your system of internal controls. Your CPA
may provide a number of very useful observations and suggestions about controls while conducting
an audit or review, but that will not be the primary purpose of their work.
AUDITS
The primary purpose of an audit is to obtain enough information for the auditor to reasonably
assert that the financial statements are free of material misstatement. To make that assertion, the
CPA must perform audit examinations in accordance with Generally Accepted Auditing Standards
(GAAS), which are the industry standards. Thus, the auditor’s opinion letter will provide peace of
mind for your funders, donors, regulators and board. It will provide readers of your audited
financial statements reasonable assurance that, in your auditor’s opinion and in all material
respects, the statements conform to accounting principles generally accepted in the U.S. An audit
conducted to the highest professional standards will help your board fulfill its role of overseeing
land trust operations and enhance donors’ and other outside parties’ assessments of your
organization’s credibility and financial stability.
In a deeper sense, audits are designed to permit the auditor to state an opinion about the extent to
which your financial statements fairly present your financial condition and the results of your
activities over the past year.
REVIEWS
In contrast to audits, a review is designed to provide the reviewer with enough information to offer
only “negative assurances,” which is a statement that tells readers that the reviewer found no
evidence that the statements do not fairly present your condition and the results of your activities.
The review report, which notes that the reviewer has not found anything indicating the statements
do not present accurate and complete information, provides much less assurance than an audit
opinion.
COMPILATIONS
CPAs also perform engagements to provide compilations. In a compilation, the CPA (or person
doing the compilation) offers no assurances as to whether the financial statements fairly present
the financial condition of the organization. Instead, in performing a compilation, the CPA gathers
information from the organization about the balances of each general ledger account at yearend
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and puts that information into the proper format to produce a statement of financial position,
statement of activities, statement of functional expenses and statement of cash flows. The
compilation report may include notes to the financial statements, but in many cases, the
organization elects to omit substantially all footnote disclosures relating to the financial
statements. The CPA is not bound by the rules for disclosure about the financial statements that
would guide the notes in a review or audit engagement. The compilation report is bound with the
financial statements and includes a letter from the CPA stating that the statements have been
compiled.
For accreditation, a CPA needs to complete a compilation or, if a land trust is not using a CPA,
the person preparing the compilation must be an independent qualified accountant. (The CPA
does not have to be independent and thus could be a member of the land trust’s board. If the
qualified accountant preparing the compilation is not a CPA, they must be independent,
meaning the person cannot be on the board or have financial or other interests in the
organization.) All compilations submitted for accreditation must include the footnotes and
disclosures related to the financial statements and show unrestricted, board-designated and
restricted net assets.
While a financial compilation does not provide the level of assurance that is available through a
review or audit, it does help a land trust present its financial information in a format that complies
with GAAP rules and, thus, is included as an option for this practice. A compilation may be helpful
to a new land trust without staff or volunteers who are knowledgeable about GAAP for nonprofits.
Alternatives to Compilations
Some small land trusts undertake a compilation primarily to obtain help presenting their financial
information in a standard format. Your land trust may want to consider some other alternatives to
accomplish this same goal. You may be able to work with a skilled accounting consultant who will
treat the engagement as a consultation, rather than a compilation. While the consultation alone
does not meet the requirements of this practice, it may provide substantial help improving your
underlying accounting system so that you will be able to provide more useful reports more easily,
as well as build your understanding of the standard formats for nonprofit financial reports.
In some circumstances, the more appropriate person to provide such a consultation may not be a
CPA engaged in public accounting. Instead, they may be a non-CPA who is employed as a fiscal
manager in a nonprofit organization or a for-profit business or a knowledgeable accountant
working in government and currently retired. In all of these circumstances, even if the individual is
a CPA, they may not be covered by the type of insurance needed to feel comfortable performing
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audits, reviews or compilations. Consequently, they will not be willing to enter into an engagement
to perform those services or issue the appropriate reports.
What they may be able to do is help you put your financial information into financial report formats
that comply with not-for-profit GAAP and help you develop practical accounting policies and
procedures. For many small land trusts, this work may enhance the value of the typical consulting
engagement.
BOARD EXAMINATION OF YOUR FINANCES
For a land trust with a budget of only a few thousand dollars and simple financial records, an audit
or review or even a compilation may seem unnecessary or not worth the cost. While an audit,
review or compilation is a requirement of this practice, a first step for small organizations may be to
have the finance committee conduct an internal review of financial records and systems. The
finance committee should consist of two or more board members who feel capable of reviewing
the organization’s records.
The procedures performed in this review should resemble those applied by independent
accountants. The committee should review all supporting documents and journals for accuracy. The
committee should also review a sampling of the year’s financial transactions. Land trusts may want
to standardize and document this process to provide guidance for future committee members.
This board review process is particularly helpful if your land trust has relied on one person (often
the treasurer) to maintain all the records, handle all transactions and produce all the financial
reports. This person should not be an active participant in this exercise. The committee’s role is to
provide independent confirmation that this person has been handling the finances appropriately
and relieve that person of holding sole responsibility for all fiscal functions.
If you are considering this approach, it will be important to recruit committee members and other
volunteers with the background and expertise necessary to perform the accounting, financial
reporting and governmental compliance duties. If none of your current board or committee
members have the necessary background, you may want to approach other nonprofit organizations
in your community for suggestions of individuals with the needed skills who may be willing to help
with this limited project.
WHAT TYPE OF FINANCIAL REVIEW IS RIGHT FOR YOUR LAND TRUST?
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In deciding what level of review is most appropriate for your land trust, you should start by looking
at your state laws. Twenty-six states have laws requiring charitable nonprofits to conduct an
independent audit under certain circumstances. The requirement for a nonprofit to submit audited
financial statements to the state is most often triggered by either the total revenue received by the
charitable nonprofit during the fiscal year or the total contributions received. In some states, the
threshold of contributions or income received that triggers the independent audit requirement is
relatively low; in other states the threshold is higher.
For accreditation, a land trust must obtain annual audited, reviewed or compiled financial
statements at the following level based on total annual support and revenue, include footnotes
and disclosures and show unrestricted, board-designated and restricted net assets. [Annual
support and revenue excludes the value of donated properties and conservation easements. It
includes support and revenue from grants and special fundraising and for the purchase of land
and easements, as well as money received for another organization as part of a fiscal
sponsorship arrangement.] A land trust must meet these requirements over its entire
accredited term, not just for the year of renewal.
o >$750,000: Audit by independent CPA
o $100,000 - $750,000: Review by independent CPA
o <$100,000 compilation by CPA (if not a CPA, must be an independent qualified
accountant)
[An independent CPA or independent qualified accountant is one who has no financial or other
interest in the organization.]
If state law requirements are stricter than these guidelines, the land trust will want to follow
state law. If state law is less strict, the land trust must meet the accreditation requirements.
The Commission established the accreditation requirements to operate a fair and credible
accreditation program, regardless of where a land trust is located, and they are based on an
analysis of the thresholds set by a majority of states, as well as standards set by other nonprofit
charity evaluators.
Beyond the minimum requirements mandated by state law and required for accreditation, boards
should take a hard look at what type of financial review would best serve their land trust.
Determining whether your land trust should have an audit, a financial review or a financial
compilation will require your board to evaluate the costs and benefits of each option. An audit will
provide significantly greater assurance about the reliability of your financial statements than a
review, while a compilation provides no assurance at all.
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Because a review opinion on your financial statements is more limited than an audit opinion and
does not require the CPA to obtain independent confirmation of information in the organization’s
financial records, it is less expensive than an audit. For smaller land trusts on tight budgets, a
review may be a perfectly adequate approach to providing assurances about an organization’s
financial reports to its board, funders and other interested parties.
A compilation does not offer any assurances about the reliability of a land trust’s financial
information. While a compilation is an option under this practice, a land trust might first consider
spending the money on an accounting consultation and training for staff who will maintain the
financial records and then growing into a review or audit.
If you think that your land trust may have significantly weak systems or missing records, you should
discuss these problems with the CPA before you enter into an agreement for an audit. It may be a
much better strategy to undergo a review of financial statements before attempting an audit. The
review will identify problem areas to resolve before engaging in an audit.
The review engagement does not involve as high a standard in its opinion on the reliability of the
financial statements, so the report does not call the reader’s attention to problems in quite so
dramatic a fashion as an audit report. If you wish this type of review, called an agreed upon
procedure, be sure to clarify exactly what you want from the accountant. This type of special review
provides an opportunity for an independent professional to look closely at the financial records and
point out areas of weakness and opportunities for improvement.
Many newer organizations will have a review done the year before they have their first audit. This
strategy provides opportunities to identify problem areas and make improvements before the first
audit and increases the likelihood of obtaining a clean audit opinion. This approach also provides
the auditor better assurance regarding the year-end balances contained in the review of the
previous year after the new systems have been in place for a year.
