DRAFT 10/22/18. Mid-America Arts Alliance. Board of Directors, Audit and Finance Committee and Management , 2018

Transcription

1 Mid-America Arts Alliance Report to the Board of Directors, Audit and Finance Committee and Management, 2018 Results of the 2018 financial statement audit, internal control matters and other required communications. 35

2 Contents 2018 Audit Results Summary of Our Audit Approach & Results... 2 Requirements Under OMB Uniform Guidance... 2 Condensed Statements of Financial Position... 3 Condensed Statements of Activities... 3 Required Communications... 4 Internal Control Over Financial Reporting... 6 Other Matters... 7 Future Accounting Pronouncements... 7 Appendix Management Representation Letter... Tab 1 36

3 , 2018 Board of Directors, Audit and Finance Committee and Management Mid-America Arts Alliance Kansas City, Missouri Dear Board of Directors, Audit and Finance Committee and Management: We have completed our audit of the financial statements of Mid-America Arts Alliance (M-AAA) as of and for the year ended June 30, This report includes communication required under auditing standards generally accepted in the United States of America as well as other matters. Our audit plan represented an approach responsive to the assessment of risk of material misstatement in financial reporting for M-AAA. Specifically, auditing standards require us to: Express an opinion on the June 30, 2018 financial statements of M-AAA. Report on internal control over financial reporting and on compliance and other matters based on an audit of the financial statements performed in accordance with Government Auditing Standards. Report on compliance with requirements that could have a direct and material effect on each major program and on internal control over compliance in accordance with OMB Uniform Guidance. Issue communications required under auditing standards generally accepted in the United States of America to assist the board in overseeing management s financial reporting and disclosure process. This report also presents an overview of areas of audit emphasis, as well as future accounting standards and industry developments for the not-for-profit environment. This communication is intended solely for the information and use of management, the Board of Directors, Audit and Finance Committee and others within M-AAA and is not intended to be, and should not be, used by anyone other than these specified parties. Very truly yours, Tondeé Lutterman Partner Stephanie Whitacre Director 37

4 Summary of Our Audit Approach & Results Our Approach BKD s audit approach focuses on areas of higher risk the unique characteristics of M-AAA s operating environment, the design effectiveness of your internal controls and your financial statement amounts and disclosures. The objective is to express an opinion on the conformity of your financial statements, in all material respects, with accounting principles generally accepted in the United States of America. Areas of Audit Emphasis The principal areas of audit emphasis and results were as follows: Risk Area Results Management override of controls The risk that management may override existing and functioning accounting controls. Revenue recognition The risk that revenue is recognized in the wrong period and/or the risk that revenues are improperly classified. No matters are reportable. Entry to increase contribution for reduction in unamortized discount on promises to give. Net asset classification The risk that net No matters are reportable. assets are not appropriately classified in accordance with donor restrictions and/or releases from restrictions are not properly recorded. Federal grant noncompliance The risk of No matters are reportable. noncompliance with applicable requirements of major federal programs. Independent Auditor s Opinion We have issued an unmodified, or clean opinion as to whether the financial statements of M-AAA, as of and for the year ended June 30, 2018, are fairly presented, in all material respects. Requirements Under OMB Uniform Guidance Our audit included reporting on major federal award programs and includes: Schedule of Federal Awards Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards Report on Compliance for Each Major Program and on Internal Control Over Compliance Schedule of Findings and Questioned Costs Data Collection Form 2 38

5 Condensed Statements of Financial Position Assets Cash $ 523,248 $ 459,524 $ 932,914 Investments 1,060, , ,460 Receivables, net 2,476, ,636 1,472,377 Prepaid expenses 194, , ,048 Property and equipment, net 2,672,572 2,804,633 2,866,455 Total assets $ 6,926,759 $ 5,075,012 $ 6,317,254 Liabilities Accounts payable and accrued expenses $ 233,101 $ 188,923 $ 222,910 Deferred revenue 124,736 97, ,013 Long-term debt and capital leases 927, ,218 1,065,318 Total liabilities 1,285,338 1,268,512 1,399,241 Net Assets 5,641,421 3,806,500 4,918,013 Total liabilities and net assets $ 6,926,759 $ 5,075,012 $ 6,317,254 Condensed Statements of Activities Revenues, Gains and Other Support Contributions and grants $ 5,286,887 $ 2,323,987 $ 4,513,458 Exhibition and related fees 249, , ,632 State arts agencies partnership fees 206, , ,127 Special project income 84,043 41,950 56,650 Investment income 87, ,246 8,711 Other income 17,282 80,774 10,700 Total revenues, gains and other support 5,930,864 3,056,901 5,152,278 Expenses Program expenses 3,089,552 3,056,802 2,527,935 Administrative expenses 801, , ,005 Fundraising expenses 204, , ,319 Total expenses 4,095,943 4,168,414 3,641,259 Changes in Net Assets 1,834,921 (1,111,513) 1,511,019 Net Assets, Beginning of Year 3,806,500 4,918,013 3,406,994 Net Assets, End of Year $ 5,641,421 $ 3,806,500 $ 4,918,013 on the financial statements for each of the fiscal years ended June 30, 2018, 2017 and

