2015-01-28 The Role of the Audit-Finance Committee
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Transcript of 2015-01-28 The Role of the Audit-Finance Committee
Audit and Finance Committees: Defining their Roles and Managing Their Work
Kay Vollans, CPA & Bob Bloom, CPA January 28, 2015
RAFFA Learning Community
Thrive. Grow. Achieve.
OVERVIEW
• Introductions
• Fiduciary Responsibilities
• Financial Oversight Responsibilities
• COSO – Internal Control – Integrated Framework
• Reporting Standards of Nonprofits
• Tax Considerations
• Roles of the Board, CEO And CFO
• Financial Reporting to the Committee
• The Audit and the 990
• Q&A
INTRODUCTIONS
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Bob Bloom, CPA is a Senior Manager for Raffa’s Audit Department. He has more than 30 years of financial advisory experience serving a variety of nonprofit organizations. Bob serves on several not-for-profit boards, and has roles on finance, audit and pension committees. Bob has made numerous presentations to Boards of Directors and has been a presenter and instructor for GWSCPA, Raffa’s Learning Community, and internal trainings. Kay Vollans, CPA is a Tax Manager for Raffa’s Non Profit Tax Department. She has eight years in public accounting and focuses on exempt organization tax compliance and consulting. Kay has written multiple articles on various tax subjects and delivers presentations in Raffa’s Learning Community as well as internally for multiple departments at Raffa.
FIDUCIARY RESPONSIBILITIES
Legal and Compliance Requirements
• Nonprofit Organizations (NPOs) must have a governing body overseeing the affairs of an organization
• All states require NPOs incorporated in their state to have a Board of Directors
• IRS Form 990 contains a series of questions concerning the board and its governance practice
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FIDUCIARY RESPONSIBILITIES
Core Concepts
• Bears the primary responsibilities for ensuring that organizations fulfill its obligations to the law, its members, its donors, its staff and the public
• Mission, strategic directions and broad policies are set by the board in conjunction with the CEO and senior staff
• Must protect the assets of the organization and provide oversight to ensure its financial, human and material resources are used appropriately to further the organization’s mission
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FIDUCIARY RESPONSIBILITIES
• Board Member Responsibilities:
– Display loyalty and exercise prudence
– Act in good faith and be responsible
– Keep informed in order to make appropriate decisions
– Monitor the organization’s financial health
– Ensure the appropriate checks and balances are in place
– Monitor the organization’s risk management
– Avoid micro-management - be governors, not managers
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FINANCIAL OVERSIGHT RESPONSIBILITIES
• Sound financial management is among the most important responsibilities of the board
• Financial Oversight responsibilities:
– Review and approve annual budget
– Review timely financial reports at least quarterly
– Monitor actual financial results against approved budget
– Oversee annual audit process and review audited financial statements
– Review Form 990
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FINANCIAL OVERSIGHT RESPONSIBILITIES
• Ensure current written financial policies exist and staff are adhering to the board approved policies
• Ensure adequate internal controls are in place to deter and detect fraud and misappropriation of assets and financial reports – Separation of duties – no one person should
perform duties of receiving, depositing and spending its funds
– Physical security of assets
– CEO/CFO are responsible for internal controls
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Systems that Protect NPOs
• Internal controls
– Goal = protection of assets and to deter fraud
• Accounting policies and procedures
– Accounting manual
– Investment policies
– Reserve/board designated endowment policies
• External audits
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FINANCIAL OVERSIGHT RESPONSIBILITIES
FINANCIAL OVERSIGHT RESPONSIBILITIES
• QUESTIONS BY BOARD MEMBERS:
– How well do we review financial reports and monitor financial performance?
– Are we making relevant comparisons – e.g., performance against budget and prior year’s information?
– Do we need to upgrade the board’s financial expertise?
– Has the organization established a reserve fund and related policies and guidelines?
