Blog

How Nonprofit Tax Form Helps Management

The nonprofit tax form 990 contains interesting questions and requirements that should be reviewed by the board, not just by the financial people. I highly recommend to download and print the full form, even if the nonprofit doesn’t need to file it.  You can check out the core pages at https://www.irs.gov/pub/irs-pdf/f990.pdf

Take a look at the 990 page 6- “Part VI Governance, Management and Disclosure “section” and what is asked in this page– it may be an eye-opener for many.

Untitled

As you can see, this form raises good questions that may be used to improve operations.  According to the instructions on the top, saying “yes’ to lines 2 through 7b requires explanations and management should review these items carefully.

Line 2 is about identifying people who may personally benefit from the organization, a possible private inurement situation, usually a no-no for tax-exempt organizations or a hefty excise tax. The take away here — be careful with business relations involving board members.

Line 5 is about the loss of assets, an intriguing item on the tax return. A “significant diversion of assets” according to the IRS is embezzlement, fraud, theft or other inappropriate use of funds that is the lesser of 5% of current annual gross receipts, 5% of total assets at year-end, or $250,000.  According to a Washington Post report in 2013, more than 1,000 organizations marked “yes” here and most were for embezzlement.  Besides giving details of the problem, it’s a good idea to also disclose any new internal controls used after the problem was disclosed to prevent it from happening again. Note that this is NOT confidential information.

Line 11 specifically asks about top management getting copies of the tax return and how reviews are conducted.  The board must be engaged in this process, even if they are not financial people.  They cannot say that they don’t know or understand the tax returns.

Line 12 asks about conflicts of interest while line 13 is about whistleblowing, and line 14 covers document retention and destruction policy.  These lines underscore the need for written policies, and under the conflict of interest item, the need to monitor those regularly.  The idea is to say “yes” to all of these.  And the take away for management is to make sure these policies are followed up by procedures to make sure they’re not just “lip service.”

Line 18 reminds organizations to make certain forms available for review, as required by law.   Such reminders are all over the tax form, including reminding nonprofits about reporting contractors and gambling winnings.  Management could highlight those items and follow up on them with the finance department.

Also, note that the 990 asks for the nonprofit’s mission statement as the first line, and also on Part III- Statement of Program Services Accomplishments.  The idea here is to match the mission statement to the programs.  If an organization mission is to provide food for the homeless, but programs relate to buying books to schools, the nonprofit may be at risk to lose its tax-exempt status, which can be a major problem.

 

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

 

 

 

Kindle Version Available

Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:

http://amzn.to/2GF2E8W

 

#Nonprofit Jobs Tips

If you’re interested in working with a nonprofit, the best approach is to volunteer first to figure out the culture and style.  If that doesn’t pan out, then it’s time to search for jobs online.  Besides general job websites like monster.com, you could narrow your search to websites that specialize in the nonprofit sector. Below are some options:

https://www.workforgood.org/jobs/

https://www.idealist.org/

https://www.bridgespan.org/

https://www.philanthropy.com/

https://careers.councilofnonprofits.org/

http://nonprofit-jobs.org/

To get a job at a nonprofit, a passion for the organization programs is a must.  Read up on it online, including the latest news on it in the media to emphasize your interest.  Next are some issues I noted many people do when trying to get a job with a nonprofit.

Dress formally — Don’t assume that just because it’s a nonprofit, you can go in wearing sweatpants, for instance.  Proper dressing shows respect and professionalism. It’s better to overdress since most employers understand that people want to make a good impression.

Don’t talk badly about other organizations — This could be done saying that a place has a toxic environment or something more subtle.  Sometimes when giving examples of situations, people slip and show issues that should have been kept private.

Check tax returns at guidestar.com — Tax returns- 990- can show how the organization is doing financially, details about each program, and even salaries of board members and the five highest employees. Look at page 7- Part VII.

Happy job hunting!!

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

 

 

 

 

 

Nonprofit Payroll Risks and Controls

Some organizations run on volunteers only, but many need employees to perform certain tasks. Since having employees is costly, it’s no surprise that payroll is usually the biggest expense in the financial statements. Running payroll can be difficult, and while many organizations contract out outside payroll services, some prefer to process it in-house. Some key risks and controls with payroll are:

Risk: Time sheets could contain wrong information.