6 Required Communications 2018 Audit Results Generally accepted auditing standards require the auditor to ensure that those charged with governance receive additional information regarding the scope and results of the audit that may assist you in overseeing management s financial reporting and disclosure process. Below, we summarize these required communications. Auditor s Responsibility Under Auditing Standards Generally Accepted in the United States of America and the Standards Applicable to Financial Audits Contained in Government Auditing Standards Issued by the Comptroller General of the United States and U.S. Office of Management and Budget (OMB) Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance) An audit performed in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States and U.S. Office of Management and Budget (OMB) Uniform Guidance is designed to obtain reasonable, rather than absolute, assurance about the financial statements and about whether noncompliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on a major federal program occurred. In performing auditing procedures, we establish scopes of audit tests in relation to the financial statements taken as a whole. Our engagement does not include a detailed audit of every transaction. Our engagement letter more specifically describes our responsibilities. These standards require communication of significant matters related to the financial statement audit that are relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Such matters are communicated in the remainder of this communication or have previously been communicated during other phases of the audit. The standards do not require the auditor to design procedures for the purpose of identifying other matters to be communicated with those charged with governance. An audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Our engagement letter more specifically describes your responsibilities. Area Significant Accounting Policies Alternative Accounting Treatments Comments Significant accounting policies are described in Note 1 of the financial statements. No matters are reportable. 4 40

7 Area Comments Management Judgments & Accounting Estimates Accounting estimates are an integral part of financial statement preparation by management, based on its judgments. Areas involving significant areas of such estimates for which we are prepared to discuss management s estimation process and our procedures for testing the reasonableness of those estimates are listed in the adjacent comments section. The following involve significant management judgments and accounting estimates: Valuation of investments Depreciable lives for property and equipment Functional expense allocation Financial Statement Disclosures Financial statement disclosures that involve No matters are reportable. particularly sensitive information. Audit Adjustments During the course of any audit, an auditor may Proposed adjustments recorded: propose adjustments to financial statement amounts. Proposed adjustments not recorded: Entry to reduce the unamortized discount for promises to give in the amount of $80,771. Entry to properly record accounts payable in the amount of $17,125. No matters are reportable. Auditor s Judgments About the Quality of M-AAA s Accounting Policies No matters are reportable. Other Communications Other material written communications between management and us related to the audit include: Engagement letter Management representation letter (attached) 5 41

8 Internal Control Over Financial Reporting In planning and performing our audit of the financial statements of M-AAA as of and for the year ended June 30, 2018, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, we considered M-AAA s internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of M-AAA s internal control. Accordingly, we do not express an opinion on the effectiveness of M-AAA s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be significant deficiencies or material weaknesses and, therefore, there can be no assurance that all deficiencies, significant deficiencies or material weaknesses have been identified. Deficiency - A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements of M-AAA s financial statements on a timely basis. A deficiency in design exists when a control necessary to meet a control objective is missing or an existing control is not properly designed so that, even if the control operates as designed, a control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively. Material Weakness - A deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of M-AAA s financial statements will not be prevented or detected and corrected on a timely basis. Significant Deficiency - A deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We observed the following matters that we consider to be deficiencies. Deficiencies Segregation of Duties Segregation of accounting duties is an essential element of effective internal controls, involving the separation of custody of assets from related recording and monitoring transactions. Segregation of conflicting duties within the accounting department is difficult because of the limited number of personnel. During our audit, we noted the Accountant currently has access, recordkeeping and monitoring responsibilities within the cash disbursement cycle. We also noted the Senior Accountant currently has access and monitoring responsibilities within the cash disbursement and cash receipts cycles. 6 42

