NOT-FOR-PROFIT INSIDER

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1 NOT-FOR-PROFIT INSIDER VOLUME 9 :: ISSUE 2 In This Issue: Fraud Risk Management Programs Affiliates of Trade Associations and Charities Retirement Plans: Are You In Compliance? Understanding Social Media Fraud Risk Management Programs DOES YOUR ORGANIZATION HAVE ONE? One of the most damaging effects fraud can have on a nonprofit organization is a tarnished reputation. Sure, fraud resulting from an employee skimming funds certainly has an immediate financial impact, but the blemish on an organization s reputation can have far worse consequences. Procedures can be implemented by an organization to strengthen internal controls and ultimately reduce the risk of fraud (I say reduce and An independent member of UHY International not eliminate because as soon as a control is created, someone can start crafting a way to circumvent it). The AICPA 2013 Audit Risk Alert: Not-For-Profit Entities Industry Developments included the recommendation that an organization develop a formal fraud risk management program, including a fraud risk assessment. The goal of this assessment is to identify certain vulnerabilities and gaps in internal control that could leave the organization open to both financial and reputational damage. Since it is in the best interest of everyone to prevent fraud, the AICPA has provided guidance in developing a fraud risk assessment. According to the AICPA s Audit Risk Alert, the fraud risk assessment developed by your organization should identify: 1. Fraud schemes that could potentially occur; 2. The possible concealment strategies that could be used by the fraudster to avoid detection; 3. The individuals who pose the highest risk of committing fraud; 4. The controls currently in place to deter or detect fraud, and; 5. A list of red flags that can be used to educate the organization, including employees and board members. Developing a fraud risk management program can be created using some of your organization s most valuable resources (i.e., your skilled management team and engaged board members). If your organization already has a fraud risk management program, great; you re already one step ahead of a potential fraudster. You should, however, consistently update the program and include the items identified by the AICPA above. If your organization has yet to develop a fraud risk management program and/ or fraud risk assessment, it isn t too late to start. Article written by Matthew Duvall, Senior Manager (Columbia, MD) The next level of service

2 2 UHY LLP NOT-FOR-PROFIT INSIDER Affiliates of Trade Associations and Charities Potential organizational and operational issues are a real threat to many types of organizations. For instance, many nonprofit organizations in the United States operate with local or regional chapters, affiliates and branches throughout the county which can be organized and reported in different ways especially depending upon the mission and objectives of the organization. Smaller local organizations may also have affiliates which, on a smaller scale, raise the same issues. These local entities may or may not be incorporated separately and have varying levels of autonomy. There are a variety of economic and regulatory issues that national organizations have to be attuned to; these issues may affect their strategy and tolerance for risk in many areas. One such area is operational risks which may be associated with chapter structure. This is why analysis of business, tax and accounting aspects in regards to chapter structure is important for national organizations as well as local and regional entities. Each of these types of organizational structures are different thus there are no definitive answers as to what the governance structure should be but, it is important to keep in mind both business and reporting implications. National organizations that maintain high levels of controls over their local affiliates may minimize their risks associated with chapter and regional entities. Those with laissez-faire attitudes and minimal controls over local chapter operations risk having these entities using the resources of the national organization inappropriately. National strategies to minimize operational risk related to local operations may include: Communication and educational information for chapters including financial and compliance requirements, required policies and expectations of best practices Clear governance policies related to chapter relations and obligations included in the organizing documents Review of local affiliate s procedures related to fund raising, accounting, tax compliance and compliance with organization policies Generally, every chapter will have separate financial statements prepared in accordance with generally accepted accounting principles or on a cash basis. On a national or state level, there may be instances where the consolidation of local chapter information may be required. ASC requires consolidation if a nonprofit organization has a controlling financial interest in another nonprofit. In most instances, however, the relationship of the national organization is not that comparable to a parent/subsidiary in the corporate world and in many cases does not have effective control of chapter operations. The extent of the national organization s economic interest in the chapter must also be considered. In some cases, there may be responsibility for debt, requirements for specific payments to the national level, or the ownership of chapter assets in the event of dissolution. Consolidation would be required if the organization has an economic interest and has control by voting interest. These same factors need to be considered by any nonprofit which establishes a related entity where the organization has the ability to appoint the board and the financial records and liabilities may be intertwined. The accounting standards also encourage nonprofits to provide consolidated statements where there is economic interest and control by other means, including contracts or agreements that might give the appearance of control. Consolidation in these instances may not be meaningful to the users of the financial statements but disclosure of the nature of the relationship among the organizations, summary information, a description of related party transactions and other information which the user may need to understand the relationship. If there is control but no economic interest, or economic interest but no control, consolidation is not allowed. Appropriate disclosures, however, are always appropriate as with any other related party. For tax reporting purposes, a Form 990 is allowed if there is a group exemption letter which permits the organization to file on behalf of all its affiliates. If local affiliates are not separately incorporated and do not have separate identification numbers, they may also be part of a national organization for tax reporting purpose. State and local requirements for filing vary but most local organizations will be filing both their separate 990 and required state filings as well. All compliance of this sort is costly and requires extensive recordkeeping and information gathering. When considering establishing chapters or subsidiaries related to the organization, consider the most appropriate way to structure the entity to effectively achieve their objectives. Nonprofits of all sizes may have relationships which may fall under these accounting and tax requirements. There are a variety of economic and regulatory issues that national organizations have to be attuned to. Article written by Marilyn Pendergast, Partner (Albany, NY)