BOARD’S ROLE IN SELECTING AND WORKING WITH THE AUDITOR OR REVIEWER
The selection of an auditor and maintaining clear communication with the auditor throughout the
audit process are key board responsibilities. Some boards assign these functions to the finance
committee. Other boards form a separate audit committee with the specific responsibility of
managing the audit process. There are strong arguments for both of these approaches.
Some land trusts find that they have so much difficulty recruiting board members or other
volunteers with strong finance skills that trying to populate more than one committee seems
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impossible. These boards feel that the finance committee can do a good job in selecting the audit
firm and ensuring full and open communication with the auditor, so there is no need to set up a
separate audit committee.
Other land trusts see great advantages to appointing a separate audit committee. They find that
some individuals with strong finance skills are willing to fulfill the time-limited duties of the audit
committee but are unwilling or unable to take on the more open-ended and time-consuming duties
of board membership or even serving on a finance committee. Land trusts that have been
successful in recruiting a separate audit committee report that they have found the finance experts
that were only willing to join the audit committee frequently become more interested in the
organization and more willing to serve on the board through their audit committee service.
Beyond this board recruitment benefit, a separate audit committee can evaluate the effectiveness
of the finance committee and report to the full board if there are problems, such as lack of
expertise or infrequent meetings.
Whether you are using an audit committee or assigning these responsibilities to the finance
committee, you should develop and follow a clear process for selecting the audit firm. The board
should provide clear direction to the committee about its authority for selection, either allowing
the committee to make the final selection or requiring the committee to bring a recommendation
about selection to the full board for approval.
Once the board selects the audit firm, the committee or committee chair should meet with the
person in charge of your audit. Establishing this relationship is important because auditing
standards require the auditor to inform the board of any significant concerns about management
that arise during the course of the audit.
Practice 3A2d requires the board to review the audit, review or compilation. The auditor should
meet with the entire committee or the full board after they prepare the draft audit report. This
meeting allows committee and board members to ask the auditor questions about the proposed
report and about the auditor’s observations about the land trust’s financial systems. You should
conduct at least part of this meeting without staff (executive session) to encourage a frank
discussion. You may also want to have a portion of the meeting with the executive director present
but with the accounting staff or fiscal manager absent so that the committee and the executive
director may ask the auditor to share their observations about the quality of the accounting staff’s
work.
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For accreditation, a land trust needs to provide the minutes from the board meeting at which
the results of the most recent audit, review or compilation were presented. See more about
the board’s role in reviewing the audit, review or compilation in Practice 3A2d.
The auditor should discuss any findings that will be included in the management letter. These
letters are generally prepared using standard accounting language and often quite hard for non-
accountants to understand. Do not hesitate to ask the auditor about both the meaning of
unfamiliar terms and the overall seriousness of the findings. It is fine to ask questions like, “How
worried would you be if you were a member of this board?”
Your auditor will ask the committee and management whether there are any changes to the
financial statements or the audit report that you would like to discuss. Remember, the financial
statements are your responsibility, so you should be satisfied that they fairly present the financial
reality of your land trust.
The audit or finance committee is responsible for ensuring that the full board understands the audit’s
findings. The committee may decide that it would like the auditor to be available for a discussion with
the full board or it may decide that the committee will simply report on its meeting with the auditor
and provide copies of the audit report to all board members.
AUDIT OPINIONS
At the conclusion of the audit process, the auditor prepares the final audit report. The auditor will
bind the report with a cover displaying the audit firm logo, the name of your land trust and the dates
of the financial statements. The auditor’s opinion letter will appear at the beginning to alert readers
to the auditor’s assessment of the degree to which readers should rely upon the financial statements.
All audit opinion letters describe what the auditor has done using the phrase “we have audited the
financial statements for the period [ ].” There are four distinct types of audit opinions that your
auditor may express:
• Unqualified opinion. The auditor states, without qualification, that the financial statements
do fairly present the financial position and activities of your organization in accordance with
GAAP. This opinion is referred to as a clean opinion and is most desirable.
• Qualified opinion. The auditor states that the financial statements do fairly present the
financial condition and activities of your organization in accordance with GAAP, except for
certain matters. The qualifications or exceptions can include items such as using a non-GAAP
treatment to record certain transactions, using a method of accounting other than the
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accrual (usually referred to as another comprehensive basis of accounting), lacking
documentation to establish certain balances and so forth.
While there are many possible types of qualifications your auditor may include in the opinion letter,
one type of qualification should be of particular concern to your board – the “going concern”
qualification. Auditors may issue a going concern opinion if the auditor fears that an organization
lacks the financial resources to “stay alive.” Circumstances that may give rise to this uncertainty
include:
• Capital deficiency
• Default of credit agreements
• Significant operating losses
• Default on loan agreements
• Bankruptcy reorganization
If an opinion expresses a going concern qualification, the auditor, in effect, warns readers that there
are factors that may limit the ability of the organization to continue its operations. This qualification
is a strong warning that the organization confronts serious problems.
• Disclaimer of opinion. It is quite unusual to see a disclaimer of opinion in an audit report. An
auditor generally issues a disclaimer opinion in response to a scope limitation. This situation
generally occurs when the organization fails to provide information necessary for the auditor
to form an opinion. The rules also require that, in those circumstances, auditors state that the
scope of their audit was not sufficient to warrant the expression of an opinion. A disclaimer
opinion can also result from going concern issues that are of such significance that the
organization’s ability to continue is in substantial doubt.
The disclaimer due to lack of information is a very bad outcome for an audit. It tells the reader of the
audit report that the organization lacks the underlying records needed to support the financial
statement information. Land trusts that are concerned that their financial recordkeeping may be
weak or inadequate should explore these concerns before engaging the auditor.
• Adverse opinion. This is the opinion no nonprofit wants. In the adverse opinion, the auditor
states that, in their opinion, the financial statements do not fairly present the financial
position of the organization. This opinion tells the reader that the group’s financial
statements may not be accurate or verifiable, undermining the credibility of the organization.
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It is quite rare for a nonprofit to receive an adverse opinion because auditors can generally identify
situations in which there will be problems likely to lead to an adverse opinion before they accept the
audit engagement and let the client know that this is a possible or likely outcome. Even in situations
in which it was not apparent before starting the audit that problems would result in an adverse
opinion, many auditors would prefer to withdraw from the audit engagement rather than issue an
adverse opinion.
If your land trust is concerned that its systems and financial reports have problems that may be so
serious as to result in an adverse opinion, you should work with an outside accountant other than
your potential auditor to assess ways to improve your system and records before engaging an
auditor. You may decide that you will not obtain either a review or audit for the year you are
concerned about and will instead obtain assistance in improving your systems so that an audit will be
productive in subsequent years.
MANAGEMENT LETTERS
In addition to the opinion letter, the auditor may provide a management letter addressed to the
board. The management letter alerts the board and management to concerns about the reliability of
the fiscal systems and accounting data. This letter focuses on the concepts of substantial deficiencies
and material weaknesses, which are issues that would likely cause a modified or adverse auditor
opinion on the financial statements or cause a halt to the audit engagement entirely. Material
weaknesses must be brought to management’s attention immediately.
Material weaknesses include such problems as not tracking donor restrictions or not recording
donated property at its fair market value at the date of receipt. Inconsequential or consequential (but
not material) management issues should be communicated to the board even though they do not
have a material impact on the financial statements for purposes of the audit engagement. These are
referred to as management points and are included in the management letter.
The management letter may also discuss other matters that are not significant deficiencies or
material weaknesses. Instead, they are observations the auditor has made about flaws within your
systems that have not yet caused problems that meet the definitions of significant deficiency or
material weakness but still should be addressed in order to avoid future problems.
For accreditation, if the management letter or correspondence that accompanied the most
recent audit, review or compilation indicated that the land trust should make significant changes
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to its financial procedures, the land trust will need to provide a statement describing the actions
it has taken to address the recommended changes.
SINGLE AUDITS UNDER THE UNIFORM GRANTS GUIDANCE 2 CFR 200
Some land trusts must obtain a more intensive audit that complies with the Single Audit
requirements established by the federal Office of Management and Budget as part of the Uniform
Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (commonly
called "Uniform Guidance") and published in the Code of Federal Regulations under Section 2 CFR
200. These requirements have replaced those previously described in OMB Circular A-133 and are
sometimes referred to as a Yellow Book audit.
A Single Audit is required if a land trust expends more than a total of $750,000 of federal funds in a
single fiscal year. The $750,000 threshold includes all funds that originate with the federal
government, even if the direct provider of the funds to the land trust is a state or local government or
another nonprofit organization. Another common way an organization may be subject to Single Audit
requirements is through provisions included in grant agreements or contracts, regardless of the
amount of federal awards expended, if any.
