Audit Report for Meadowland Elementary PTO - June 2016 Prepared at the request of President Marc Raphael and the Board of Directors by Allen Jackson The following structure was used: Area of Review, STANDARD, FINDINGS, NOTES. STANDARD reflect generally accepted accounting practices for non-profits. FINDINGS are what I found from my interviews with the Treasurer and past-treasurer. NOTES are my observations and additional information related to the Area of Review. This was not a comprehensive audit of all the financial records of the organization. Instead, a sample of transactions were reviewed and validated. Receipts were obtained, and signatures representing approvals or other authorizations were accepted as valid. Information was obtained in a casual interview setting with Michelle Ryan, the current Treasurer, and her husband Randy, a past Treasurer. Where additional strengthening of the organizations policies, processes, or bookkeeping needs to be done, I have noted in RED the need for additional efforts by the President and Board. Thank you for letting me provide my insights! ============================= Matching Expenditures to Invoices STANDARD: Each expenditure should be matched with a receipt or invoice that shows where, when, and what. A separate notation should exist saying why the expenditure was made and to which account an expense will be charged. FINDING: Invoices showing expenditures were kept and associated with each check. Expenditures are entered into Quickbooks and assigned to an account. STANDARD: Approval authority should be clear (who authorized the expenditure) and upon what basis. FINDING: Approval authority for this small organization is often informal and relies upon the working relationship between the Treasurer, President, and other members of the Board. Decisions regarding the appropriateness of each expenditure often relies upon the informed judgement of the Treasurer. Record Management STANDARD: All financial information should be stored reliably, securely, and in an organized manner. All relevant information, such as bank statements, cancelled checks, invoices, cash receipts, and cash register tapes (or adding machine tapes if used to record cash received at events) should be stored at least through the end of each reporting period. Having this information stored and readily accessible helps resolve any issues or discrepancies that arise. FINDING: All financial information was assembled and available in several large boxes. Most information is retained in Quickbooks. Page 1 of 6
STANDARD: Tax receipts must be kept on hand for at least 7 years, as this is the statute of limitations on tax fraud. FINDING: Financial information going back at least 7 years was available, with most documentary information going back to 2001 and Quickbooks data going back to 1995. STANDARD: Financial information kept in computer programs should be backed up to remote (usually online) servers during and at the end of each data entry / report writing session. Use of online versions of accounting software should be programed to accomplish this automatically. FINDING: The Quickbooks version (2014 Pro) is owned by the Treasurer and is used on a stand-alone computer and the data is kept on that computer s hard drive. Back-ups may be kept on USB data storage jump-drives. STANDARD: Accounting information should be available to several key members of the Administrative Committee / Board of Directors in addition to the Treasurer (example: Vice-Treasurer, President, Audit/Compliance Board Member). These additional individuals should have (at least) read access to the information and the ability to draw unique reports from the data. FINDING: Only the Treasurer has a copy of Quickbooks and hence only the Treasurer can pull reports and make data queries. NOTE: Online versions of Quickbooks permit multiple individuals within an organization to have reportlevel access to the information and access levels may be assigned by a primary control individual. Individuals with read-only access do not have all transaction-level data (such as access to personnel records). An online version would remain updated and would belong to the organization. Cash Management STANDARD: Cash and cash-equivalents (gift cards, freebies from vendors, debit & credit cards) need to be carefully recorded and their use carefully supervised. FINDING: This is an area that needs to be strengthened. (1) The organization does not utilize debit or credit cards, which is a strength. Such cards are difficult to manage as the banks assume no liability for inappropriate procurement by authorized individuals using such cards, and in cases where family members or others have taken and used such cards without permission, organizations are often hesitant to prosecute. (2) The receipt of gift cards, freebies from vendors or local businesses, and other cash-equivalents must be treated as cash, accounted for as income to the organization, and receipts must be provided to donors. A record of the disbursement of such cash-equivalents must be kept and available for audit purposes by the IRS and Virginia authorities. STANDARD: Authority to make cash expenditures should be detailed in Financial Policies Manual. FINDING: This is an area that needs to be strengthened. Currently, there is no Financial Policies Manual. Page 2 of 6