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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK
• In 1992, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released Internal Control – Integrated Framework
• The original framework for designing, implementing and conducting internal control and assessing the effectiveness of internal control
• It has been updated, because business and operating environments have changed dramatically: – Complexity – Technologically driven – Global
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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK
• The Framework has been enhanced by expanding the financial reporting category of objectives
• The Framework reflects changes in the business and operating environments: – Expectations of governance oversight – Globalization of markets and operations – Changes and greater complexities of business – Demands and complexities of laws, rules, regulations
and standards – Expectations of competencies and accountabilities – Use of, and reliance on evolving technologies – Expectation relating to preventing and detecting fraud
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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK
• Internal control helps entities achieve important objectives
• COSO’s Framework enables (empowers) organizations develop a system of internal control to adapt to changing environments, mitigate risks, and support sound decision making and governance of the organization
• Management and Boards of Directors (Audit Committees) must determine how much control is enough
• The Framework assists Boards, management and stakeholders in their respective duties regarding internal control
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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK
• Components of Internal Control – Control Environment – Risk Assessment – Control Activities – Information and communication – Monitoring Activities
• The Framework sets out 17 principles and 77 points of focus representing standard concepts associated with each component
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COSO – INTERNAL CONTROL -INTEGRATED FRAMEWORK
• Role of the Board of Directors through the Audit Committee – The Board should discuss with senior
management the state of the entity’s system of internal control
– Senior management is accountable for internal control
– The Board should be appraised of the risks to the achievement of the entity’s objectives re: internal control
– The Board should challenge management
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COSO – INTERNAL CONTROL – INTEGRATED FRAMEWORK
Principles Points of Focus
1 The organization demonstrates a commitment to integrity and ethical values
1 Sets the tone at the top
2 Establishes standards of conduct
3 Evaluates adherence to standards of conduct
4 Addresses deviations in a timely manner
2
The Board of Directors demonstrates independence from management and exercises oversight of the development and performance of internal control
5 Establishes oversight responsibilities
6 Applies relevant expertise
7 Operates independently
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Provides oversight on Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities
3
Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives
9 Considers all structures of the entity
10 Establishes reporting lines
11 Defines, assigns, and limits authorities and responsibilities
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Control Environment
COSO – INTERNAL CONTROL – INTEGRATED FRAMEWORK
Principles Points of Focus
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The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives
12 Establishes policies and practices
13 Evaluates competence and addresses shortcomings
14 Attracts, develops and retains individuals
15 Plans and prepares for succession
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The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives
16 Enforces accountability through structures, authorities and responsibilities
17 Establishes performance measures, incentives and rewards
18 Evaluates performance measures, incentives and rewards for ongoing relevance
19 Considers excessive pressures
20 Evaluates performance and rewards or disciplines individuals
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Control Environment (continued)
REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS
• In order for Board members to make educated decisions, information reported to them must be: • Accurate & Complete
– Enable management & board to make informed decisions
• Timely – Keep current on financial status
• In Context – Presented in relationship to the history - Goals &
Programs of your nonprofit • Appropriate
– Include financial information deemed important to management & board
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REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Principle Financial Documents
• Annual audited financial statements
• Monthly/Quarterly unaudited financial statements prepared by staff, in accordance with GAAP, or cash basis
• Annual Budget
• Other ad hoc or unique financial reports
– Budget vs. actual reports (vs. prior year to date) – Cash flow projections – Departmental financial statements
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REPORTING STANDARDS OF NONPROFIT ORGANIZATIONS Other Important Financial Reports
• IRS Form 990
• Major Financial Commitments – Loans, Purchases, Acquisitions
• Investment Statements & Policies
• Reserve Policies – Operating – Capital – Program initiatives
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FORM 990 – PAGE 6
• Policies not required but considered “good governance” according to IRS
• Form 990 review by entire board (this form)
Presentation Title / Page 20
TAX CONSIDERATIONS
Form 990: Annual Federal information return for exempt organizations – Program service accomplishments – Attached schedules based on appropriate
answers to “trigger” questions about activities – Governance policies described should be verified – Board members and compensation reporting – Public support test – Failure to file or timely file costs
