Fiscal Practices (Steve Katell, MBA, CPA)

(Best) Fiscal Practices

Stephen Kattell, MBA, CPA

Kattell and Company, P.L.

Serving the Nonprofit Community

Summit Objectives

To provide education, resources, and tools to nonprofit staff and board members on a specific topic in order to further their missions.

Fiscal Practices and Mission

Sound fiscal practices NEVER ensure that an

organization will achieve its mission.

HOWEVER

Deficient fiscal practices OFTEN prevent

organizations from achieving their mission.

Fiscal Practices and Mission

BUT, NOT ALWAYS

Some nonprofits achieve mission without sound fiscal

practices

– Sometimes just lucky

– Usually much more costly

DO YOU WANT TO LEAVE ACHIEVEMENT OF

YOUR MISSION TO CHANCE? Do You Feel Lucky?

Responsibility

Responsibility can be

delegated but not

abdicated.

RESPONSIBILITY?

Board of Directors

Board Treasurer/Committees

Chief Executive Officer – Executive Director

Chief Financial Officer – Accountant

– Bookkeeper

– Finance director

– Controller

Contractors – Bookkeeper

– Payroll Company

– Auditor

– Attorney

Volunteers

Responsibility (according to steve)

Board of Directors

Board Treasurer/Committees

Chief Executive Officer – Executive Director

Chief Financial Officer – Accountant

– Bookkeeper

– Finance director

– Controller

Contractors – Bookkeeper

– Payroll Company

– Auditor

– Attorney

Volunteers

Board of Directors

Set a budget.

Monitor status of budget by comparison to regular financial information. – Balance Sheet

– Profit and Loss Statement Include budget to actual comparison

– Balance Sheet and P&L should “articulate”.

– Generated from the accounting software.

Use care of a prudent person.

Board of Directors

Let these do the leg work and report to the

full board:

– Treasurer

– Finance Committee

– Audit Committee

– Investment Committee

The more financial experience the better.

Board of Directors

Leg work includes:

– Liaisons between board and staff with respect to

all fiscal matters

– Meetings with the CEO and CFO to review

budgets and reports and recommend changes

– Reviewing and making recommendations

regarding internal controls

– Reviewing and making recommendations

regarding policies and procedures

Chief Executive Officer

You can have great passion for the mission and programs, but you must also have a working knowledge of the finances:

– Where’s the cash?

– How does each action, decision, or program affect the cash?

CEO supervises the CFO.

Some CEOs are better suited to be the CPO or DD because they just don’t get it when it comes to the finances.

Internal Controls

That set of policies, programs, practices,

procedures… that provide assurance that

you will achieve your objective.

Fiscal objectives

– Assets are safeguarded

– Financial information is accurate and reliable

– Transactions are authorized

For smaller nonprofits – CASH is KING.

Internal Controls Perspective… … the Fraud Triangle

Incentives and pressures Bad habits – drugs, alcohol, gambling, spending

Bad breaks – divorce, medical problems

Solution – Robust HR Department

Opportunities Lack of internal controls

In most cases of theft of cash, obvious controls were missing.

Attitudes/Rationalizations Low moral from layoffs

Perceived inequities in hiring, pay, bonuses, promotions

Solution – Establish a culture of high ethical standards and integrity

Cash is King

Get the cash in your hands.

– Ask for donations.

If pledged, follow up on payments

– Bill for goods and services delivered

Follow up and collect on accounts receivable

Don’t let the cash out of your hands.

– The person responsible for paying the bills should be the

cheapest person in the organization.

– This person should not worry about being the most popular.

No Miss Congeniality awards here!

Internal Controls – Money In

Principles:

– How do you know all of the money that should be

deposited into the bank actually makes it to the

bank?

– Rule of thumb. The fewer the number of people

who touch the money before it goes into the bank,

the fewer controls you need.

Internal Controls – Money In

General – Pass out “For Deposit Only” stamps like candy.

– Segregate Duties – establish healthy competition between functions.

Revenues – Segregate duties: Program personnel want to report maximum revenues.

– Processes to ensure invoicing and recording for all goods and services delivered.

– Processes to follow up on collections.

Contributions – Segregate duties: Development people want to report maximum

contributions.

– Reconcile donor database with accounting records.

– Who sends out donor acknowledgements and on what basis?

Grants – Try not to leave money on the table.

– Reconcile grant billings to expenses in the GL.

Internal Controls – Money Out

How do you know that all money taken out of the bank (or investment accounts) was for a legitimate and authorized purpose?

checks written

EFTs

on-line bill pay

automatic deductions

fees

Fraud Rule of Thumb. Most organizations typically need to worry about just one person, the CFO.

Internal Controls – Money Out

Controls over CFO

– If the CFO stole money, who would detect it?

– 2 signatures on checks - MEANINGLESS.

– Someone other than CFO needs to review bank

statements.

– Larger organizations need more complex

processes.

Internal Controls – Money Out

Over-Payments – Payables Clerk should be the cheapest person in the

organization.