3 UHY LLP NOT-FOR-PROFIT INSIDER 3 Retirement Plans: Are You In Compliance? Your organization s compliance with US Department of Labor (DOL) and Internal Revenue Service (IRS) regulations is critical, as noncompliance penalties can be severe, and can potentially result in a plan disqualification. DO YOU NEED AN AUDIT? One area where there continues to be confusion among plan sponsors is the question of when a plan audit is required. If a plan has over 100 eligible participants as of the beginning of the plan year, an audit is required. However, there is the rule whereby a plan could forego the audit requirement. If the plan filed a Schedule I (eye) the prior year as a small plan, and the number of eligible participants as of the beginning of the current year is under 120, the plan may elect to file in the current year as a small plan, which means no audit is required. Once the number of eligible participants as of the beginning of the plan year exceeds 120 then the plan must have an audit. The plan would complete a Schedule H in its form 5500 for the current year as a large plan. Eligible participants as defined by the IRS in its form 5500 instructions, includes the following: (1) active participants, who are individuals currently employed by the plan sponsor, covered under the plan, and receiving credited service [this includes those eligible, even if they are not actually participating]; (2) retired or separated participants, who are individuals no longer working for the plan sponsor and are either receiving benefits or entitled to receive benefits; and (3) deceased participants, defined as individuals who have died and have one or more of their beneficiaries either receiving benefits or entitled to receive benefits. We have seen a number of plan sponsors performing the count of plan participants using only those current employees actually participating in the plan. This is not correct, so be very careful when counting your eligible participants. Continued on Page 4...

