Financial Stewardship in Not-for-Profit Organizations

Not-For-Profit Financial Stewardship ARTSFUND October 13, 2015 Rob Fleming, CPA Shareholder | Clark Nuber PS rfleming@clarknuber.com

AGENDA Duties Of Board Financial Responsibilities Reading Financial Statements IRS Form 990 Internal Controls Risk Management

BOD RESPONSIBILITIES Duty Of Care Duty Of Loyalty Duty Of Obedience (Topic is covered in legal session)

BOD RESPONSIBILITIES Hire, coach and evaluate the executive director Develop mission, vision, values, and policies Develop strategic plan Assure financial stewardship Fundraise Be an advocate Ensure BOD s own effectiveness

WASHINGTON ATHLETIC CLUB Mission To enrich the quality of life of our members Vision To be the premier athletic club in America Values Leadership, excellence, integrity, service, and sensitivity

COMMON BOARD CONCERNS Accountability and Transparency Sustainability Prudent Behavior Ethical Behavior Compliance with Laws and Regulations

RECENT EXAMPLES Penn State/Second Mile Susan G. Komen Foundation Archdiocese Of New York

FINANCIAL STEWARDSHIP GOALS Accountability and Transparency Financial reports are accurate, complete, timely, and useful Monitor internal controls Communicate with auditors

FINANCIAL STEWARDSHIP GOALS Sustainability Review, approve and monitor operating and capital budgets Monitor cash flows (both investment policies and debt policies) Prudent Behavior Expenses are reasonable and necessary Approve major transactions

FINANCIAL STEWARDSHIP GOALS Ethical Behavior Monitor issues relating to conflicts of interest, code of ethics, whistleblower reports, and excessive compensation Compliance with Laws and Regulations Monitor compliance reporting Implement record retention/destruction policy

TEXAS INSTRUMENTS ETHICS TEST Is the action legal? Does it comply with our values? If you do it, will you feel bad? How will it look in the newspapers? If you know it s wrong, don t do it If you are not sure, ask Keep asking until you get an answer

DISCUSSION What financial issues/practices have you seen in your work with nonprofits that are troubling to you?

BEST PRACTICES National Corporate governance proposals of Senate Finance Committee did not become law Independent Sector in October, 2007 issued: Principles of Good Governance and Ethical Practice: A Guide for Charities and Foundations

BEST PRACTICES Report Contains 33 Suggested Practices Legal Compliance Effective Governance Financial Oversight Responsible Fundraising See full report at: Independentsector.Org

LEGISLATION IN WASHINGTON State legislature amended RCW19.09, the state law that governs charitable solicitations Goal is to increase accountability and transparency of nonprofit organizations Does not apply to churches or to organizations that do not solicit contributions from the public

LEGISLATION IN WASHINGTON Financial Reporting If average revenues are more than $1m, must have independent review of tax return If average revenues are more than $3m, must have independent audit of financial statements

LEGISLATION IN WASHINGTON Other Requirements Revised reporting requirements for commercial fundraisers Educational program for charities, boards, and general public Board member must sign reports submitted to State

WHAT IS UNIQUE ABOUT NONPROFITS? Purpose other than to make a profit Tax deductible contributions No ownership Special tax benefits

ACCOUNTANTS REPORTS Audit - highest level Review - analytics and inquiry Compilation - no assurance No accountant s report financials prepared internally

COMPONENTS OF FINANCIAL STATEMENTS Balance Sheet Detail of assets, liabilities, and equity (net assets) Represents a point in time Indicates future cash flow

COMPONENTS OF FINANCIAL STATEMENTS Statement of Activities Shows revenues and expenses over a period of time Shows revenues by restriction Shows expenses by function (program and administration/fundraising)

COMPONENTS OF FINANCIAL STATEMENTS Statement of Cash Flows Summary of changes in cash during the period

COMPONENTS OF FINANCIAL STATEMENTS Footnotes Description of business and operations Description of accounting policies Detail of balance sheet amounts Unusual events and contingencies

DISCUSSION If you were a new member of the Seattle Rep Board and were given its financial statements, what would you notice or conclude about the organization?

IRS FORM 990 Same information as financial statements Also provides information on compensation, donors, expenses by category, and board members 17 questions on corporate policies now on form Form is receiving much more attention IRS revised the form for 2008

MAINTAINING YOUR EXEMPT STATUS Follow mission No political activity Limited unrelated activity No self inurement Comply with IRS and State requirements

INTERNAL CONTROLS Active involvement by management Perform background checks Have two people process cash receipts Examine support for all disbursements Separate control of assets from accounting

INTERNAL CONTROLS Review unopened bank statements Approve all adjustments and write-offs Compare actual results to budgets Relate financial results to service efforts and accomplishments

ENTERPRISE RISK MANAGEMENT Process of identifying, mitigating and monitoring risks that could have a significant impact on your organization Board should be asking three questions: What are our major risks? How do we know we have identified all risks? What is our mitigation plan to reduce identified risks?

ENTERPRISE RISK MANAGEMENT Mitigation options Avoidance Share the risk Insurance Joint venture Reduce the risk Limit the involvement Diversify Acceptance

ENTERPRISE RISK MANAGEMENT Discussion: What would be some examples of risks for nonprofits that should be addressed?

THANK YOU Questions?