The amount of federal funds expended for purposes of determining whether a Single Audit is
required does not include amounts organizations receive when acting as contractor/vendors of goods
or services under service contracts. However, this is a hotly contested issue because there is
substantial disagreement about what constitutes a true contractor/vendor agreement.
A good place to start to is to read the language in your funding award or funding agreement. The
Uniform Guidance requires that funders specify whether the organization receiving the funds is a
recipient or sub-recipient or a vendor/contractor. If the organization is a recipient or sub-recipient,
the agreement must specify the specific federal program that is the source of the funds by providing
the CFDA (Catalogue of Federal Domestic Assistance) number of the program.
If your agreement with funders providing federal funds (including federal funds that are being passed
through state or local government or another nonprofit) is silent on the question of whether the
organization receiving the funds is considered to be a recipient or sub-recipient, you can contact the
funder to request clarification (be sure to get the answer in writing).
The Single Audit includes the standard financial statements and a separate schedule of the
expenditure of federal funds (SEFA), each with an auditor’s opinion. The auditor’s opinion letter will
reference government auditing standards and the Uniform Guidance. Additionally, the auditor will
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prepare reports on their review of the land trust’s internal control structure and compliance with
laws and regulations. The auditor’s reports on these items will include any findings of material
weaknesses. The report on compliance must contain the auditor’s opinion on whether the
organization administered the federal funds in accordance with applicable law and regulation.
If you believe your land trust may be subject to the Single Audit requirement of the Uniform
Guidance, you will want to discuss the situation with any potential audit firms you are considering to
provide audit services. Not all CPA firms are able or willing to perform Single Audits. Moreover,
because Single Audits require substantially more time to perform and expose the auditor to
substantially more risk, the cost of such an audit done is significantly higher than the cost of a
standard independent audit of financial statements.
For accreditation, if the schedule of findings from a land trust’s most recent Single Audit indicated
that the land trust should make significant changes to its financial procedures, the land trust will
need to provide a statement describing the actions it has taken to address the recommended
changes.
ADDITIONAL RESOURCES
• Audit Committee Effectiveness Center. The American Institute of Certified Public Accountants
sponsors this site to help audit committees implement best practices. The site contains a
wealth of resources for audit committees.
• Audit Committee Toolkit, American Institute of CPA’s
• Audit Guide for Audit Committees of Small Nonprofit Organizations. This guide, sponsored by
the Virginia Society of Certified Public Accountants, can assist the audit teams of small
nonprofits in performing a limited review of their organizations’ financial statements. This
guide should help a land trust’s board control financial activities until they reach the stage
when a professional audit is possible. It also emphasizes the importance of internal controls
in safeguarding the assets of an organization.
• Warren Ruppel. Not-for-Profit Audit Committee Best Practices San Francisco: Jossey-Bass,
2005.
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WHAT DOES AN AUDIT INVOLVE?
The engagement letter should outline the procedures the auditor will perform during the audit
process. The letter should also contain details regarding what will be expected of land trust
personnel and the documentation they will be expected to produce. If, in the course of performing
the procedures needed to render an opinion on your financial statements, the auditor obtains
information about possible fraud or impropriety or learns about significant weaknesses in your
fiscal controls, auditing standards require that the auditor inform the appropriate individual within
your organization about these problems. However, uncovering these problems will not be the
primary purpose of the audit, so do not rely on a traditional audit to uncover malfeasance. Auditors
take the legal position that the purpose of the standard audit of financial statements is not the
discovery of fraud or malfeasance. Consequently, the engagement does not include all of the
procedures that would be necessary to provide reasonable assurance that such fraud or
malfeasance did not occur (fraud audits are a different type of engagement and are considerably
more expensive). The auditor also has no responsibility for alerting authorities of any fraud.
Your auditor will use a variety of procedures to obtain the information needed to form an opinion
on the reliability of your financial statements. The auditor will design an audit program to guide the
audit process, which typically includes steps that allow the auditor to obtain an overall
understanding of your accounting policies and procedures, as well as your internal control
structure. The auditor will conduct a preliminary assessment of the areas in which there is the
highest risk for error or misstatement in your financial statements.
In most cases, the auditor will begin with an in-depth interview with management personnel
through whom the auditor gains an understanding of the nature of your operations, including your
primary sources of funds and their primary uses. With this understanding in mind, the auditor will
ask a series of detailed questions about how you handle different types of financial transactions,
focusing on who is responsible for various steps in initiating, authorizing, recording and reviewing
them.
Most auditors will provide their clients with a list of documents and schedules needed to conduct
the audit. Gathering these materials for the auditor will save time, and because audit fees are
based on time required, having requested materials ready and complete may save your land trust
money. Your staff should feel free to ask the auditor for clarification about exactly what they will
need to avoid wasted effort or delays.
During the course of the audit, the CPA will:
• Obtain an understanding of the land trust’s operation, systems and procedures
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• Test the procedures to determine the extent to which your internal systems can be
depended upon to produce reliable information
• Determine what additional procedures are necessary to obtain assurances of the reliability
of the financial statement information
• Perform those additional procedures
• Obtain independent evidence to support key elements of the information presented on
your financial statements
• Identify and discuss with the land trust any significant areas in which the financial
statements do not appear to conform to GAAP
• Reflect on all of the information obtained through the audit process to create an opinion
regarding the financial statements
• Issue a draft audit report and discuss the draft report and financial statements with the
land trust and prepare revisions if needed
• Issue the final audit report and management letter
Although the auditor is responsible for planning and executing all of these steps, each of them will
require participation by your land trust’s staff, volunteers or board.
You can help the auditor form a more accurate understanding of the nature of your operations by
carefully selecting the land trust personnel assigned to the audit. You should ensure that the initial
interviews involve the executive director, board chair or other person having the deepest
understanding of your land trust’s overall mission and operations, including the nature of its
financial support and underlying strategies to fulfill your mission.
When the auditor is ready to move on to building an understanding of your fiscal systems and
procedures, you should pull together the team of individuals with the clearest knowledge of how
your system works. One of the questions the auditor is required to ask is: “Where are the
opportunities for someone to commit fraud in this organization?” This question does not reflect on
the integrity of your land trust or its personnel – it is just part of the auditor’s duty to identify and
evaluate risks for impropriety in the design of audit procedures.
Your auditor will take an in-depth look at your general ledger and financial statements. They need
to understand the structure of your chart of accounts, your procedures for posting adjusting entries
and the process you use to review the accuracy of your financial statements. The auditor will
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identify general ledger accounts for which independent confirmation is needed and ask you to send
letters to the parties that could provide that confirmation. Typically, confirmation letters will be
sent to your banks, brokerage house, major funders and donors, attorneys, vendors and creditors.
Your auditor will ask your accounting staff, volunteers or board members to prepare schedules that
support the accuracy of the balances in significant asset, liability, revenue and expense accounts.
For example, if your financial statements report that you have pledges receivable totaling $50,000,
the auditor will ask for a schedule listing the names of everyone who has pledged along with the
amount of the original pledge, the amount collected and the amount outstanding. The auditor
might then ask you to request that these donors write directly to the auditors confirming that they
intend to pay the pledges.
The auditor will also ask you to provide a schedule reconciling the bank account balances included
in your financial statements with the bank statements provided by your bank. If there are transfers
between bank accounts, the auditor will ask for a schedule of those transfers in order for the
auditor to trace them.
If your land trust receives funds with donor restrictions, either from individual donors or from
foundations and governmental sources, your auditor will ask to see the contracts, award letters and
other documents that establish the donors’ restrictions. The auditor will also ask you to provide an
analysis of the amounts received from each restricted source, the amounts used for the restricted
purposes and the amounts remaining to be used for the restricted purposes in future periods.
While you are compiling this information, the auditor will conduct tests of transactions. These tests
involve examining sample invoices, checks, deposit records and other documents of transactions in
your records to determine whether all of the procedures that you describe in your written fiscal
policies and procedures and in your interview with the auditor are being followed consistently. The
purpose of the test of transactions is to help the auditor determine the extent to which they can
rely upon your systems or the extent to which they will have to use alternative analytic procedures
to form an opinion about the reliability of your statements. This step is required, even if the auditor
does not intend to rely on your internal controls.
As the audit proceeds, your auditor will identify areas where they believe you may not have
followed GAAP in recording financial information. For example, some land trusts record
conservation easements as assets at cost. A change an auditor might recommend would be to
expense conservation easement costs as program services expenses. Alternatively, an auditor may
suggest that a land trust report investments in mutual funds and readily marketable securities at
market value, as opposed to cost. If issues such as these are identified and corrected, then the
auditor’s reports will not require modification.
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The auditor will want to speak with management personnel about their interpretation of GAAP and
possibly propose changes (adjustments) to the way you record information. If the organization
chooses not to accept the recommendations, the auditor may find it necessary to take a number of
different steps, depending on the significance of the departure from GAAP. The most serious
departures from GAAP may require the auditor to disclaim any opinion or present an adverse
opinion on the financial statements. In some cases, the auditor may be compelled to withdraw
from the audit engagement entirely.