STANDARD: Use of cash control devices (including cash boxes, cash registers, adding machines, etc.) and credit card readers require users and supervisors to be trained and supervisors to be able to control the transaction flow. FINDING: Cash management at events are often (perhaps usually) managed by informal volunteers selected on the spot. The criteria for selection of cash management individuals is based mostly upon their willingness and friendliness, and it is hoped that the small scale of the cash transactions and the use of whole dollar amounts mitigates the additional cash management risk. NOTE1: The use of volunteers is a key to the organizations mission: getting more parents involved in parent-child-teacher interactions. Supervisors need to be able to manage the flow of transactions to keep the additional risk to a manageable level. NOTE2: Use of credit or debit card readers, peer-to-peer payment systems (such as: Square Cash, Venmo, PayPal, Apple Pay, Android Pay, Samsung Pay, Google Wallet), etc., provides convenience to those attending events and lowers cash management risk. The cost of such systems is reasonable relative to the risk; attendees should be encouraged to use these payment methods rather than cash. STANDARD: Bank charges for client-checks returned for insufficient funds or otherwise, should be collected from the client, future checks should not be accepted for a period of time (often 6-months to 1-year for first time violations and 1-year or never for multiple offenders). After 1 year, if bank fees are not reimbursed by the client, such accounts receivable should be formally written off by Board decision. FINDING: It is often difficult for an organization to confront donor clients to obtain reimbursement for bank fees resulting from returned checks, yet the organization has an obligation to attempt such reimbursement. Responsible cash management requires that checks not be accepted from an individual who has financial management problems until such problems can be expected to have been addressed. A reasonable time period is often established as policy. Budgets STANDARD: Each expenditure should link to the approved budget. Each revenue source should be linked to the budget. FINDING: The organization has an annual budget process. As with most small organizations, the budget is usually based upon the previous year s budget with minor adjustments. Where line items exceed budgeted amounts, an Administrative Request is made and, if approved at a subsequent Board meeting, a budget exception is made. NOTE: The term Budget often confuses the power of this management tool, as non-accountants often assume it is for bookkeeping purposes only. Also, with the ready availability of Administrative Requests to make an exception to the existing budget, the process can be used mid-year by subcommittees / individuals to reprogram funds from mission priorities into other uses. In truth, a budget should be a Spending Plan where organization resources are being spent to accomplish the highest priority goals, or raised to further those goals. Page 3 of 6
STANDARD: Annually, and at least every 3-5 years, a formal strategic planning session should be engaged with the goal of ensuring that organization priorities are being effectively addressed, strategic partners and stakeholders are being engaged, and that changes to the organization and its priorities are being addressed. The result of strategic planning should include a spending plan that targets organization resources to meet its priorities, fund raising goals for meeting the annual spending plan(s), and a method for evaluating the degree of success each fund raising event / spending line item has in meeting the organization s priorities. FINDING: This is an area that needs to be strengthened. It appears that there has not been a strategic planning session, per se, in many years. Internal Controls STANDARD: Internal controls are those provisions that help to protect against fraud, theft, and other internal accounting issues. They are the procedures the organization uses to ensure its assets are protected and its information is accurate. Internal controls must be clearly understood by everyone involved, transparent, and available for review as circumstances evolve. FINDING: This is an area that needs to be strengthened. Currently there is no Financial Policies Manual. STANDARD: Separate accounting duties should be assigned to the extent reasonable and possible. For example, it is best to not allow the same person to both handle cash and do the bookkeeping, as this makes it easier to explain away missing cash. FINDING: This is an area that needs to be strengthened. As with many small organizations, it is difficult for Meadowland PTO to attract people needed to serve as back-ups to existing positions, and the role of back-up thence falls to the President or other assigned Board member. However, it is essential that a back-up process exists, as the state-mandated due diligence required of non-profit Board Members requires effective cash management and financial controls to safeguard the charitable contributions made by the public. STANDARD: Incoming administrative and subcommittee officers need to be trained and the information (files, contact lists, reports) from outgoing officers needs to