In many organizations receiving government funds, everyone files time sheets—even the president—to support charging grants “real” salaries rather than estimated/budgeted ones. Fortunately, many organizations use computerized timekeeping devices and time sheets that once implemented, reduce errors and confusion significantly.

A traditional internal control is for nonprofits to require supervisory approvals on time sheets (manual or electronic) to make sure hours and overtime are authorized. Auditors typically verify if the time charged to a grant was allocated and authorized properly. If the auditor finds errors or no time sheets, or time sheets with no approvals, the scope of the audit is likely to increase, becoming more expensive.

Risk: Employees may be fictitious.

Each employee should file the proper paperwork with human resources and should visit the HR department personally. I know of a case where a program supervisor “hired” a relative part-time who was a “ghost employee.” The nonprofit paid the “employee” for six months, while the supervisor cashed the paychecks.

It was only after a problem with the time sheet of this person (all fake) that the human resources manager got involved, and the fraud was discovered. So, it’s crucial for HR to see and meet with all employees, including part-timers to be sure they’re real and are actually working for the organization.

Risk: Unauthorized payroll changes or increases happen.

To make sure payroll records are correct, department managers should review and sign off payroll registers regarding their department at least once a quarter. Many department managers get the dollar amount of their department’s payroll expenses through regular internal financial reporting, but not the details.

So, having managers verify payroll numbers, overtime, sick days, vacations, etc. is very helpful in keeping it all correct. If they see someone claiming overtime that the manager didn’t approve, he or she can follow up on it.

Controllers or accounting managers should review payroll registers and change reports to make sure the persons running payroll aren’t paying themselves unauthorized overtime or salary increases—a fraud I witnessed that could have been prevented had the controller taken a look at payroll reports regularly.

Risk: Paying terminated employees by mistake.

One issue I often see with payroll relates to nonprofits paying terminated employees because payroll staff didn’t know about the terminations. Once paid, it’s tough to get the money back.  So, it’s important for human resources and managers to notify the payroll department when people quit or are let go. Staff may need to process final checks and update the payroll system.

Nonprofits may implement policies and procedures, including a checklist to follow when employees leave. Many details are involved, such as COBRA requirements that need to be handled correctly or the organization could be liable for fines.

Risk: Payroll information may leak.

Confidentiality is essential with payroll records. Nonprofits must keep all payroll-related documents, including time sheets, in safe, locked filing cabinets where only a few selected authorized personnel are allowed in. Similar security measures must be considered with access to the computerized payroll systems that should be very limited.

Nonprofits should hire people who are discreet and don’t discuss confidential matters with others in the organization. They should avoid using email when mentioning any sensitive payroll information because the system may not be secure enough.

Excerpt from book Nonprofit Finance – A Practical Guide Second Edition — https://goo.gl/M563u9

 

Grant Audits

Many organizations receive grants and as expected, the federal government is concerned that the grants are spent properly, requiring audits of nonprofit recipients in addition to regular visits from the federal agency staff.

Instead of having a separate audit of each major grant, the Single Audit allows for one independent audit covering all federal grant contracts. It usually combines an audit of the organization and its grants. According to the National Council of Nonprofits, “a single audit covers the entire scope of the organization’s financial operations, ensuring that:

  • The financial statements are presented fairly;
  • The organization has an adequate internal control structure, and that
  • The organization is in compliance with any special government regulations/laws that apply to the specific type of federal funding the audit covers.”

These single audits are required if the nonprofit has spent $750,000 or more in federal funds (This threshold is likely to change in the future). Single audits are performed by independent CPA firms, which usually carry out both regular and single audits within the same engagement, releasing the results in two different reports—one for the regular portion and another for the grant audit.

During a single audit, a CPA firm evaluates the fairness of the financial statements and the schedule of federal financial assistance, which contains information about grants. To this end, auditors assess risk by reviewing prior findings, internal controls, and usage of contractors. Also, CPA personnel should consider the materiality of the funds, with major grants often getting most of the attention.

The Super Circular clarifies that auditors are responsible for following up on any deficiencies, also called “findings.” The nonprofit is supposed to respond with a corrective action plan. All of these documents are forwarded to the appropriate government agency.

Management should be aware of the cumulative grant spending because as the organization gets closer to the $750,000 in annual grant expenses, it should start budgeting for the single audit. It doesn’t come cheap, and grant funds may have to be adjusted to include this cost.