Less significant departures from GAAP may only require modification of the audit opinion in order
to make the reader aware of the issue. These modified opinions are often referred to as except for
opinions. As the term implies, the auditor may state that the financial reports present fairly, in all
material respects, the activities and financial position of the land trust, except for the areas
identified as departing from GAAP. Ultimately, however, management needs to decide whether to
accept the auditor’s interpretation and agree to the adjustments or stick with the original
interpretations.
As you have these discussions about potential adjustments, you will have to weigh the
consequences of agreeing or not agreeing to the auditor’s suggestions. In some situations, your
auditor may tell you that if you do not agree to the adjustments, they will need to issue a qualified
opinion on your financial statements. You must determine whether receiving a qualified opinion
will damage your credibility to such a degree that it is worth accepting the proposed audit
adjustments in order to obtain a clean, unqualified opinion.
Once the issues about potential adjustments to your statements are resolved, your auditor will
issue a draft report. Management and the board audit committee or finance committee should
review the draft carefully. Pay particular attention to the notes to financial statements to be certain
that they describe your organization, its work and its financial activity clearly and accurately.
Remember that both donors and other outside parties may have access to your audit. The notes to
financial statements are also the land trust’s responsibility, not the auditor’s, so you will want to be
sure that they present the clearest, most compelling picture of your organization.
FACTORS TO CONSIDER IN AUDITOR SELECTION
There are a number of factors that the audit or finance committee should consider in selecting an
auditor, including:
• Knowledge of and experience with auditing community-based nonprofit organizations. Not
every CPA or CPA firm has expertise in the requirements of nonprofit accounting. A firm that
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provides audit services for a substantial number of community-based nonprofits will be
knowledgeable about GAAP for nonprofits and probably be familiar with the typical challenges
that organizations with limited resources face and their need to conduct complex accounting
for gifts and grants with donor restrictions.
• Experience with land trusts. Land trusts have unique accounting challenges, most notably how
to report conservation easements. It will be very helpful if your audit firm has provided services
to other land trusts or has access to colleagues who have served land trusts. A firm that is
committed to providing the highest quality of service will complete preliminary research to
familiarize itself about land trust issues before submitting a proposal to provide services.
• Demonstrated capacity and commitment to researching areas of specialized accounting. While
there may be no CPA firms in your area with experience auditing land trusts, you can still
evaluate potential firms based on their experience conducting research on specialized areas of
accounting. Ask the potential firms to describe other audit engagements that have required
specialized research. You may wish to contact those clients for references.
• Capacity of the firm to do quality, timely work. Failure to complete audit work on time is one of
the most frequent complaints that nonprofits have about auditors. Delays in finishing audit
work for other nonprofit clients may be a sign that a firm underestimates the time required to
complete nonprofit engagements. It may also be a sign that the firm is prioritizing for-profit
clients over nonprofit work. This would not be a surprising decision because nonprofit audit
work is generally less profitable to the firm than work for business clients.
However, in evaluating the question of timeliness, you should check with several of the firm’s
clients. Sometimes, delays in the completion of audits have more to do with the difficulties the
nonprofit organization has providing the needed information than with the timeliness or
commitment of the audit firm.
In terms of audit quality, you should check with your state board of accountancy to determine
whether any complaints have been filed against the audit firms under consideration. You
should also ask audit firms to describe any specialized training completed by the staff and
principals who will be involved in your audit engagement.
• Capacity to communicate complex accounting concepts to non-accountants on the board and
staff. Before committing to an audit firm, check that both your accounting staff and at least one
member of the committee has had an in-person meeting with both the audit firm member who
will be in charge of your engagement and the person who will supervise the fieldwork (the
work conducted at your office that involves the most direct and intense communication with
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your staff). You should be sure that both the staff and the committee feel confident that the
audit firm staff can communicate clearly and respectfully with both accountants and non-
accountants.
• Plan for conducting the audit, including use of junior or senior staff. It is very important that you
obtain a detailed description of which members of the audit team will perform the various
components of the audit. In larger firms, a partner will officially manage your audit
engagement. However, the larger the firm, the more likely it is that the partner in charge will
delegate most, if not all, of the responsibility for the audit to more junior staff. In the worst
case, you may find that the person assigned to do the fieldwork, the work that involves the
most direct contact with your staff, is a recent accounting graduate with little or no experience.
This situation can pose a tremendous burden on your staff who will be training this junior
auditor about the basics of nonprofit accounting. Each year you may find yet another junior
rotated onto your engagement.
In small firms, particularly in sole proprietorships, you may find that the owner of the firm will
conduct the fieldwork, or at least provide direct supervision to the person doing the fieldwork.
If the owner is very experienced in nonprofit auditing, this arrangement can be a tremendous
advantage. However, small firms often have more difficulty meeting timelines because they
have fewer resources to deploy when unanticipated events arise.
Past performance is the best predictor of future experiences. So be sure you check references
and think carefully about the experiences that others have had with this firm.
• References. All of the firms interested in providing audit services for your land trust should
provide references. Ask to see, if possible, a list from each of the firms of their nonprofit clients
and make your own selection of which organizations to contact.
Whenever possible, your reference checks for your final candidates should include discussions
with the executive director and a member of the audit committee of the client organizations
served by the auditor. You should ask about overall satisfaction, timeliness, communication
skills and any reservations the organization would have about working with the audit firm
again.
• Pricing and multiyear contract options. Audit proposals should explain the basis for the
proposed price and whether the auditor is willing to enter into a not-to-exceed agreement,
which limits the maximum amount of the fee. Typically, audit fees are determined by the
number of hours required to complete the audit. Most auditors are somewhat cautious in the
pricing proposals for new audit clients. They recognize that they will not really know how
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difficult the engagement will be until they start working and learn the strengths and limitations
of an organization’s systems.
You should not assume that the least costly proposal is the best or that the most costly
proposal is an indication of the highest quality work. In most cases, you will find the total
proposed prices somewhat similar despite the fact the different audit firms arrived at their
estimates through different methods.
You should consider requiring that audit firms propose multiyear pricing options. This approach
requires that the firm commit to holding the price steady or instituting only minimal increases
over a three-year period. This approach avoids the possibility that an audit firm will submit an
initial year proposal with an unreasonably low price and then propose unreasonably high prices
in subsequent years.
In most cases, you will want to work with the same audit firm over at least a three-year period.
Changing auditors usually makes the audit process more time-consuming and stressful for your
staff and audit committee. Changing auditors frequently may also cause funders and donors to
wonder if you are having disagreements with your auditors, which may reflect some questionable
practices in your organization.
On the other hand, you should rotate auditors periodically so that they do not become too
accustomed to your practices and friendly with your staff or volunteers, which may impair their
independence. If there are not sufficient audit firms locally, you should at least try to make sure
that the personnel on the audit team are rotated from year to year.
WHAT DOES A REVIEW INVOLVE?
The CPA begins the review by examining the financial statements you prepared at the end of your
fiscal year. They will identify the most significant information on the financial statements, including
your cash accounts, major receivables, major payables and the presence or absence of temporarily
or permanently restricted net assets. These are all items presented on your statement of financial
position or balance sheet. The CPA will also examine your statement of activities to identify the
income and expense accounts with greatest significance, usually the largest components of your
income and expense. Once the CPA has identified the most significant information on the financial
statements, they will examine your general ledger and other underlying accounting records to
determine whether the records agree with or support the numbers presented on the financial
statements.
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While evaluating all these components of your financial statements, the CPA will often perform the
procedures and examinations outlined in an analytical inquiry checklist. Many of the procedures
outlined in this checklist could be used in either audit or review engagements. They will prepare a
series of work papers that demonstrate the connection between the financial statement numbers
and the underlying records. For example, to make the connection to the number you reported as
accounts payable, the CPA will prepare or ask your accountant to prepare a list of all the amounts
your land trust owed to specific vendors or creditors at yearend and compare the sum of that list
with the amount reported on your financial statements.
These procedures involve examining records maintained by your land trust, rather than gathering
information from outside sources (a procedure used in an audit). The CPA will review your bank
statements to verify the cash balances in your accounts, but will not seek independent
confirmation from the bank about the accuracy of the statements. Of course, with the advent of
online banking, reviewing your bank statement online will allow the CPA to see the records as they
are maintained on the bank system.
If the CPA determines that the underlying accounting records do not support the numbers in your
financial statements or that you have not followed the guidance of GAAP, they may suggest
revisions or adjustments to your financial statements. If you decide to accept the proposed
adjustments, you will revise your records and financial statements, and the CPA will include those
revised statements in the review report. If you decide not to accept the adjustments, the CPA may
comment on those issues in the report.