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TAX CONSIDERATIONS
Tax return compared to Audited financial statements: – GAAP reporting can be different from IRS
requirements – Part XI Reconciliation of net assets – Schedule D Reconciliation – i.e. Donated services and use of facilities not
allowed to be reported as revenue/expense (different from donated goods)
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TAX CONSIDERATIONS
Unrelated Business Income (UBI): DEFINED:
– Trade or Business: activity conducted for the production of income from selling goods or performing services
– Regularly carried on: activities that have a frequency and continuity, pursued in a manner similar to non-exempt organizations
– Not “substantially related” to exempt purpose: does not contribute importantly to accomplishing organization’s purpose
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TAX CONSIDERATIONS
Unrelated Business Income (UBI): – Form 990-T: Required filing (for gross UBI of $1,000 or more)
that calculates taxable income on unrelated business activities
• Advertising on websites or in periodicals • Debt-financed income • Job web activity • Inventory: mugs, t-shirts, bumper stickers
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TAX CONSIDERATIONS
Unrelated Business Income (UBI):
– Exceptions:
• Interest/Dividends/Capital Gains
• Real property rentals
• Royalties
• Convenience
• Volunteer activity
• Donated goods
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TAX CONSIDERATIONS
More UBI considerations:
– Substantial services in relation to rent/royalty arrangements may create UBI
– Alternative investments (K-1’s) verified for UBI and state reporting
– Verifying: Net operating losses and carryforwards – Planning: Quarterly payments on tax for cash flow
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TAX CONSIDERATIONS
State considerations:
– General business license – Sales tax exemption certificate – Personal property tax filings – State charitable registrations – UBIT: location of business and domicile state
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TAX CONSIDERATIONS
Other compliance items:
– Payroll – 940, 941, unemployment, W-2, 1099 – Retirement and Benefit Plans – Dissolutions & mergers – Lobbying/political registrations – Political Action Committees & FEC filings – Retirement plans – Foreign ownership or accounts
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TAX CONSIDERATIONS
Don’t be hesitant to ask tax related questions:
– Ask your organization’s financial officer or your tax advisor
– Form 990 review period typically set aside for Board members
Your exempt organization’s 990 return is your
business...and everyone else’s!
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ROLES - EFFECTIVE BOARD LEADERSHIP
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• A shared understanding of the organization’s mission and vision
• A clear sense of roles and responsibilities • Trust • Establish guiding principles, policies and
mission for the organization • Regular review of the strategic plan and
mission (keep them fresh and relevant) • Establish metrics for success
ROLES – GOVERN MORE/MANAGE LESS
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More On 1. Policy issues 2. Components of
corporate strategy 3. Relationship between
budgets and priorities
4. Being a strategic asset
5. Governing the organization
Less On 1. Policy language 2. Specifications of a
particular program or service
3. Terms and conditions of services or contracts
4. An operational overseer and evaluator
5. Monitoring the management
GOVERNING BOARD RESPONSIBILITIES
• Determining mission and setting policy
• Hires and evaluates the executive
• Ensures that adequate resources are available
• Approves budget; monitors financial results
• Sets investment policy; monitors results
• Sets operating policies; monitors progress; evaluates outcomes
• Responds to executive’s information
• Monitors compliance
• Establishes strong internal control environment; monitors adequacy of controls (auditor involved); follows up on implementation of recommendations
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EXECUTIVE OFFICER RESPONSIBILITIES
• Institutes Executive Board policy • Hires, monitors, and evaluates staff & volunteers (including
finance) • Uses resources as directed by Board; participates in resource
development • Creates budget to implement Board policy • Provides adequate and timely financial information to Board • Manages investments and other assets; safeguards assets
(including adequate insurance) • Implements operating policies • Keeps Board informed, especially when problems impend • Ensures compliance with laws & regulations (including tax,
donor restrictions, OMB) • Operates strong internal control system; administers ethical
standards; implements auditor recommendations
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FINANCIAL OFFICER RESPONSIBILITIES
• Awareness of organization mission and policies • Hires and monitors financial staff • Assists Executive as requested • Assists Executive in creation of budget; monitors
progress; alerts Executive to impending problems • Keeps detailed investment records; monitors
performance • Assists Executive as requested; keeps financial
records • Keeps Executive informed (also Board, as
requested by Executive) • Monitors compliance with laws and regulations • Designs and operates internal control system;
implements auditor recommendations
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PITFALLS OR OPPORTUNITIES
• Choose members for values and skills rather than friendship or connections
• Avoid conflicts and personal agendas
• Perform self assessments
• Reward motivation; recognized enthusiasm and outstanding performance
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IDEAS FOR PRODUCTIVE MEETINGS
• Mission-based meetings • Have the right presiding officer • Frequency/Cycles • Preparation: Agenda/Consent
Agenda/Reports • Minutes • Evaluation/Feedback • ENJOY!