Note that nonprofits may need to have a regular, less detailed audit to comply with grantor or state rules. For example, the states of Connecticut and Hawaii require the filing of audited financial statements of charities with an annual gross income of $500,000 or more regardless of federal funding. This audit is less detailed and cheaper than the Single Audit, but it needs to be done.

 

Excerpted from Nonprofit Finance: A Practical Guide — Second edition –available at Amazon — https://goo.gl/M563u9

No Audit Freak Out

One of the most common audits of a nonprofit organization is the one performed by an independent CPA firm, usually, every year. This work may be a requirement for many grantors who want assurance that the funds have been used properly. Auditors may ask detailed questions or require certain information that may not be readily accessible. However,  there is no need to panic – be prepared and understand the process, which tends to be the same every year. Some tips below are to help you deal with the audit, which is one of those processes that many organizations go through, not just yours.

Tip #1– Sometimes staff with not much experience conduct the audit,  so, try to help them and show them the way, or they may get lost and the audit may take longer. The idea here is to have a helpful, not a defensive attitude. It can be frustrating to have to do this every year with different audit staff, but it’s part of the game. The good news is that it’s common for a former team member in an audit to return the following year as a Sr. or Supervisor so that you won’t have to train auditor again.

Tip #2- Be sure to have all the reports and items mentioned on the audit list, often given to the client a few weeks before the audit. If you don’t have all, call the CPA firm and let them know. Maybe you have other reports or items that can be alternatives to what’s on the list. Your audit may also be postponed until you have all the documents. Most accounting firms schedule nonprofit audits a few months during the year, so you may have some flexibility there.

Tip #3– Hire temp workers or volunteers on an as-needed basis to get all the documentation done, prepare worksheets, and help with filing, copying, and other tasks. Some organizations also use temps to assist with the day-to-day activities while the accounting folks are busy with the auditors. Your accounting staff may not be able to do their regular jobs and at the same time give auditors the attention and information they need. So, help at the right time can lessen the stress. Usually, having temps do a specific task, such as entering invoices for payment, works the best because the work is repetitive and training time is minimum. If you’re lucky to have an accountant on your board or as a volunteer, you can give him or her more involved financial tasks.

Tip #4– Communicate often with the manager responsible for the audit to identify issues or bottlenecks. Sometimes auditors use too technical language that the nonprofit staff may not understand and panic. Or maybe there’s a problem in finding information or explanations for certain transactions that you may be familiar with. The goal is to have a quick, clean audit with no major issues or conflicts. The quicker you know of problems, the smoother the process will be.  Make a point to contact the manager at least once every few days.

Tip #5- Notify everyone in the organization of the upcoming audit, since auditors may need to talk to people in other areas of the nonprofit, such as programs and HR. Warn managers and staff that they may need to present certain things to the auditors, including showing them confidential HR and payroll files and reports. Since auditors usually request the same items and calculations, such as vacation accruals every year, the requests shouldn’t be that surprising. But it’s always good to let people know beforehand.

Other Considerations -Freaking out with questions asked by auditors makes no sense— usually, they follow a pre-set program that may not fit your organization 100%, so you can explain to them the situation in a respectful way and offer alternatives.  Ask the auditors what goals they’re trying to get at.  Maybe they are looking at mitigating a risk that doesn’t really apply to your nonprofit, so let them know about it. CCH – Wolters Kluwer Audit guides, for instance, are very popular with many CPA firms that use their audit programs to guide them through this process.  If you’re interested, you could buy the guides, even if it’s expensive.

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

Nonprofit Finance and Management Explained

The second edition of my book, “Nonprofit Finance: A Practical Guide,” is out.  It includes detailed coverage of FASB update regarding reporting, details about liquidity and other details effective in 2018.   For example, the official financial reporting will show only two net assets, but internally, a nonprofit should maintain the three net assets separately and combine the temporarily and permanently restricted for reporting only.

Internal controls are covered in detail for cash, payables and computerized systems, giving ideas about how to minimize certain risks specific to the nonprofit sector.

Like the first edition, nominated for a McAdam Book Award, this second one has many examples and suggestions based on real-life experience, not just theories.  It was written with both the accountant and the non-accountant in mind, so that people of different backgrounds can benefit from the material and put it to good use right away.

You can check the new edition at https://goo.gl/M563u9