The CPA will also work with you to draft notes to the financial statements, which describe your land
trust’s accounting policies, and provide more detailed information about key areas, such as lists of
grants included in net assets with donor restrictions or explanations about the type of in-kind
assistance your land trust received. While assistance with preparation of the footnotes to the
financial statements are outside of the scope of the review engagement, most CPAs are willing to
propose a draft of the notes for review by your organization, if requested.
Upon completion of the work, the CPA will issue a report, which includes a signed letter describing
the review engagement and expressing an opinion on the financial statements taken as a whole.
The CPA binds the letter into a report document that includes each of your financial statements at
yearend – the statement of financial position, statement of activities and statement of cash flows,
as well as the notes to the financial statements. If the land trust completed a statement of
functional expenses, it would also be included.
If, in the course of the review engagement, the CPA discovers information that would have a
material impact on the conformity of the financial statements with GAAP when taken as a whole,
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the opinion will so indicate. The opinion may identify the deviation from GAAP and indicate the
scope of the deficiency in the report, or the accountant may decline to offer an opinion on the
financial statements.
The CPA will show you a draft of the letter before issuing the report. Your board, staff or relevant
volunteers should review the draft carefully to be sure that you are comfortable with both the facts
and the tone of the letter. If you have declined to accept adjustments to your financial statements
that the CPA considers important and includes in the draft letter, you may want to reconsider your
decision to decline the adjustments to ensure that your books are accurate and will pass the
1 · Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
STANDARD 6. FINANCIAL OVERSIGHT
E. Risk Management and Insurance
2. Carry general liability ( ), directors and officers liability, property and other insurance, all as appropriate to the land trust’s risk exposure or as required by law
Accreditation indicator elements located at www.landtrustaccreditation.org
IMPORTANCE OF INSURANCE
None of us knows exactly what tomorrow will bring, but most of us — including most managers of
nonprofit organizations — expect that tomorrow will be much like today. However, events that we
cannot now fully foresee may, occasionally and with little warning, make a nonprofit’s tomorrow
much different — much worse or much better — than it is today. Unpredictable events involving
each of the four fundamental values of a land trust — its people, its property, its income and its
reputation — may bring near disaster or good fortune.
Unpredictable events involve risk, which is a measure of the possibility that the future may be
surprisingly different from what we expect. To fulfill its public service mission, land trust boards, employees and volunteers must manage risks effectively by countering threats of loss and
leveraging opportunities for gain. A correctly tailored insurance portfolio is an effective way to help
manage risk.
What will you do if the unthinkable happens? Fire, flood, damaging encroachment on a preserve, a
landowner who refuses to abide by an easement or a tree that crushes a car? That is where
insurance comes in. Most land trusts do not keep enough money in reserve to cover such losses, so
they purchase insurance to insulate them from the financial consequences of the unthinkable. The
role of insurance and other strategies within a land trust’s risk management program depends upon
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the goals and resources of the organization. Insurance is one means to an end, and its role will
depend on what your land trust seeks to accomplish.
Some of the most common goals related to insurance include:
• Ensuring a source of financial recovery should an individual suffer bodily harm or property
damage while visiting the land trust’s property or while participating in a program
sponsored by the land trust
• Ensuring the availability of funds to cover the cost of defending claims filed against the
land trust, including its directors and officers
• Reducing the risk that the land trust’s cash on hand will be exhausted by costly property or
liability claims
• Giving peace of mind to the land trust’s leaders with respect to the organization’s ability to
survive a property loss or liability claim
• Helping land trusts defend their conserved lands from violations or legal challenges
Insurance can be a significant expense for a cash-strapped organization. Land trusts can also find
themselves insurance rich and coverage poor when their insurance program does not address
insurable risks properly. The role of insurance often depends on a nonprofit’s financial resources,
appetite for risk taking and uncertainty, and risk management activities.
Purchasing insurance with a high deductible may free up financial resources to be spent on mission-
related activities in the short term, although a prudent organization choosing a high deductible will also choose to set aside funds to pay that deductible in the event it becomes necessary to do so.
High-deductible coverages usually have a moderate premium and, generally, insurance coverage
helps the land trust spread risk so that it does not need to have as much cash in reserves for
contingencies. Careful analysis of the policy terms and your land trust’s risk and risk tolerance is
essential to understand the limits and implications of such plans so that the organization has
adequate reserves for the deductible and uncovered events.
The role of insurance in a land trust’s risk management program will vary from one land trust to the
next. In some organizations, the portfolio of insurance purchased from commercial carriers is the primary source of funding for losses and claims. In other organizations, the same set of coverages is
a safety net, to be tapped in emergencies only. Regardless of the perspective that land trust leaders
hold with respect to the proper role of insurance, all leaders can benefit from gaining a better
understanding of the types of risks addressed in commonly purchased coverages.
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For accreditation, a land trust must carry general liability insurance, and the policy must cover
significant risks. In addition, the board or other delegated entity must evaluate insurance needs
at least every five years to determine risk exposure and needs for directors and officers liability insurance, property insurance and other insurance required by law (such as workers’
compensation insurance).
TYPICAL INSURANCE PRODUCTS FOR LAND TRUSTS
Land trusts typically purchase a number of different insurance products (summarized in Table 1).
Before looking at each type of insurance individually, let’s consider how the various insurance
coverages fit together. General liability insurance covers claims alleging bodily injury or property
decisions by the land trust board and staff. Unpaid directors of nonprofits, such as a land trust, may
have some coverage available under their individual homeowners or personal liability umbrella policies, but the protection, when it is available, is limited to the individual and does not offer
defense and indemnity for the land trust where the board member volunteers. Title insurance
generally excludes items on the ground, unless the survey exception is deleted, and usually
excludes landowner compliance with the conservation easement. Title insurance does compensate
the land trust if the actual title to (ownership of) the conservation easement is challenged or if
there is a dispute about the legal description of the property, provided that it is not excluded by the survey exception. Terrafirma fills gaps in coverage that these other insurance products do not cover
and provides coverage for the costs of upholding conservation easements and owned lands held for
conservation purposes when they have been violated or are under legal attack.
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Table 1: Common Insurance Products for Land Trusts
Coverage Type Purpose
General liability Bodily injury
Cyber risk insurance Data loss and system damage, business interruption,
Property Damage or destruction to real property, such as buildings,
conservation land and personal property; embezzlement
of funds
Conservation defense liability: Terrafirma Cost of a lawsuit to protect a land trust’s easements and
conservation properties
Employment practices liability Wrongful discrimination or harassment of employees
Professional liability Errors or omissions in the delivery of professional services
Non-owned auto Accidents involving vehicles used on the land trust’s
behalf, but not owned by the land trust
Umbrella/excess liability Catastrophic claims
Volunteer accident Medical payments for accidents suffered by volunteers
Crime/fidelity coverage Theft, forgery or other fraud, including computer fraud
Workers compensation Medical costs and income replacement for staff who
suffer injuries or illness at work
Title insurance Defense of title impairment or failure (for fee-owned land
and easements)
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Tips for Assessing Your Insurance Needs
• Document the land trust’s goals for its insurance program. The role of insurance and other
strategies within a land trust’s risk management program depends upon the goals and
resources of the organization. Insurance is one means to an end, and its role will depend on
what your land trust seeks to accomplish. Therefore, you need to document your goals for your insurance program.
• Obtain an updated schedule of insurance at least annually from the land trust’s agent or
broker. An annual review of all insurance coverage is an essential risk management activity
because circumstances change. For example, property values may have changed
dramatically resulting in insufficient coverage to fully replace a total loss. Without an
annual review of your insurance, you may find you have less coverage than you need or you
are wasting money on unnecessary coverage.
• Request that your agent or broker disclose the method and amount of compensation
associated with your account. In order to not overpay for insurance, you must understand
both how and how much your agent or broker is compensated for your account.
• Schedule and convene an annual meeting with your agent or broker. Your annual insurance
review should include an annual meeting with your agent or broker to review your insurable exposures and to determine the need for changes in your insurance program in
order to stay current with changes in values, property acquisitions and advances in risk
management planning.
• Provide each member of the board with a copy of the land trust’s directors and officers
(D&O) liability coverage. Because the land trust’s D&O liability coverage benefits board
members in particular, it is important that they have a copy of the current D&O policy.
• Have written documentation on the differences in coverage provided by your commercial
general liability, D&O liability and property policies. Having written documentation on the
differences in coverage will help you know in the event of a claim whom to notify and what
is covered and what isn’t and will assist your attorney, as well, in coordinating with the insurers.
• Assign responsibility for coordinating the insurance buying process to a senior manager in
the land trust. The insurance-buying process is a serious matter and should be managed by
a senior leader in the land trust, not by junior staff or inexperienced or uninformed
volunteers. This person will need to make many judgment calls and must be well informed
about the land trust risks and programs.
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• Have a board member or other personnel carefully review your insurance options and needs
on an annual basis. High-level staff or volunteers must conduct a careful annual review of
your insurance options, which are influenced by your current program activities and risk management needs.