4 4 UHY LLP NOT-FOR-PROFIT INSIDER Retirement Plans: Are You In Compliance? Continued from Page 3... FOLLOW YOUR PLAN DOCUMENT Employees at the plan sponsor who are responsible for the plan s operations and compliance with the DOL and IRS regulations should maintain a copy of the plan agreement (including any plan amendments) and be familiar with all the provisions in the agreement. Those individuals in the HR and payroll departments should fully understand the plan provisions, including eligibility, definition of compensation, distributions, loans, and so on. The actual operations of the plan need to mirror the provisions spelled out in the plan agreement. If operations do not mirror the provisions, or if any provisions are vague or unclear, we recommend that the plan sponsor consult with an ERISA attorney. WHAT IF YOU ARE NONCOMPLIANT? If you believe your plan might have operational defects or noncompliance issues, prompt attention is warranted. Our experience with the DOL and IRS is that they expect plan sponsors to be proactive both in identifying operational defects or noncompliance, and then in correcting such occurrences in a timely manner. The IRS offers a system whereby a plan sponsor may voluntarily correct operational defects and noncompliance issues. First, under this Employee Plans Compliance Resolution System (EPCRS), mistakes can be corrected in the following ways: (1) Self-Correction Program (SCP), which permits a plan sponsor to correct certain plan failures without contacting the IRS; (2) Voluntary Correction Program (VCP), which permits a plan sponsor to, any time before agency audit, pay a limited fee and receive IRS approval for correction of plan failures; and (3) Audit Closing Agreement Program (Audit CAP), which permits a plan sponsor to pay a sanction and correct a plan failure while the plan is under audit. There are certain eligibility requirements that have to be met in order to use the SCP, but if you are able to use this program there is no fee. If the plan sponsor enters the VCP, there is a fee and certain documents have to be prepared and submitted to the IRS to obtain IRS approval. The fees vary, but for a plan with plan participants of between 101 and 500, the fee is $5,000. Plan sponsors who feel they might have operational defects or noncompliance issues should contact an attorney who specializes in retirement plans and ERISA. Additionally, a CPA firm that specializes in audits of retirement plans should also be contacted to assist with efforts to determine the extent of any operational defects and noncompliance that might have occurred. Article written by Michael Kirby, Principal (Columbia, MD)

5 UHY LLP NOT-FOR-PROFIT INSIDER 5 Understanding Social Media Sorting through the abundances of social media sites can be a daunting task. What type of social media is best used to reach your target audience? What social media platform best represents the message your organization is sending? What are the demographics associated with the various types of social media? WHAT IS SOCIAL MEDIA? Unlike traditional media, social media centers on the opportunity for two-way communication. The users interact with the host by providing comments, sharing ideas and exchanging ideas. Users may also interact with each other directly and not involve the host. It is a latticework of communication and messaging, rather than the traditional one-way messaging found in advertising. WHAT ARE THE OPTIONS? Facebook Facebook is an online social networking service used to exchange messages, receive automatic notifications, and used to join common interest groups organized by workplace, schools, colleges or other characteristics, and categorize friends into lists. Facebook users exceed 1,230,000,000, and nearly half of the one billion plus users are between the ages of 18 and 34. Slightly more users are female. The newsfeed feature of Facebook allows users to update friends on statuses, happenings, and events; post pictures; and refer friends to other relevant websites. Facebook may be best suited for reaching younger constituents in a less formal environment (such as campus recruiting) and is a way to show a different side of your organization (such as being engaged with coworkers in a more social setting). Some drawbacks to Facebook are that it is time consuming to update and if it s not updated regularly, users may lose interest and stop checking the page. LinkedIn LinkedIn is a social networking website for people in professional occupations. Founded in December 2002 and launched on May 5, 2003, it is mainly used for professional networking. One purpose of the site is to allow registered users to maintain a list of contact details of people with whom they have some level of relationship, also known as connections. Users can invite anyone (whether a site user or not) to become connected. LinkedIn also supports the formation of interest groups and as of March 29, 2012 there were 1,248,019 such groups. The majority of the largest groups are employment related, although a very wide range of topics are covered mainly around professional and career issues. There is currently 128,000 groups for both academic and corporate alumni. There are approximately 259 million unique users of LinkedIn. Of these users, 93 million users are in the United States. LinkedIn allows users who post content to be perceived as subject matter experts and repost third party content. LinkedIn shares some of the same challenges as Facebook. It is time consuming to manage and user training is required to adequately navigate the site. While a large majority of the professional community is on LinkedIn, few are using it to any real business advantage. Content pages for groups need to be updated regularly, which can be time consuming. Twitter Twitter is an online social networking and microblogging service that enables users to send and read tweets, which are basically text messages limited to 140 characters. Registered users can read and post tweets, while unregistered users have read only access. Users access Twitter through the website interface, Short Message Service (SMS) or mobile device app. Twitter was launched in July 2006 and rapidly gained worldwide popularity, with 500 million registered users in Continued on Page 7...