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FINANCIAL REPORTING TO THE COMMITTEE
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REPORTING TO YOUR BOARD
• Foundation – Consolidated Statement of Financial Position – Statement of Activities
• Community Based Organization – 1 page summary – Financial Report
• Consolidated NPO – 1 page summary – Financial Report
• Association – Financial Reports – Budget
• Private School – Dashboard – Statement of Activities
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REPORTING TO YOUR BOARD
• Be transparent
• Be consistent from period to period
• Reconcile cash to GAAP
• Check your work before you distribute
• Be a good messenger – send materials out well before the Board meeting, never last minute
• Tell the whole story
• Be direct
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REPORTING TO YOUR BOARD
Characteristics of Financially Healthy Nonprofits
• Ready source of cash (good liquidity) • Sufficient resources to ensure stable programming • Good revenue mix (earned income vs. contributions) • Positive net asset balances that continue to grow each
year • If there is a deficit, surplus of prior years cover it • Reasonable “overhead” • Timely reporting (mgm’t and board hold themselves
accountable for financial stability) • Operating reserves or a working plan to establish one • Committed to income-based spending
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POINT THIS OUT TO YOUR BOARD
REPORTING TO YOUR BOARD
Signs of Financial Trouble
• Spends more money than received or earned • Payables are growing faster than operations • Old accounts receivables • Poor cash flow – consistently asking for grant
advances • Poor or late financial reporting • Growing or unreasonable overhead or costs of
fundraising • Restricted net assets are in excess of liquid assets • Mgm’t and Board focus is lack of funds • Net asset balances continue to decrease each year
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POINT THIS OUT TO YOUR BOARD
THE AUDIT AND THE 990
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THE AUDIT
• Audit Committee Roles and Responsibilities – The Audit Committee Charter
• Do We Change Auditors? • Partner Rotation • Dealing with New Auditors • Audit Committee Toolkit
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AUDIT COMMITTEE CHARTER
• Purpose • Authority • Composition • Meetings • Responsibilities • Financial Reporting • Internal Controls • Internal Audit • External Audit • Compliance • Reporting Responsibilities • Other Responsibilities
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DO WE CHANGE AUDITORS – SOME CONSIDERATIONS
• NPOs change auditors for 3 reasons: – Services – Fees – Policy
• Common misconception – Sarbanes Oxley Does NOT mandate change of Auditors
• How do services break down: – Not enough partner/manager involvement – Too much turnover at ALL levels – Lack of responsiveness to your needs – Not experienced with NPOs
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DO WE CHANGE AUDITORS – SOME CONSIDERATION S (continued)
• Not enough Partner/Manager involvement – lack of responsiveness
• Firm is not experienced with NPOs • Firm can not make decisions • Too much turnover • Too many surprises • Fees
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PARTNER ROTATION
• Sarbanes Oxley: §203 requires (for public companies) that the lead audit partner and audit partner responsible for reviewing the audit (concurring partner) to rotate off the audit every five years
• Other partners will be permitted to serve a maximum of seven consecutive years with a two year time out period. Such audit partners include partners of registrant company, parent company and those who lead an audit of a subsidiary whose assets and revenue constitute 20% or more of the consolidated total
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CHANGING AUDITORS
• Audit Committee should adopt a policy to evaluate auditor
• Policy could mirror Sarbanes Oxley and mandate partner or manager rotation
• Could evaluate auditors every 5 to 10 years • Could mandate change of auditors every 5
or 10 years • Be flexible
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NEW AUDITORS – WHAT WILL BE REQUIRED?