• Resist the temptation to simply renew all existing policies at the same limits and with the
same providers. While it can be expedient to merely renew all existing policies at the same
limits and with the same providers rather than undertaking a meaningful annual review, it
will benefit the land trust in the long run to be confident that it has adequate insurance all
the time to ensure a smooth resumption of operations after a loss with a minimum of
disruption to mission-critical activities.
• Work with an agent or broker who specializes in nonprofit organizations, including
environmental organizations or land trusts. Nonprofits and particularly land trusts have
specific, unique needs and risks. You need to work with an agent or broker who specializes in nonprofit organizations, including environmental organizations or land trusts, to be
certain that your coverage is adequate and appropriate for your activities.
• Follow the requirements for prompt reporting of claims and incidents and take steps to
ensure compliance with the claims-reporting requirements of your various insurers. When
you have a claim, unless you follow the requirements for prompt reporting of claims and
incidents and take steps to ensure compliance with the claims-reporting requirements of
your various insurers, you may find that the insurer denies all coverage of the claim or
imposes greater limits. You may also seriously undermine the effective early resolution of your claim. Be sure to notify the insurance carrier and your insurance agent, as well as your
board and attorney, in the event of a claim or incident.
General Liability
General liability insurance policies typically cover an organization’s exposure for bodily injury and
property damage caused by an accident, except for liabilities that are specifically excluded.
Coverage applies at your premises or anywhere else in the United States, its territories or Canada.
This insurance is extremely important for land trusts to acquire as one bad accident could lead to
financial ruin. You may also be surprised how often general liability will cover the land trust in a
trespass or enforcement lawsuit where the neighbors or successor owners sue the land trust.
Insurance underwriters—the professionals who determine the terms, conditions and pricing of
coverage offered to your land trust—generally add endorsements to general liability policies. An
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endorsement either excludes or expands coverage. The scope of coverage under any general
liability policy will depend upon the particular exclusions and enhancements added to the standard
policy.
Common categories of claims under a general liability policy include:
• Injuries arising from your premises
• Injuries to visitors on land trust properties
• Injuries to volunteers, employees or consultants working for you
• Injuries to guests at special events
• Injury caused by products you sell or manufacture
• Fire damage to your or your landlord’s building
• Damage to property not owned by you or in your possession
Regardless of the specific general liability policy, general liability won’t cover:
• Emotional distress, unless arising from bodily injury
• Financial loss, unless arising from bodily injury or property damage
• Property damage to intangible property (such as information stored on a computer
network)
Commercial general liability coverage refers to an expanded form of general liability that includes
two additional categories of coverage: personal (non-bodily, property) and advertising injury
liability and medical expense coverage.
Cyber Risk Insurance
General liability won’t cover losses from a cyberattack or data breach. Good computer protocols,
relentless information technology hygiene and repeated volunteer and employee training can
reduce the threat of cyberattack. Data breach threats come from many sources: an employee falls
prey to email phishing; a laptop vanishes from an employee’s car; a disgruntled employee leaves
with donor credit card numbers and more. Unintentional privacy breaches, such as information
lost, stolen or accessed by an unauthorized source, regardless of where the data is stored, can be just as costly as the more notorious hacker data theft. The device—and all the vital data on it—
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could be damaged, lost forever or fall into unscrupulous hands. These common activities can lead
to potential liability:
1. Conducting e-commerce, especially collecting credit card data and processing payments
online
2. Storing and transferring employee, client or donor data—both electronic and paper
3. Storing personal information on laptops, smartphones, pads, thumb drives or external
portable drives without proper safeguards
4. Remote workers with sensitive data on remote hard drives and mobile devices
5. Allowing partners or vendors to access personal information without proper safeguards
6. Storing personal information on cloud servers or systems
An experienced broker can identify the insurers who offer the product most suited to your
company’s needs and help negotiate favorable terms and price. Working together, a team including
your broker and outside counsel can ensure that you purchase the right coverage with appropriate
terms and conditions.
Directors and Officers Liability
Directors and officers (D&O) liability policies cover liability for economic damages resulting from
poor judgement, breaches of duty, conflicts of interest, errors or omissions in the governance or
management of an organization. Similar to the structure of a general liability policy, a nonprofit
D&O policy covers liability claims, except those that are specifically excluded. The two policies,
therefore, are intended to be mutually exclusive, meaning that they do not cover the same liabilities; in fact, they specifically exclude the events that the other covers. See Tables 2 and 3 for
an overview of differences and similarities in the policies. The principal difference between general
liability and D&O is that the general liability form covers claims alleging bodily injury and property
excludes bodily injury and property damage. D&O insurance is important for land trusts because
board members may be targeted in lawsuits and need to defend themselves (state and federal volunteer protection laws may be inadequate in such situations).
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Table 2: Key Differences between Commercial General Liability and D&O Policies
Commercial General Liability Directors and Officers Liability
Covers bodily injury, property damage and
personal and advertising injury.
Always excludes bodily injury and property
damage.
Covers accidents only. Claims usually arise
directly from operations rather than governance (management decisions).
Covers wrongful acts. Claims usually arise from
governance or management decisions. Board members, management personnel and the
organization itself are often defendants in these
claims and are listed under a broad definition of
insured in the policy.
Most often sold to nonprofits as an occurrence
policy. The coverage trigger in this policy form is
the date of the event, accident or occurrence.
Most often sold to nonprofits as a claims-made
policy. In some cases, D&O is available on an
occurrence form. In a claims-made policy, the
coverage trigger is the date the claim was made
against the organization. For example, a lawsuit alleging sexual harassment is likely to be filed or
made many months after the alleged incident or
incidents of harassment occurred.
Standard policy wording. Most insurance
carriers use one of the forms issued by the
Insurance Services Offices (ISO). The form
number and ISO reference appear at the bottom
of each page of the policy.
Nonstandard policy wording. Each insurer drafts
or “manuscripts” its own D&O policy forms.
Differences in wording and policy structure
make it more difficult to undertake a side-by-
side comparison of coverage, which is key to
determining which provides better or preferable protection for the insured.
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Table 3: Similarities in Commercial General Liability and D&O Policies
Commercial General Liability Directors and Officers Liability
Covers liabilities common to all nonprofits,
including land trusts.
Covers claims alleging wrongful management
acts that are common to all nonprofits.
Provides broad catch-all or basic liability
coverage. Other liability coverages are more specific and narrower in scope.
Provides broad coverage for wrongful
management acts.
Includes all board members, employees and
volunteers as insureds.
Includes all board members, employees and
volunteers as insureds.
Claims typically covered by nonprofit D&O policies that include employment practices coverage
include those alleging:
• Wrongful termination
• Breach of employment contract
• Discriminatory hiring practices
• Failure to promote
• Negligent evaluation (an assertion that an employee’s performance evaluation was
excessively negative, unfairly low or otherwise inaccurate and therefore did not reflect the
employee’s actual, higher level of performance)
• Retaliation
• Wrongful discipline
• Failure to grant tenure
• Invasion of privacy
• Employment-related defamation
• Employment-related infliction of emotional distress
The majority of claims filed under nonprofit D&O policies allege wrongful employment practices,
but not every covered D&O claim is related to human resource matters. Land trusts should note the
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many areas are subject to risks of negligence. Examples of non-employment claims alleging
wrongful management acts typically defended by D&O policies include:
• Misallocation of funds
• Breach of fiduciary responsibilities
• Self-dealing/conflict of interest
• Antitrust or restraint of trade violations
• Third-party discrimination, defamation or invasion of privacy
• Negligent financial advice to third parties
• Failure to maintain insurance
• Tortious interference with contract
• Breach of contract
• Failure to accredit or certify
• Infringement of trademark, patent or copyright
Exclusions Common to Nonprofit D&O Policies
Each insurance company offering D&O coverage develops and uses its own, somewhat unique,
policy wording. As a result, the coverage offered by two competing companies can vary
significantly. Nonetheless, there are exclusions common to all nonprofit D&O policies. These
include:
• Bodily injury
• Property damage
• Theft
• Criminal acts
• Sexual abuse and harassment
• Deliberately fraudulent acts
• Pollution
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• Nuclear reaction or radiation
• Litigation pending prior to the original inception date of the policy
• Claims involving retirement plans, employment disputes or security laws
Property Coverage
Most land trusts purchase some type of property insurance. The scope of coverage depends upon
the type of property that may be damaged and what caused the damage to occur. Common
property policies protect the following types of property against damage or destruction:
• Real estate/buildings
• Valuable papers
• Money and securities
• Computer equipment
• Boilers and machinery
• Lost income/extra expense
• Personal property
• Fine arts (owned and non-owned; transit and exhibition)
• Accounts receivables
• Contractors’ equipment or buildings under construction or renovation
• Property while it is in transit
• Property belonging to others
To collect under a property policy, the covered property must be damaged by certain causes of loss.