be transferred. FINDING: This is an area that needs to be strengthened. Transfer of the knowledge, files, and contact information of vendors, beneficiaries, and other strategic partners relevant to each position is often left to chance as no formal end of term report or formal hand-over meeting is held. STANDARD: Subcommittee (or Event) Chairs should be responsible for making financial and inventory reports. How much money was spent, how much was made, what items were on hand at start-up and what are available at end. A separate notation about what was broken and/or repaired should be made. FINDING: This is an area that needs to be strengthened. There is no formal year-end reporting by the President, Treasurer, or Event Chairs. Instead, the minutes of Board meetings are used to report on how individual events fared and how well the organization is meeting its goals. There is rarely a separate inventory accounting of items purchased or gifted by local businesses or parents and no record is kept of the breakage or repair of items. There is no required back-up reporting of cash flows which may be compared with Treasurer reporting. Page 4 of 6
STANDARD: Checkbook, cash, inventory, and other reconciliations should be timely made. FINDING: Cash and checkbook reconciliations are timely made. IRS 990-N Filing and Donor Reports STANDARD: IRS Reporting should be done annually. Donor receipts should be sent by 3rd week in January, must include EIN, and must say whether anything was given (and value) in exchange for the donation. FINDING: I was unable to determine the status of this requirement. Donor letters are not sent by the Treasurer and probably are sent after each event. Family Fun Night thank-you letters are sent by the President. rd NOTE: Thank-you letters are not a substitute for Donor receipts, which must be sent by the 3 week in January to all persons and organizations claiming a charitable donation to the Meadowland PTO. STANDARD: Tax receipts must be kept on hand for at least 7 years, as this is the statute of limitations on tax fraud. FINDING: Financial information going back at least 7 years was available, with most documentary information going back to 2001 and Quickbooks data going back to 1995. NOTE: Scanned receipts are acceptable for IRS purposes if each receipt includes the vendor s name and address, transaction date, and the amount paid. Also, notes about what you bought and its business purpose should be included. The IRS requires a policy of regular, consistent and accurate data backup. Several programs combine receipt scanning, numbering and date stamping, and online storage. Quickbooks will connect to any scanner that is TWAIN compliant and associate the scan with the transaction. Tax Exemption Documents STANDARD: The following documents should be available for use at every meeting: Articles of Incorporation, Bylaws, VA Annual Reports, and the minutes of past meetings. In general, exempt organizations must make available for public inspection certain annual returns (Form 990 filings), applications for state or federal sales or income tax exemption, a Determination Letter by IRS of 501(c)3 status (if received), and the organizations Sales and Use Tax Exemption Certification from the State of Virginia (if received). The organization must provide copies of such returns and applications to individuals who request them. Copies usually must be provided immediately in the case of in-person requests, and within 30 days in the case of written requests. The tax-exempt organization may charge a reasonable copying fee plus actual postage, if any. FINDING: The Treasurer had copies of the Bylaws, and the Determination Letter by the IRS of 501(c)3 status and the Sales and Use Tax Exemption Certification from Virginia. Due to its size, the organization files Form 990-N (Postcard) for its fiscal year Sept/01 - Aug/31 and individuals requesting a copy may be directed to the www.irs.gov website. Page 5 of 6
Conflict of Interest Policy STANDARD: Each 501(c)3 Organization must have a written Conflict of Interest Policy. FINDING: This is an area that needs to be strengthened. Currently there is no Conflict of Interest Policy in place. However, each 501(c)3 is required to have a written Conflict of Interest Policy and the Directors are required to know and understand such policy. NOTE: A conflict of interest policy should: (a) require those with a conflict (or who think they may have a conflict) to disclose the conflict/potential conflict; and, (b) prohibit interested board members from voting on any matter in which there is a conflict. See IRS Form 1023. STANDARD: A clear description of any transaction during the preceding three (3) years between the nonprofit and any of its officers and directors (and persons related to such officers and directors) including but not limited to loans, advances, sales or purchases, guarantees and service or management contracts. FINDING: This is an area that needs to be strengthened. There are many reimbursement transactions that involve Officers and Directors as the organization is effectively run by its Officers and Directors. Fortunately, the Treasurer maintains adequate records of such reimbursements that it appears unlikely that such reimbursements are actually payments for services rendered to the organization. Page 6 of 6