FINANCIAL MANAGEMENT & RECORDKEEPING

Transcription

1 FINANCIAL MANAGEMENT & RECORDKEEPING need graphic here Erik Halluska, CPA WithumSmith+Brown PC January 6,

2 Agenda Not-for-Profit and Exempt Structure IRS Filing Requirements Financial Management and Reporting On the Horizon Questions? 1

3 Not-for-Profit Basics NFP = State Classification Tax exempt = Federal Classification Exempt from all taxes? NO Exempt from income generated from exempt purposes Earnings must be used for exempt purpose If not, could violate exempt status 2

4 Common Types of Not-for-Profits 501(c)3 Religious, Educational, Charitable 501(c)4 Civic Leagues, Social Welfare Organizations, and Local Associations of Employees 501(c)5 Labor, Agricultural, and Horticultural Organizations 501(c)6 Trade Associations, Business Leagues, Real Estate Boards, etc. 501(c)7 Social and Recreational Clubs 3

5 Chapter Structure - Generally 501(c)6 Chapters must file for their status with IRS and state (Form 1024 for 501(c)6) IRS classification based on activities IRS Letter of determination Maintain copy Federal Tax ID Annual Report State of Florida 4

6 IRS & Tax Considerations 5

7 IRS Filing Requirements Form 990 Gross Receipts >= $200k OR total assets >= $500k Form 990EZ Gross Receipts < $200k AND total assets < $500k Form 990N Gross Receipts normally less than $50k 6

8 IRS Filing Requirements 15 th day of the 5 th month after the end of the chapter s/council s fiscal year (e.g. May 15 th for calendar year ends) Provision for 6 month extension Only extends filing date, not date to pay taxes if 990-T is required Penalties for late filings Open to Public Inspection IRS copy not for public display Public Copy- redacts names/addresses from Sched B 7

9 Federal and State Tax Considerations Federal Income Tax UBI Unrelated Business Income (Form 990-T) Federal Payroll Taxes (Form 941 Quarterly) State Taxes Sales Tax (on publication sales) Real Estate Tax (owned office space) Unemployment Tax (associated with payroll) 1096/1099 Filings- payments to contractors in aggregate > $600 Must be filed by 1/31, sent to payees by 2/28 8

10 IRS Considerations- UBIT UBIT Unrelated Business Income Income from a trade or business, regularly carried on, that is not substantially related to organization s exempt purpose Threshold: Gross Income > $1,000 Requires Filing form 990-T (with 990) Estimated taxes due if EOY tax > $500 If UBIT exists, must also file F-1120 with State. Exceptions discussed ahead. 9

11 IRS Considerations- UBIT Unrelated Business Income Common Triggers: Sale of merchandise Advertising revenue (e.g ads in annual publication) Rental income from debt-financed property UBIT Exceptions Annual Events/conferences (not regularly carried on) Qualified Sponsorships (general display/speak, no pitch) Gains from sale of property Income generated from labor of volunteers (fundraisers) Affinity programs (partnerships for mutual benefits) Sale of Donated property (bake sales) 10

12 Financial Management and Reporting 11

13 Keys to Prudent Financial Management Planning and Budgeting Adequate Internal Controls Timely/Relevant Financial Reporting Managing Cash Flow Oversight and Governance 12

14 Planning and Budgeting Management-wide discussions of direction Initial Drafting of Budget by Mgmt (ground floor) Foundation Historical data Modifications Known or expected changes Increased/decreased membership dues or participation Payroll COLAs New Activities Review and Approval by BOD/Finance Committee (aerial view) Not written in stone. Measurability and Accountability Budget to actual & relationship to annual GAAP financial statements Common types of budget methodologies (cash, modified cash, accrual, modified accrual) 13

15 Internal Controls Cash Management Information Security Financial Reporting Controls Payroll Internal Audit/Surprise Procedures Segregation of Duties 14

16 Internal Controls: Cash Management Cash Receipts Cash receipts log Deposit procedures Bank reconciliation Cash Disbursements Approved vendor list/access Dual signature requirements (e.g. $> 500) Wire authorization restrictions Purchase order/invoice approval prior to payment Expense reimbursement policies Limit manual checks Credit Cards Best Practice- Use personal cards and require reimbursement 15

17 Internal Controls: Information Security Password management Periodically changing & Complex First letter of you favorite song Offsite server backups (cloud based and daily) Employee fraud awareness training Phishing/Ransomware Keep software up-to-date Encrypt mobile devices Physically secure servers 16

18 Internal Controls: Financial Reporting Restrict access to only necessary tasks Secure signature stamps Require approval of non-standard journal entries Establish a month/year-end closing checklist and timeline 17

19 Internal Controls: Payroll Automated timekeeping systems Timecard & Payrate change approval Approval procedures prior to processing Flux Analysis 18

20 Internal Controls: Internal Audit/Surprises Existence of internal audit functions Surprise Audits (Regularly) Match payroll reports to active employee list Compare vendor list to sample of disbursements 19

21 Internal Controls- Segregation of Duties CASH MANAGEMENT Person A Person B Prepares cash receipts log Prepares bank recs Access to approved vendors Authorize Wire transfers Make deposits Receives bank statements Cut and Sign checks Prepares Bank Recs 20