Most policies cover every type of cause, except those specifically excluded in the policy (for
example, nuclear war), but some policies only cover damage caused by specific causes, such as fire,
lightning, wind, water or objects falling from the sky. Many policies do not cover significant
catastrophes that affect a wide geographical area, such as floods or earthquakes.
13 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
Although land trusts have had relatively few legal challenges, conservation easements and
preserved lands are increasingly under attack across America. As population and development
pressures increase, so does the value of conserved properties, making them vulnerable. Eventually,
every land trust will face legal challenge even if they don’t end up in court. Experts to help you
resolve and document any legal challenge are just as expensive as lawyers, so insurance to protect conserved land is important for all land trusts to consider.
The Land Trust Alliance created Terrafirma to offer a significant layer of protection from risk
exposure not covered by other insurance products. To the extent that other insurance policies do
provide coverage, those resources are to be used first to address claims. Terrafirma is owned by
the participating member land trusts as a safety net for the costs of upholding conservation
easements and protecting fee lands held for conservation purposes when they have been violated
or are under legal attack and to provide information to those land trusts on risk management.
Terrafirma is the first far-reaching, national service to ensure the permanence of conservation undertaken by the land conservation community. The insurance program is a risk retention group, a
mutual insurance arrangement whose business is limited to insuring its members, all of whom are
members of the Land Trust Alliance. Terrafirma is a charitable risk pool with tax-exempt status
under the Internal Revenue Code. Learn more at www.terrafirma.org.
Employment Practices Liability Insurance
Most nonprofits that purchase D&O coverage purchase employment practices liability (EPL)
coverage as part of the D&O policy, but EPL coverage is also available as a standalone. A separate
EPL policy may not provide a nonprofit with the depth of coverage that a nonprofit D&O policy with
EPL coverage may include. Many stand-alone EPL policies do not include the organization, all employees or volunteers as insureds. The definition of covered employment actions may be
narrower in a stand-alone EPL policy than a nonprofit D&O policy with included EPL coverage.
Finally, a stand-alone EPL policy may be more expensive and include a large retention or possible
coinsurance provision in which the insured must pay a certain percentage of the loss.
Purchasing employment practices coverage as part of a D&O policy has one clear disadvantage. A
policy with both D&O and EPL coverage addresses two very distinct exposures with one policy limit.
The inclusion of EPL coverage, therefore, could erode the amount of funds available to protect the
directors’ and officers’ personal assets and to protect the nonprofit and its employees and volunteers from other claims. The defense and resolution of an employment-related claim will
reduce and could possibly exhaust the D&O policy limits, thereby leaving limited or no funds for any
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additional non-EPL claims. The majority of nonprofit D&O policies provide no separate limit for EPL
coverage. However, some companies are introducing either a sublimit or separate limit for EPL
coverage. Therefore, a land trust should carefully evaluate the adequacy of its D&O policy limit when it purchases a D&O policy that includes employment practices liability coverage. At the same
time, it is important to keep in mind that some nonprofits, including land trusts, will never face a
non-employment-related claim, and therefore, a D&O policy with employment practices liability
coverage may represent an affordable and appropriate option.
Professional Liability Insurance
Professional liability insurance, also known as errors and omissions liability insurance or malpractice
insurance, covers liability for the higher standard of care required of professionals when providing
services within their area of expertise. Professionals subject to this higher standard of care must
possess and demonstrate the same expertise and competencies common to members in good standing of their profession. Land trusts do not typically purchase professional liability coverage
because their customary liability exposures are covered under commercial general liability or D&O
or other typical coverage (but not always).
Does your land trust need professional liability insurance? Whether a particular service provider in
a particular situation can be held to a professional standard of care is a legal question that can only
be answered definitively in a court of law. The relevant question for insurance purposes is: does
your land trust provide services that are specifically excluded under your general liability and D&O
policies? If the answer is “yes,” you probably need a professional liability policy. Ask your insurance agent if your land trust’s activities are covered or not. You should also compare the scope of your
policy and its exclusions with the services you provide.
Non-Owned Automobile Liability
Non-owned automobile liability insurance covers liability for accidents caused by an employee or
volunteer driving their own vehicle on a nonprofit’s behalf. The coverage is designed to protect only
the nonprofit organization—not the employee or volunteer. Coverage applies when the liability
limits of the vehicle owner’s personal automobile policy have been exhausted. This policy form
does not provide coverage for damage to the employee or volunteer’s vehicle.
Non-owned auto liability is excess coverage, designed to cover the nonprofit only when it is
specifically named in a lawsuit and the damages are higher than the vehicle owner’s policy limits or
when the vehicle owner has no personal auto liability in force. Obviously, if a land trust does not rely on employees’ or volunteers’ personal cars, this insurance is unneeded.
15 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
Excess and Umbrella Liability
Liability insurance policies provide either primary or excess coverage. Primary coverage is the first
to apply or respond to covered claims. When the limits of a primary policy have been exhausted,
the excess policy will be triggered and provide additional limits of liability for defense costs,
judgments and settlement expenses. Excess policies follow form, which means that they mirror the
terms and conditions of the underlying policy. They do not cover claims that would be excluded by the primary policy. Some of these coverages, such as excess auto liability, include the label excess in
their names and are, therefore, easy to identify. Excess coverage is often inexpensive due to the
low probability that it will be needed.
Umbrella insurance policies generally provide broader protection than excess policies. Why? In
addition to providing excess coverage over underlying limits, an umbrella policy will “drop down” to
cover losses not covered under a land trust’s primary insurance policies. This coverage is subject to
a large deductible, which is called a self-insured retention. The standard self-insured retention
amount is $10,000.
Umbrella policies supplement the coverage a land trust has through its other liability policies. If an
organization does not have sufficient liability coverage to resolve a claim or a lawsuit, the person bringing the action might go after the organization’s property assets to pay for damage. Umbrella
policies cover the excess liability of damage claims against an organization or its employees and
volunteers. Generally, umbrella policies provide coverage only when the limits of other policies
have been exhausted. In determining if your land trusts needs an umbrella policy, take a look at
your activities, the amount of insurance coverage you hold and the communities in which you
operate (are they particularly litigious with high awards common?). It may make more sense to increase your insurance coverages across the board. Most land trusts that reach a staff size of more
than five full-time equivalents usually start considering umbrella coverage merely due to the extent
of the organization’s activities and obligations.
The declarations page (“dec page”) for your umbrella policy will typically indicate the relevant
underlying policies. In order for the umbrella coverage to apply, the scheduled underlying policies
must be in force at the time of loss.
Volunteer Accident Coverage
Although permitted in some states, including volunteers in a land trust’s workers compensation
coverage is an expensive proposition. As an alternative, land trusts that use volunteers extensively
may elect to purchase volunteer accident coverage. This coverage provides medical reimbursement
up to a defined limit, but it does not provide income replacement. A typical policy offers no-fault
16 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
coverage that is available if a covered individual suffers an injury while serving a nonprofit
organization. Accident medical reimbursement coverage (also known simply as accident coverage)
can also be written to cover volunteers and participants. A volunteer accident policy does not provide coverage for the organization itself; however, the availability of the coverage may dissuade
an injured volunteer from bringing a legal claim against the land trust.
Accident coverage provides reimbursement for medical treatment, hospitalization and licensed
nursing care, for dental care or repair and replacement of dentures and for repair and replacement
of eyeglasses. It also includes benefits for accidental death and loss of limb and sight. Limits of up to
$25,000 per covered accident are generally available.
Most accident policies are available with no deductible. Accident policies are written on an excess
basis, which means that they are excess over Medicare, Medicaid or any supplemental insurance
the volunteer may have in place. If there is no such insurance, the coverage becomes primary.
Common exclusions for this policy include sickness, injuries occurring while performing fire or
rescue duties or playing sports or accidents incurred while under the influence of controlled
substances.
Crime/Fidelity Coverage
A crime policy is generally a package of policies that protect an organization against intentional
theft by insiders as well as theft of assets by third parties. A fidelity bond is often used interchangeably with crime coverage; however, a fidelity bond or employee dishonesty bond is
actually just one component of a broader crime policy. The coverage can be purchased separately
or as a stand-alone policy.
A fidelity or employee dishonesty bond addresses a single type of exposure that is theft and
embezzlement committed by a staff member. It also covers claims concerning mishandling of
retirement plans and frequently is provided by the D&O carrier. If a client, contractor or a third
party, such as a burglar, steals anything, the fidelity bond does not apply. Most nonprofits purchase
blanket position bonds rather than only coverage for specific persons on the policy so that the organization has coverage for all of a person’s acts associated with the organization. In determining
whether you need this type of insurance, review your land trust’s activities and financial systems to
see if makes sense to purchase. If the organization handles large amounts of funds, has complex
financial arrangements, works with donors outside of the state in which your land trust is
organized, has a significant payroll and certainly if it manages a pension plan or other retirement
funds, then you may be wise to buffer the organization from this type of loss. Risk balancing
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through excellent financial management systems of course is the first critical step. It is also
important to remember that this type of insurance protects the honest employees, board,
volunteers and your reputation from suffering effects of dishonest actions.
