02/09/2018

1

Financial AccountabilityImportant Stuff Nonprofit

Boards MUST Know

PresenterMiriam Robeson, Attorney

February 9, 2018

Financial Accountability for Nonprofits

Finance Sales Tax Best Practices Accountability Risk Management

FinanceBasics of

Financial Statements

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What are Financial Reports?

Basic Reports Income/Expense

Balance Sheet

Intermediate Reports Compilation

Review

Advanced Reports Audit

Statement of Financial Position

How Complicated Must They Be?

Basic Reports

Income/Expense (aka: Profit & Loss, P&L, Cash Flow)

Reports income from all sources, all expenses

Include Restricted Funds

Should be provided at every board meeting

What’s missing from this one?

Nonprofits < $50,000/year annual income

Handout: Sample Financial Report

Basic Reports

Account Balance (aka: Balance Sheet)

Cash account balance

Asset balance

Should be provided at every board meeting (in some form)

What are Retained Earnings? Accumulated net income from all

previous years

Nonprofits < $50,000/year annual income

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Basic Reports

Year-End Accounting Year-End Review

Internal (Audit/Review)

Compilation

Review

Audit

Government Reporting IRS 990N

State NP20

501(c)(3) Nonprofits < $50,000/year annual income

Intermediate Reports

Same as Basic -PLUS: Internal Audit TeamCPA Review or Audit Some detailed reports Additional Financial procedures IRS 990 EZ (not 990N)

Annual Income $50,000 - $250,000

Advanced Reports

All Reports in Basic and Intermediate

PLUS – Additional Financial Procedures

Financial - IRS 990 required

Full Audit Financial Information

Financial Management

Assets and Inventory

Nonprofits > $250,000 Annual IncomeAlso - significant government grants

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Finance - Audit Review

Full Audit

Most Expensive

Most Comprehensive

Review of Finances, Financial Practices,

Board practices

Review

Medium Review (and cost)

“Reasonable Basis”

Does not review policies, procedures,

internal controls

Compilation

Most Basic (least expensive)

Only reviews financial information on the

surface

Bank Statements, Financial records

provided by client

No assurances, no opinion

Internal

Performed “in house” or informally

Generally not accepted for grants

or government

Suitable for very small nonprofits

Provides minimal oversight and

protection

Basic Comprehensive

Financial Compliance - Federal

IRS – 990 Form<$50,000 – 990 N• Change in threshold

beginning 2010• On-line ONLY• Due 5 + 15 after end of fiscal

year• NO extensions of time!

>$50,000 – 990 EZ/990• Due 5 + 15• 6 month automatic

extension• For most nonprofits – 990 EZ

• Minimal property or real estate

• Normal gross receipts < $200,000

• Total Assets < $500,000

Failure to file – automatic revocation of §501(c)(3) status

Other Compliance - State

•Indiana Secretary of State – bi-annual

Annual Business Entity Report

•Indiana State Board of Accounts•Financial Reporting for Government Funds

Entity Annual Report (E-1)

•Indiana Department of Revenue

NP-20

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Sales TaxWhen do you need to collect sales tax?

When are you exempt from paying sales tax?

Sales Tax Rules –Collecting and Paying Sales Tax

Sales more than 30 days in a calendar year Intermittent or consecutiveWhat about internet sales?

Does not apply to sales to members Books, membership supplies, etc.

Getting in the SystemCollecting and Paying Sales Tax

Indiana Department of Revenue BT-1Online Application$25 fee Retail Merchant Certificate

Register for IN TAX (online reporting and paying)

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Reporting RequirementsCollecting and Paying Sales Tax

Monthly reporting Even if you DO NOT HAVE SALES Report Zero $0.00 sales Penalty for failing to report

Seasonal Reporting Must be approved for seasonal reporting Report only the months of sales

Report and Pay online Be sure you BOTH Report and Pay

Sales Tax Rules –Exemption from Sales Tax for purchases

Must be Indiana Nonprofit CorporationMust have Tax ID#

Does not need to be STATE tax ID#

Do NOT need to file BT-1 Exemption from paying sales tax for

purchases for nonprofit purposes Does not include meals, hotels

May not be worth the trouble (larger vendors)

Must use ST-105 Form

Best PracticesBest Practices

For Financial Oversight And Management

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Nonprofit Financial “Best Practices”

Practice clear, decisive financial governance

Adopt Ethics and Conflict of Interest Policies

Implement Financial Controls

Engage regular, independent financial review

Promote transparency of Reporting

Develop a Risk Management Plan

Know emerging nonprofit financial issues

Compliance, Competence, and Confidence

Clear, Decisive Governance

Proper policies in place

Review all financial documents

Procedures to verify data

Safeguard Nonprofit assets

Compliance with legal and tax reporting

Best Practices for Conduct

AccountabilityRequirements to protect the

financial integrity of the nonprofit

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Accountability

The Buck Stops with the Board

Board reports to •Donors•Government•Sponsors•Grantors•Constituents

Are you Good Stewards of the resources the public entrusts in your care?