9 Although there are some compensating procedures in place, the above circumstances create a situation where intentional or unintentional errors could occur and not be detected timely. We understand management and the Board of Directors are aware of this situation and believe enacting any further changes, after comparing the potential benefits to their related costs, is not feasible at this time. Absent any additional controls, management oversight is the only effective means to mitigate the risk of material misstatement from these segregation of duties conflicts. Unamortized Discount Rate In the current year, M-AAA received promises to give that extended beyond one year. These transactions were recorded net of the unamortized discount rate. During our auditing procedures, it was noted that the organization was using a rate that was higher than the industry standards and, as a result, an entry was proposed to decrease the rate in the amount of approximately $80,000. We suggest that management review the rate and calculation annually to determine if there are any necessary changes that should be considered. We observed other matters that are considered to be deficiencies that we communicated to management orally. Other Matters Although not considered material weaknesses, significant deficiencies or deficiencies in internal control over financial reporting, we observed the following matters and offer these comments and suggestions with respect to matters which came to our attention during the course of the audit of the financial statements. Our audit procedures are designed primarily to enable us to form an opinion on the financial statements and, therefore, may not bring to light all weaknesses in policies and procedures that may exist. However, these matters are offered as constructive suggestions for the consideration of management as part of the ongoing process of modifying and improving financial and administrative practices and procedures. We can discuss these matters further at your convenience and may provide implementation assistance for changes or improvements if you require. Future Accounting Pronouncements Not-for-Profit Accounting Standard for Financial Reporting Accounting Standards Update (ASU) changes requirements for financial statements and notes of all not-for-profit (NFP) entities and is effective for fiscal years beginning after December 15, Early adoption is permitted and should be applied on a retrospective basis; however, NFPs have the option in the year adopted to omit certain disclosures shown in comparative financials. A summary of the changes by financial statement area is as follows: Statement of financial position: The NFP statement of financial position will distinguish between two new classes of net assets those with donor-imposed restrictions and those without. The ASU retains the current requirements to provide information on the nature and amount of different types of donor restrictions in the notes to the financial statements. 7 43

10 Underwater donor-restricted endowment funds are to be shown within the donor-restricted fund class. This is a change from the previously required classification as unrestricted. Statement of activities: The standard requires NFPs to report expenses by both nature and function, either on the face of the statement of activities, as a separate statement or within the notes. NFPs are required to use the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset, in the absence of explicit donor stipulations. This eliminates the option to release the donor-imposed restriction over the estimated useful life of the acquired asset. Investment income will be shown net of external and direct internal investment expenses. There is no longer a requirement to include a disclosure of those netted expenses. Statement of cash flows: An NFP can continue to choose to either use the indirect or direct method of reporting to present operating cash flows. If the direct method is used, there is no longer a requirement to present or disclose cash flows using the indirect (reconciliation) method. Notes to the financial statements: Financial Accounting Standards Board (FASB) requires enhanced quantitative and qualitative disclosures to provide additional information useful in assessing liquidity and cash flows. Provide disclosures on amounts and purposes of governing board or self-imposed designations and appropriations as of the end of the period. For many NFPs, adoption of the ASU will result in significant changes to financial reporting and disclosures, which likely will require significant hours to implement correctly. Management should examine its current reporting system to identify what changes are necessary to comply with the new standard for both its internal and external reporting requirements. Based on your financial statement reporting changes, BKD will need to spend additional time in formatting these changes within our audit reporting system if you outsource your annual report and disclosure preparation to BKD. Please contact your BKD Advisor if you would like assistance converting M-AAA s financial statements to the new model and preparing the new disclosures. Procurement Requirements under Uniform Guidance The Office of Management and Budget (OMB) issued Title 2 U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance) in December Uniform Guidance is applicable to state and local governments, American Indian tribes, higher education institutions and not-for-profit organizations for all federal awards or funding increments to existing awards made on or after December 26, Due to significant changes in the Uniform Guidance procurement requirements, OMB delayed the requirement to implement those Uniform Guidance provisions for a full three years from the effective date. For example, if a nonfederal entity has a March 31 year- 8 44