22 Financial Reporting Methods of Accounting Cash (simpler) Modified Cash (A/P, PPE, etc) Accrual/GAAP (Recognize when transactions occur) Basic Financial Statements Statement of Financial Position Balance Sheet (Net Assets) Statement of Activities Income Statement (Revs/Expenses, P&L) Statement of Cash Flows (accrual method only) 21

23 Financial Reporting Audit Annual contributions > $1,000,000 Audit OR Review Annual contributions >$500,000 BUT <$1,000, Optional Audit, Review or Compilation Annual Contributions < $500,000

24 Managing Cash Flow Foundation- Budget and Spending Policy What is the purpose of your reserves: Operations in time of need Specific future projects What do you have in reserves? How close to goal? Meeting your reserve goals: $ Needs = monthly operating exp X month goal IRS does not restrict how much a non-profit can have in reserves 23

25 Managing Cash Flow Treatment of Reserves: In accordance with established investment policy May establish guidelines (ranges for types) Short-term Checking account = No return on idle funds Conservative approach- Certificates of deposit or T-Bills Aggressive/Riskier approach- Investments/securities Long-term approach Real property Infrastructure 24

26 Oversight and Governance Tone at the Top Ethical in fact and appearance Periodic and consistent board meetings Timely Review of Financial Reports Clear designation of responsibilities Accountability Transparency Business Risk Assessment 25

27 Oversight and Governance - Fraud 26

28 Oversight and Governance- Fraud Fact or Fiction??? Having regular external audits are the best way at catching employee fraud. External audits account for less than 4% of the detection methods. 27

29 Oversight and Governance- Fraud Fact or Fiction??? Fraud hotlines are not very effective at detecting frauds because employees are afraid to use them. FALSE! 47% of cases detected from tips came from hotlines 28

30 Oversight and Governance - Fraud 2,410 cases of fraud examined 29

31 Oversight and Governance - Fraud 2016 ACFE Report to the Nations (2,410 cases) Organizations typically lose 5% of revenues in a given year (total loss in the Billions) Asset misappropriation (theft) represented 83% of fraud The most common cause of fraud LACK OF INTERNAL CONTROLS The majority of fraud originates in the accounting department 30

32 Oversight and Governance Fraud Triangle Opportunity FRAUD TRIANGLE Incentive/Pressure; perceived need Rationalization 31

33 Common Types of Fraud Misclassification of expenditures Recording verbal pledge receivables (or not recording) Altering documents and concealing payee s Paying personal bills on the company dime Shell company scheme Procuring a benefit by use of power Subsidiary ledger not reconciled to G/L 32

34 Fraud Headlines What have we seen? Internal Frauds Unapproved compensation Personal Expenditures passed through Theft / sale of computers/equipment Travel double-submission schemes Collusion to approve invalid expenses Overstatement of time on grant reporting Theft of Cobra reimbursement External Frauds Falsified Checks cashed on company account Cryptolocker requiring payment to unlock computer Scheme from boss to wire funds Charitable contribution used as a ploy to extract funds Receipt of IRS or other regulatory body notice indicating funds are owed 33

35 Fraud Headlines- Lack of Controls 34 David Rennie, former ED Sold donated goods to 3 rd party wholesaler ( approved vendor ) for a profit instead of being sent to the shelters, food banks and children they were supposed to go to According to the Star, the ED lied to staff and donors, omitted info from his bosses, destroyed evidence, moved vast amounts of donations to be sold and took cash payments for donations Caught by manager who reported the matter to internal auditors

36 Fraud Headlines- Lack of Controls Former Treasurer of Mahopac Volunteer Fire Department, Michael Klein Purchased antique fire engine and yacht dubbed K BAM He wrote checks (275 in total) to vendors that typically sold police/fire equipment and created fake invoices. The expenses were coded to various vendors to conceal the fraud Auditor did not catch this. 35

37 Fraud Headlines- Poor Governance Children s Cancer Fund of America $75.8m in donations over a 5 year period received Spent less than 3% of funds for grants and contributions to cancer patients Poor governance, accounting, and fundraising decisions (high fees) Board meetings overseas; decisions to benefit themselves leftover money (pay bonuses) 36

38 Fraud Headlines- Lack of Oversight CEO charged with stealing funds from NPO Received Federal and State Grants Slush fund created from excess funds Used intimidation and retaliation to keep subordinates silent Diverted over $250,000 for personal use Son was paid over $140,000 for a no-show job, just prior to the son becoming a police officer 37

39 Fraud Headlines- Lack of Oversight NPO received federal funds for various purposes including serving children Transferred funds to pay personal bills and make purchases for his benefit and for friends Money transferred through wire transfers and forged checks Transferred to personal bank accounts and accounts of fictitious company he created 38

40 On the Horizon- Financial Reporting New Accounting Standards- GAAP ASU Presentation of F/S of NFPs Effective Years ended 12/31/2018 or 6/30/19 Limiting Net Assets Categories to 2 buckets Net Assets with and without donor restrictions Expanding liquidity disclosure of NFPs Functional Expense statement = big change 39

41 QUESTIONS OR COMMENTS? 40

42 Thank You For Your Time! ERIK HALLUSKA, CPA Senior Manager, WithumSmith+Brown, PC Please contact me with any additional questions. 41