6 6 UHY LLP NOT-FOR-PROFIT INSIDER SOCIAL MEDIA CAN HELP REACH NEW AUDIENCES AND PROVIDE A PLATFORM TO INTRODUCE USERS TO YOUR ORGANIZATION.

7 UHY LLP NOT-FOR-PROFIT INSIDER 7 Understanding Social Media Continued from Page , who posted 340 million tweets per day. Twitter is now one of the ten most visited websites and has been described as the SMS of the Internet. Tweets are publicly visible by default but senders can restrict message delivery to just their followers. Users can tweet via the Twitter website, compatible external applications (such as for smartphones) or by SMS available in certain countries. While the service is free, accessing it through SMS may incur phone service provider fees. Users may subscribe to other users tweets (this is known as following ) and subscribers are known as followers or tweeps, a portmanteau of Twitter and peeps. The users can also check the people who are unsubscribing (or unfollowing) them on Twitter via various services. In addition, users have the capability to block those who have subscribed to follow them. In a 2009 Time essay, technology author Steven Johnson described the basic mechanics of Twitter as remarkably simple : As a social network, Twitter revolves around the principle of followers. When you choose to follow another Twitter user, that user s tweets appear in reverse chronological order on your main Twitter page. If you follow 20 people, you ll see a mix of tweets scrolling down the page: breakfast cereal updates, interesting new links, music recommendations, even musings on the future of education. Users can group posts together by topic or type by use of hashtags. Hashtags are words or unspaced phrases prefixed with a # sign. Similarly, sign followed by a username is used for mentioning or replying to other users. Twitter has approximately 100,000,000 active users logging in at least once a month, with 50 million daily users. 53% of users are women and 47% men. 5% of users account for 75% of all activity and New York City has more Twitter users than any other city. 63% of users are under the age of 35. Twitter is best for reaching a wide target audience, since messages are short. A wide variety of both social and technical topics is appropriate. Users can build a following and develop reputation for subject matter expertise. Like other forms of social media, Twitter is time consuming. Tweets should be frequent and therefore, content is needed on a regular basis. SUMMARY There are other social media venues, such as Pinterest, Instagram, MySpace, etc., but these applications do not necessarily lend themselves as traditional business applications. Focusing on Facebook, LinkedIn, Twitter, or some combination of these, should provide sufficient exposure to your target audience. With any social media endeavor, content is key and should be updated frequently. Social media updates can be quite time consuming, but when done in a thoughtful, well-planned manner, social media can help reach new audiences and provide a platform to introduce users to your organization. Article written by Angela A. Fink, Principal (St. Louis, MO)

8 NOT-FOR-PROFIT INDUSTRY INSIGHT With the increasing complexity of laws and regulations, it s important for associations, foundations, charities, hospitals, schools and other tax-exempt entities to seek out professionals with extensive experience in nonprofit compliance issues. We understand there are many challenges affecting the industry and provide the attention needed to help clients stay focused on their job at hand. UHY LLP s National Not-For-Profit Practice offers comprehensive audit and assurance, tax planning and compliance and business advisory services to meet the unique, complex needs of nonprofit organizations. These types of specialized services, which cut across the traditional service lines, demonstrate our philosophy of skilled professionals integrating industry expertise with technical services. OUR LOCATIONS CT New Haven GA Atlanta MD Columbia MI Farmington Hills MI Sterling Heights MO St. Louis NJ Oakland NY Albany NY New York NY Rye Brook TX Dallas TX Houston ADDITIONAL UHY ADVISORS LOCATIONS IL Chicago DC Washington Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided as is, with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of UHY Advisors. UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP and UHY Advisors, Inc. are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. UHY is the brand name for the UHY international network. Any services described herein are provided by UHY LLP and/or UHY Advisors (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members UHY LLP. All rights reserved. [0514]