11 end, the first year the procurement standards under Uniform Guidance would be applied is fiscal year 2019 (April 1, 2018 through March 31, 2019). The effective date for implementing the procurement standards under Uniform Guidance is now. Nonfederal entities need to review the standards, align current practices with those standards and provide training to those involved in procurement to help nonfederal entity employees understand the required regulations. FASB Changes to Revenue Recognition The model for revenue recognition is changing with FASB s release on May 28, 2014, of ASU , Revenue from Contracts with Customers (the ASU). The goal of the final standard is to improve consistency of requirements, comparability of revenue recognition practices and usefulness of disclosures. The ASU applies to all contracts with customers, other than those within the scope of other standards, such as leases, insurance, financing arrangements, financial instruments and guarantees. For nonprofit organizations, the primary income streams, contributions and investment returns are not in scope. However, all ancillary income must be reviewed for inclusion under the new guidance subscriptions, membership dues, etc. The ASU does not apply to other parties to a contract who are not customers, i.e., collaborative arrangements. Sponsored research agreements and other grants (both government and private) may not be considered contracts with customers; a subsequent accounting standard update has been issued in 2018 and should provide additional clarity. The core principle of the new model is that an entity would recognize revenue as it transfers goods or services to customers in an amount that reflects the consideration it expects to receive. In order to achieve that core principle, an entity would apply a five-step model. The five-step application is as follows: Step 1: Identify the contract with a customer Step 2: Identify the separate performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the separate performance obligations in the contract Step 5: Recognize revenue when (or as) performance obligations are satisfied Because this is a principles-based standard, significant additional management judgement and estimates will be required at adoption and on an ongoing basis. These judgements and estimates include, but are not limited to, bifurcating exchange and non-exchange components, the identification of separate performance obligations and determining the transaction price. While revenue timing and presentation may not change materially, nonprofit organizations will have to evaluate and document their consideration of recognition of revenue under the new fivestep model. The standard requires extensive new qualitative and quantitative revenue disclosures to enable financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. 9 45

12 The standard may be adopted using a full retrospective approach or a modified, cumulative effect approach wherein the guidance is applied only to existing contracts as of the date of initial application, and to new contracts transacted after that date. An entity choosing a modified approach would not restate comparative years, but it would be required to provide additional disclosures in the initial year of adoption. The standard is effective for annual reporting periods beginning after December 15, 2017 for public entities, including: 1. A public business entity 2. An NFP entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market 3. An employee benefit plan that files or furnishes financial statements to the SEC For all other entities, the standard is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods after December 15, Early application is permitted for all entities for annual periods beginning after December 15, FASB Releases Not-for-Profit Accounting Standard for Grants and Contributions On June 21, 2018, the FASB issued Accounting Standards Update (ASU) This standard clarifies existing guidance on determining whether a transaction with a resource provider, e.g., the receipt of funds under a government grant or contract, is a contribution or an exchange transaction. The guidance requires all organizations to evaluate whether the resource provider is receiving commensurate value in a transfer of assets transaction, and whether contributions are conditional or unconditional. If commensurate value is received by the resource provider, the transaction would be accounted for as an exchange transaction by applying Topic 606, Revenue from Contracts with Customers, or other topics. The standard clarifies that a resource provider is not synonymous with the general public. Indirect benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider. If commensurate value is not received by the resource provider, i.e., the transaction is nonexchange, the recipient organization would record the transaction as a contribution under Topic 958 and determine whether the contribution is conditional or unconditional. FASB expects that the new standard could result in more grants and contracts being accounted for as contributions (often conditional contributions) than under current generally accepted accounting principles. Because of this, it believes the clarifying guidance about whether a contribution is conditional or unconditional, which affects the timing of revenue recognition, is important. Both the recipient and resource provider would equally apply the guidance. For public entities, the standard will be effective for annual reporting periods beginning on or after June 15, For all other entities, the standard will be effective for reporting periods beginning on or after December 15,

13 Changes to the Method of Accounting for Leases Under U.S. Generally Accepted Accounting Principles (U.S. GAAP) On February 25, 2016, FASB issued ASU , Leases (Topic 842), the long-awaited new standard on lease accounting. Under the new ASU, lessees will recognize lease assets and liabilities on their balance sheet for all leases with terms of more than 12 months. The new lessee accounting model retains two types of leases, and is consistent with the lessee accounting model under existing GAAP. One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for today. The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with today s operating leases. Lessor accounting under the new standard is fundamentally consistent with existing GAAP. Lessees and lessors are required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization s leasing activities. For public business entities, the final leases standard will be effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. For all other entities, the final leases standard will be effective for fiscal years beginning after December 15, 2019 and interim periods thereafter. Early application is permitted. * * * * * * * This communication is intended solely for the information and use of management, the Audit and Finance Committee, the Board of Directors and others within M-AAA and is not intended to be and should not be used by anyone other than these specified parties. Kansas City, Missouri,