– Compare to contract or agreement.

– Compare to last month’s invoice.

– Compare to last year’s invoice.

– Compare to purchase order.

– Compare to receiving report or packing list approved by the person who actually received the goods.

Most common over-payments – sales tax. – Company credit cards/debit cards are acceptable when

properly controlled.

Bookkeeping Basics… Check Your Work!

Cash - monthly bank reconciliations.

My latest pet peeve – bank reconciliations that don’t

reconcile.

What’s a bank reconciliation? Bank reconciliations

can only have 4 items:

– Balance per bank statement

– Plus – Deposits in Transit

– Minus – Outstanding Checks

– Equals – Balance per general ledger

Bookkeeping Basics… Check Your Work!

Investments

– Agreement to investment statements.

– Proper recording of current period income, fees,

gains and losses.

Receivables and payables.

– Agreement to subsidiary schedule.

– No bogus entries or balances.

Bookkeeping Basics… Check Your Work!

Prepaid expenses.

– Some sort of supporting schedule proving the amounts

prepaid.

Fixed Assets.

– Actually on hand.

– Depreciation schedule.

Long Term Debt.

– Balance agrees to monthly statement, if any.

– Balance agrees to amortization schedule.

Bookkeeping Basics… Check Your Work!

Look at your trial balance.

Do you understand every account that is

there and do you understand every balance?

A more complex organization means more

complex accounts and balances.

Complex accounts and balances require

more skill from top level management.

Management Information

Use of classes if highly recommended for – Functional reporting

Required by IRS and GAAP

– Departmental reporting Accountability

– Grant reporting Required by state and federal law

Provides evidence that double dipping did not occur. (Note: double dipping is bad.)

– Tracking donor restrictions Keeping donors informed

– Determining profit and loss from one or more activities.

Audits – Who Needs Them?

Independent (external) – CPA

“Internal Audits” for smaller organizations

can be a nice substitute for an external audit

– Set up an “audit committee” who will provide an

after the fact review.

– Volunteers who know their way around financial

records.

Independent Audits

Not required by the State of Florida

Not required by the IRS

Typically required by funding sources. – United Way of North Central Florida requires for

budgets of over $500,000.

– Federal government requires for expenditures of federal awards of more than $500,000.

– Consult other funding or regulatory requirements.

Independent Audits

Don’t be penny wise and pound poor.

Think twice: How much is the cost of an audit

compared to the large donor who didn’t give

you a second thought?

There are actually benefits of an audit

– Sometimes quantifiable.

– Usually less tangible.

– Not always cost justified.

Audit Alternatives

Reviews

– United Way requires reviews for organizations

under $500,000.

– Provides limited assurance based on limited

procedures.

Compilations

– Provides no assurance.

And Now for My Soapbox

There are those that suggest that auditor rotation is

a best practice.

It is not a best practice. Studies show it’s not even a

good practice.

Mandatory rotation “dumbs down” the process.

The best practice is to evaluate your auditor every

year and to make any future engagement contingent

on the quality of the latest engagement.

Internal Revenue Service

Primary source of laws and regulations governing the activities of tax-exempt organizations (TEOs)

Generally prohibiting: – Private benefit

– Private inurement

– Political activities

Limiting: – Lobbying

Providing for: – Taxation of unrelated business activities

IRS – Compensation Issues

Reasonable compensation or excess benefit.

What is reasonable?

Safe harbor provisions provide a rebuttable

presumption of reasonableness.

– Independent committee

– Comparability data

– Contemporaneous documentation

Compensation Issues

One of the most common criticisms that is found in an audit… compensation that is not properly reported to the IRS. – Bonuses

– Gifts

– Awards

– Personal use of Vehicles

Computers

Cell phones.

Compensation Issues

Non Taxable Benefits: – Health, Life, Dental Insurance

Part of a plan applicable to all employees.

Reimbursement for actual health insurance.

Seek professional help.

– Retirement Plans Can’t just give them money

403(b)

401(k)

457

Others

Seek professional help

Form 990 Series

Form 990-N – Gross receipts ≤ $50,000.

– Filed electronically

Form 990-EZ – 2008: Receipts < $1,000,000 and assets < $2,500,000

– 2009: Receipts < $500,000 and assets < $1,250,000

– 2010: Receipts < $200,000 and assets < $500,000

Form 990 – All others.

– Extensive.

Form 990 – Governance Policies

Form 990. Do ALL members of governing board review Form 990 BEFORE filing?

– Describe process for review.

Conflict of Interest Policy. Does TEO have a conflict of interest policy? – Annual disclosures?

– Regular and consistent monitoring? Describe such monitoring

Whistleblower Policy. Written whistleblower policy?

Document Retention. Written document retention and destruction policy?

Compensation. Did process for determining compensation of CEO, officers and other key employees include safe harbor provisions?

– If yes, then describe the process.

Joint Venture Arrangements.

Local Chapters, Branches, or Affiliates.

Questions?

Applause!