What is Financial Accountability?The Board is Responsible for:

Knowing the financial status of the NP

Understanding the financial status

Acting on financial needs of the NP

Preventing financial mishaps

Mitigating financial crisis

Financial AccountabilityBasic Requirements

Financial Policies Financial Controls Monitor appropriate use of nonprofit

funds Rules for Charitable Donations Audit - review

Handout – 10 Financial Priorities for Nonprofit Boards

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AccountabilityFinancial Policies

Policies for –Handling MoneyRecording MoneyReporting Money

Handout – Nonprofit Financial Control Policy

Accountability - Financial OversightWatch the money - Watch the people

Financial Oversight is the review of both finances and financial practices

Ensures safe, ethical financial procedures

Protects Nonprofits and the Directors/Staff

Provides integrity and transparency to the public

Catches financial difficulties before they become financial impossibilities

Handout – 10 Tips for Keeping an Eye on Finances

Accountability - Charitable Donations

• What can be considered a donation?• What paperwork is required?• Donations of goods or funds > $250 require written

acknowledgement• Magic language: “No goods or services were provide in

exchange for this donation”

Watch the Rules regarding charitable donations!

NOTE – donations of TIME and EXPERTISE are NOT deductible!

Handout: Top 10 Rules for Charitable Donations

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Accountability - Governance

•Personal Benefit•Abuse of Status

Conflict of Interest

•Board – Staff – Volunteer - Donor

Ethical Standards

Handout – Conflict of Interest PolicyHandout – Document Destruction Guidelines

Ethics/Conflict of Interest

Conflict of Interest Policy Signed by Board and Staff annually Practiced openly Transparency critical to credibility!

Ethics Newspaper Headline Test Appearance of Impropriety

Best Practices for Integrity

Improving Fiscal Health

General Tips for Healthy Nonprofits

Pay attention to finances as well as missionRecruit Board members based on needEmbrace in-kind donations – but have a

planMake smart decisions about facilitiesGrowth is not always good – watch “mission

creep” and inadequate capacity

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Risk Management

Steps to Identify and manage nonprofit financial risk

Risk Management for Nonprofits

Best Practices to Prevent Financial CrisisIdentify RiskRanks RiskIdentify Policies to manage riskImplement protectionsImplement procedures in event of crisis

General Liability Insurance

Don’t Leave Home Without

It!

“Slip and Fall” insurance for

basic activities

Personal Injury

Property Damage

Most places require it

Facility rental

Working with other

organizations

NOTE –Usually DOES NOT COVER

MEMBERS

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Risk ManagementD&O Insurance

D&O Insurance

covers

D&O Insurance

coversBreach of DutyBreach of Duty Wrongful acts of

the boardWrongful acts of

the board MismanagementMismanagement

What D&O Does

What D&O Does

Provides legal defense

Provides legal defense Pays claimsPays claims

What D&O

Doesn’t

What D&O

Doesn’t Normal liability

claimsNormal liability

claims Criminal actsCriminal acts

Directors & Officers Insurance Protects - Board and Key Staff

Risk Management PlanTypes of Risk to Manage

• Board members, volunteers, employees, clients, donors, the public.People

• Buildings, facilities, equipment, materials, copyrights, trademarksProperty

• sales, grants, contributions, sponsors, fund raisingIncome

•reputation, stature in community, ability to raise funds and appeal to prospective volunteersGoodwill

Risk Management - PeopleRisk Management - People

Embezzlement by employees

Embezzlement by officers

Embezzlement by members

Fraud from “outsiders”

Trust But Verify

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Who Commits Fraud? High-level fraudsters (Officers/Directors) cause greatest

damage – more than 3x more costly, and take longer to detect.

More than 85% have never been previously charged or convicted.

Behavior warning signs: Living beyond means and experiencing financial difficulty

YES – The 2014 Global Fraud Study found that organizations that had common controls in place had Significantly fewer losses (in # and $)

Shorter time-to-detection

2014 Global Fraud Study, Association of Certified Fraud Examiners

Do anti-fraud measures help prevent fraud?

Primary Control Weaknesses for Victim Orgs.

Handouts – 10 Ways to Catch Fraud and Mistakes from OutsideHandout – 15 Ways to Minimize Employee Fraud

1%2%2% 4%5%

7%

8%

19%

20%

32%

Lack of Reporting Mechanism Lack of Clear Lines of Authority Lack of Employee Fraud EdLack of Independent Audit Other Lack of Competent OversightPoor Tone at the Top Override of Existing Controls Lack of Management ReviewLack of Internal Controls

Preventing Fraud

Have and use financial control policies

Know who handles the money

Remove temptationReview financial information• ALSO - have independent review of

finances

Be aware that it can happen to your nonprofit!

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Know Emerging Nonprofit Issues

Subscribe to Nonprofit forums Board Source, INRN workshops

Listen to your stakeholdersWhat concerns affect them?

Listen to your professionals Attorney, CPA

Best Practices to Staying Current

Financial Accountability for Nonprofits

Finance Sales Tax Best Practices Accountability Risk Management

Thank you for your attention!

Any Questions?

Miriam Robeson, Attorney

Today’s materials are available on Miriam’s Website: www.lawlatte.com

Contact Miriam at:MiriamRobeson@lawlatte.com