Common claims allege employee dishonesty, embezzlement, forgery, robbery, safe burglary,
computer fraud, wire transfer fraud, counterfeiting and other criminal acts. Because dishonesty-related losses are not typically covered by most property insurance policies, fidelity insurance is an
additional component for many businesses.
Workers Compensation
Coverage A (or Part One) of the policy provides reimbursement for medical claims and income
replacement for workers unable to work due to illness or injury. The coverage, therefore, reduces,
but does not eliminate the risk that the employer will face a liability claim from an injured worker.
Coverage B (or Part Two) provides employers with liability protection for liability claims that are
narrowly allowed by statute.
Today, every state requires that employers who meet defined thresholds (based on number of
employees or type of activity) carry workers compensation coverage. Workers compensation is
governed at the state level through state statutes (no fault). Employers’ liability is governed through the legal system and tort law (common law and negligence). The only named insured of a
workers compensation policy is an employer of at least one full-time employee. The employer must
have a federal employer’s identification number (EIN) to obtain coverage. Most states require
confirmation that workers compensation coverage is in place on unemployment tax forms.
Title Insurance
Sometimes title problems occur that could not be found in the public records or are inadvertently
missed in the title search process (see Practice 9F). To help protect your land trust in these events,
consider obtaining an owner’s policy of title insurance to insure you against the most unforeseen
problems when you acquire conservation easements or fee-owned land. Owner’s title insurance, called an owner’s policy, is usually issued in the amount of the real estate purchase (or its value, if a
donation). It is purchased for a one-time fee at closing and lasts for as long as you or your heirs
have an interest in the property. Only an owner’s policy fully protects the land trust should a
covered title problem arise that was not discovered during the title search. Possible hidden title
problems can include:
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• Errors or omissions in deeds
• Mistakes in examining records
• Forgery
• Mortgage holder fraud, forgery or false information
• Undisclosed heirs
• Potential boundary issues if not excepted from coverage
An owner’s policy provides assurance that your title company will stand behind you—monetarily
and with legal defense, if needed—if a covered title problem arises after you acquire land or a
conservation easement. The title company will help pay valid claims and cover the costs of defending an attack on the title. Receiving an owner’s policy isn’t an automatic part of the closing
process, and it is paid for by different parties in different parts of the country. For more on title
insurance and when your land trust needs to purchase it, see Practice 9F and this Practical Pointer.
INSURANCE TRIAGE QUESTIONS
The kinds and amounts of insurance will depend on your organization’s size, risk profile, property
and legal structure. Use the following questions to determine your land trust risk categories, which
should help you select the proper types of insurance.
Do you own real estate?
o If yes, consider property, general liability
Do you have employees?
o If yes, consider D&O (with employee practices liability or as a separate policy),
general liability, non-owned auto (if employees use their personals cars for land
trust business), crime/fidelity coverage, workers compensation (required in all
states), harassment and sexual abuse
Do you hold conservation easements?
o If yes, consider Terrafirma, title insurance, volunteer accident (if your volunteer’s
monitor easements) and also carry general liability and D&O because all these
coverages provide defenses when unhappy successor owners or neighbors sue the
land trust
19 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
Do you employ licensed professionals?
o If yes, consider D&O, general liability, professional liability
Do you buy or sell land?
o If yes, consider Terrafirma, title insurance, general liability, property,
umbrella/excess liability and D&O (you will be surprised how often disgruntled
persons will sue a land trust for bad faith, misrepresentation or fraud in the context
of a failed real estate transaction, or even a successful one, where negotiations
were aggressive)
Do you have volunteers?
o If yes, consider D&O, general liability, volunteer accident, crime/fidelity, non-
owned auto, harassment and sexual abuse
Do you have events?
� If yes, consider property, general liability, crime/fidelity
Do you own a company vehicle?
� If yes, consider auto, general liability, property, umbrella/excess liability
Do you use power equipment or hand tools likely to cause injury?
� If yes, consider property, general liability, volunteer accident, workers
compensation (required in all states)
Do you use or are personnel exposed to chemicals?
� If yes, consider property, general liability, volunteer accident, workers
compensation (required in all states)
Do you conduct children’s programs or events?
� If yes, consider D&O, general liability property, crime/fidelity and, sadly, land trusts
must also now have harassment and sexual abuse protection
Do you lease office space?
� If yes, consider general liability, renter’s insurance
20 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
Do you lease equipment?
� If yes, consider general liability, volunteer accident, workers compensation
(required in all states)
Are you in a litigious area of the state?
� If yes, consider D&O, general liability, Terrafirma, volunteer accident,
umbrella/excess liability
Are attorney fees generally high in your region?
� If yes, consider Terrafirma and umbrella/excess liability
Is your area of the state subject to severe weather or flooding?
� If yes, consider general liability, property, umbrella/excess liability
If your office was forced to shut down for one or more months, would it cause operations
to cease?
� If yes, consider general liability, property, umbrella/excess liability, business
interruption
Does your area have heavy media coverage?
� If yes, consider commercial general liability and D&O should a land trust decision
result in a lawsuit or adverse media campaign
Do you use computers and the Internet to conduct fundraising and your operations?
� If yes, evaluate your cyber risks and consider purchasing an appropriately sized
21 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
Table 4: Insurance Coverage Matrix
22 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
What to Do When Purchasing Insurance
• Find a competent insurance professional (broker or agent) whom you trust to advise you on
insurance matters and act as your advocate in the insurance marketplace
• Ask your insurance agent or broker to disclose how they are compensated and also the
amount of compensation they receive for work on your behalf
• Have a senior staff person or board member purchase insurance and annually review the
policies
• Take the time to read your insurance policies annually
• Investigate the financial stability of your insurers
• Ask your broker or agent to respond in writing to your questions
• Consider seeking multiple bids for your insurance coverage at least every four to five years
• Give thoughtful consideration to how much risk your land trust can afford to retain
• Provide your board of directors with a copy of the actual policy wording for the land trust’s
D&O liability policy
• Provide a periodic briefing on your insurance program to the land trust’s board of directors
• Review your risks annually
What Not to Do When Purchasing Insurance
• Delegate responsibility for your insurance program to a junior staff member or new
volunteer
• Simply renew your coverages each year without considering whether your coverage needs
have changed
• Wait until the last minute to submit completed applications
• Be evasive about your operations and exposures on your application
• Be shy about asking questions concerning your coverage or the process
• Regard your insurance coverage as the equivalent to a risk management program
23 Land Trust Alliance · Land Trust Standards and Practices · Practice 6E2. Risk Management and Insurance Accreditation indicator element and Terrafirma enrollment prerequisite ( ) Last revised December 17, 2019
Tips for Working with Your Insurance Professional
• Provide prompt, clear, concise answers to questions
• Expect your quote in a timely manner
• Ask questions and expect understandable answers
• Get important answers in writing
• Don’t withhold information from your broker
• Report claims to your broker immediately and be prepared to give detailed information
regarding the claim
• Meet with your broker annually to review your policies
Insurance Professional Services/Responsibilities
The following list indicates some of the services an insurance professional might provide to a land
trust. The leaders of your land trust must decide which services it requires or views as desirable.
• Provide complete and accurate information to the insurance carrier on behalf of the
insured, including signed applications and updated information at renewal.
• Remit down payments and balance payments to the insurance carrier in a timely fashion.
• Arrange financing, if requested by the insured member.
• Help insured with compliance with safety recommendations.
• Complete certificates of insurance and request additional insured endorsements, as
required by funding sources, landlords and so forth.
• Review all contracts for the insured with respect to insurance requirements. Forward
unusual contractual obligations to the insurance carrier for review and comment.
• Be available to answer questions regarding the insurance contract.
• Report claims and coordinate claim adjusting with the insurance carrier.
• Be available to participate in the land trust’s risk management committee, if requested.
• Be available to attend at least one of the land trust’s board meetings per year, if requested.
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• Present an appropriate insurance package to the land trust for its review and action.
• Serve as a source of information with respect to insurance questions.
• Maintain a complete insurance file for the insured nonprofit (as the insured, you should
keep a copy, as well).
• Maintain continuing education and proper licensing status at all times.
ADDITIONAL RESOURCES
Online
• A Guide to Risk Management for Land Trusts, an online course offered by the Land Trust
Alliance.
• Nonprofit Risk Management Center. Complimentary for Land Trust Alliance members. Click
on “Affiliate Login,” and first-time users need create an account (be sure you indicate you
are a member of the Land Trust Alliance to receive free access).