• At Preliminary – Risk Assessment – Understanding the entity and environment – General applications IT controls – Process memos or flowcharts:
• Cash receipts cycle • Cash disbursement cycle • Payroll cycle • Investment cycle • Fixed asset cycle • Financial statement preparation and closing cycle
• Walkthroughs of each cycle – sample transactions cradle to grave
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• Control testing of: – Cash receipts – Cash disbursements – Payroll
• At Year End – Substantiation of Accounts – Evaluation – Analytical and Reasonableness – Disclosure
• Review of Financial Statements and disclosures • Other Reports
– AU-C 260 – The Auditors Communication with Those Charged with Governance
– AU-C 265 – Communicating Control Matters Identified in an Audit (the Management Letter)
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NEW AUDITORS – WHAT WILL BE REQUIRED? (continued)
NEW AUDITORS* – RECOMMENDATIONS
• Be prepared on time – establish a time line • Good communication with auditor
throughout the year • Good communication with Audit Committee • Close your books and prepare interim GAAP
FS, on a monthly/quarterly basis • Keep your key schedules current – Cash,
AR, Investments, fixed assets, AP/AE, other liabilities and net assets.
• Perform a pre-audit • Discuss fees and change orders in advance
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* or with your current auditors
AUDIT COMMITTEE TOOLKIT
• Independence Questionnaire • Audit Committee Planner • Audit Committee Charter • Audit Committee Best practices • And the 1 pager –
– Roles and Responsibilities
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FEDERAL FORM 990 COMPLIANCE ITEMS
• Compliance timeline should line up with audit to avoid extensions and final deadlines
• Avoid last minute gathering of tax information by setting up processes to gather IRS required information throughout the year
• Understand risk areas and prevent tax surprises
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QUESTIONS & ANSWERS
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APPENDICES
Appendix I – Sample Whistleblower Policy (Raffa) WB Toolkit (AICPA)/WB Firms (Raffa)
Sample Conflict of Interest Policy (excerpt from Board Source)
Appendix II – Tips for Creating and Elements of a Good Document Retention Policy (Unknown)
Appendix III – Best Practices Checklist (Independent Sector) Appendix IV – Checklist for Accountability (Independent
Sector) Appendix V – Executive Summary of the US Senate Finance
Committee Report (The Panel on the Nonprofit Sector) Appendix VI – State Governance Proposals and Bills (National
Council of Nonprofit Associations) Appendix VII – CA Nonprofit Integrity Act (Chronicle of
Philanthropy) Appendix VIII– Parts of Audit Committee Toolkit (Raffa)
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APPENDICES
Appendix IX - Trust is not an internal control, By Olson, Cheryl R, October 1, 2003, Publication: The CPA Journal, Wednesday, October 1 2003
Source: http://www.allbusiness.com/professional-scientific/accounting-tax/1157058-1.html#ixzz1XAHNyuew
Appendix X – Committee of Sponsoring Organizations of the Treadway Commission – Internal Control Integrated Framework, Guidance on Monitoring Internal Control Systems
Appendix XI – Not-for-Profit/Exempt Organizations Blog: Non-Profit Lawyers & Attorneys: Proskauer Rose Law Firm: Tax & Corporate Law for 501c(3) Organizations – Is the Foreign Corrupt Practices Act on your Radar Screen, By Emily Stern, posted August 18, 2010:
http://www.irs.gov/pub/irs-tege/governance_practices.pdf
Appendix XII – Raffa’s Audit Committee Toolkit
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© Raffa, P.C., June 2014 This information may not be reproduced without written permission from
Raffa, P.C., 1899 L Street, NW, Suite 900, Washington, DC 20036 (202) 822-5000
For information for and about nonprofits visit
www.iknow.org
To become or find a nonprofit board member visit
www.boardnetusa.org
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Bob Bloom, Senior Audit Manager Direct: 202-955-6709 E-mail: [email protected] Kay Vollans, Tax Manager Direct: 202-955-6757 E-mail: [email protected]
Thank You