Ace Your School’s Annual Audit!

All public charter schools, and many private schools and parochial institutions, undergo an annual audit. While best practice is to structure work throughout each year to ensure a clean audit, now is a good time to assess where you are and address potential deficiencies. A little preparation goes a long way in ensuring a smooth and painless audit.

 Join Craig Stevens and Rob Eby of Aronson LLC for a free webinar led by Brad Olander, CEO of GoldStar, on May 16th at 11am.  During this convenient 30-minute session, we will address common questions including:

•  What does working throughout the year with the audit in mind look like?
• How do you assess potential deficiencies now?
• Who should be involved in the audit planning process?
• What are typical key audit tasks, processes, and deliverables?

 Executive directors, controllers, CFOs, principals and other school professionals serving in an administrative or finance role should register today for this important webinar!

 If you missed April’s webinar: “Financial Reporting-Support your board so they can support you,” be sure to visit our resources page to download the webinar!

Services Received from an Affiliate

FASB issued Proposed Accounting Standards Update (ASU) No. EITF-12B, Not-for-Profit Entities (Topic 958): Personnel Services Received from an Affiliate for Which the Affiliate Does Not Seek Compensation (a consensus of the FASB Emerging Issues Task Force).  The FASB will be accepting comments on this proposed accounting update until September 20, 2012.  The proposed update would modify the current that guidance which indicates that only those contributed services that (1) create or enhance nonfinancial assets or (2) require specialized skills, are provided by individuals possessing those skills, and typically would need to be purchased if not provided by donation should be recognized.  In addition, under this accounting update the value of the services would be measured at the cost recognized by the affiliate for the personnel providing those services.  For more detail read the full FASB exposure draft.

Following Donor Restrictions – A Court Case Against Johns Hopkins

In 2005, Johns Hopkins University was the recipient of a bequest of 138 acres of farmland worth $54 million. The bequest had restrictions on it allowing for development of modest, low-rise academic campus facilities, however, the family (and heirs) of the estate believes that the university’s amended plans, which include a high-rise science facility of over 4.7 million square feet, constitute a violation of the donor’s intent. The family filed suit against the university in Montgomery County Circuit Court last November. Earlier this month during a scheduled hearing, the judge announced a November 13, 2012 trial date.

It will be interesting to see how the courts interpret the donor intent and whether the actions of the university violate the contract that transferred ownership of the property. Stay tuned for updates!

(Source: The Nonprofit Times)

New Acronym Alert: PCC (Private Company Council) established to define GAAP for private companies

On May 23, the Financial Accounting Foundation (FAF) voted to create the Private Company Council (PCC), whose main purpose will be to define differences and exceptions in U.S. GAAP for private companies. This new council will differ considerably from the previously proposed council in October. Several reductions of FASB’s part in the PCC’s decision making process have been made: FASB’s role in the decision making process has been switched from “ratification” to “endorsement;” The PCC chair will no longer be a FASB member; FASB will be given 60 days to approve a PCC decision or must give a public, written notice of why it failed to endorse the decision; and the PCC is able to decide, by a two-thirds vote and discussion with FASB and stakeholders, which components of GAAP are eligible to be exceptions or modifications.

The PCC, with around nine to 12 members chosen by FAF, will hold a minimum of five meetings every year during its first three years. Several of the deliberative meetings will welcome the public and FASB members, while other administrative and educational meetings will exclude FASB members. A FAF committee will supervise the PCC and FASB as they respond to the requests of the private companies. The Private Company Financial Reporting Committee, which had previously worked with FASB about private company matters, will no longer exist in the near future.

Suggested variances in U.S. GAAP for private companies will be brought up by the public and discussed further by the PCC, who will send the approved modifications or exceptions to FASB for final endorsement. These endorsed modifications or exceptions will then be integrated into U.S. GAAP. FASB is in the process of creating a Private Company Decision-Making Framework, which will be the standard set of rules to determine if and when an adjustment to U.S. GAAP is necessary for private companies. FASB is also working on establishing a clear understanding of how a nonpublic entity is to be defined. The AICPA has shown its support for the PCC and has proclaimed its plans to found an “other comprehensive basis of accounting” (OCBOA) framework for private companies that are small enough to be excluded from the requirement to file U.S. GAAP financial statements. The AICPA hopes that OCBOA will be a “less comprehensive, less costly alternative” for these small and medium-size companies and believes that steps have been made in the right direction to change U.S. GAAP for all private companies.

Source: Journal of Accountancy, July 2012, FAF Creates Private Company Council by Ken Tysiac

How do you record donated services from an affiliate?

Frequently nonprofit organizations receive services from a parent or affiliate’s employees or there may be shared administrative support for which the recipient organization doesn’t pay or incur costs. But what do you do to capture the value of the work provided? What is fair value in this case and what qualifies as a “specialized skill” (sidenote: unrelated donated services must qualify as a specialized skill or one that creates or enhances non-financial assets)?

The Emerging issues Task Force (EITF)’s job is to hash out those insidious little details that are left in grey territory by the FASB. They began discussing this topic in March which I helpfully translated into dramatic narrative here. Or, you can read all about it in their own words here. They go through possible scenarios and discuss if changes should be retrospective. At their June meeting, EITF reached what is referred to as “consensuses-for exposure” which is to say they agreed on an approach and now the FASB needs to chime in.

What was agreed upon was this: The recipient organization should record donated service revenue and expense for all work done on their behalf by an affiliate’s employees at cost. Retrospective application is optional. Early adoption is permitted.

Deferred Rent (Avoiding Management Letter Comments, Part 8)

Deferred rent affects the majority of organizations.  If you have a lease that includes any of the following: escalation clauses, rent abatement, or tenant allowances then most likely your lease is subject to deferred rent.  Deferred rent is the process of straight-lining rental expenses evenly over the term of the lease. This may seem benign enough but if you haven’t accounted for it properly, it can really add up quickly and result in a significant deficiency comment or worse.

To calculate deferred rent:

• Calculate total rent per year and then sum together to find total rent for the term of the lease.
• Divide the total rent for the term of the lease by the total number of months in the lease term.  This gives you your monthly straight line rent.
• For each fiscal year of the lease, multiply the number of months the lease is in effect by the straight line rent.
• The difference between actual rent paid and the calculated straight-line is the change in deferred rent.
• Each year add the new change to the cumulative change from the prior year.  By the end of the lease the liability should be back to zero.

A sample deferred rent calculation schedule is shown below:

This table is set up for a 5 year lease with annual escalations of 3% and rent abatement for the first 3 months of the lease.  For ease of use the table is set up assuming the organization has a 12/31 year end.  Each entry will hit deferred rent liability and rent expense.  The debit and credit will be determined based on where you are in the cycle.  In the example above the liability will be credited for the first year and debited for the last remaining years.

Please contact your accountant if any of this seems intimidating or you have questions.  No two cases are exactly alike and we are here to help you if something doesn’t seem right.

This is part 8 of a continuing series on common management letter comments.  Click here to read part 1, part 2, part 3, part 4, part 5, part 6, and part 7.

Reconciliations (avoiding management letter comments, part 7)

One part of a good system of internal controls is performing reconciliations between general ledger accounts and supporting documentation or subsidiary ledgers.  The timing of the reconciliations depends on the account.  Completing reconciliations in a timely manner helps to find differences and errors and allows the organization time to look into any problems prior to completing year-end financial statements.

Some of the accounts that should be reconciled monthly are cash, investments, account receivables, and account payables.  Salary expense should be reconciled on a quarterly basis to the Form 941s that are filed.  A reconciliation between the contributions per the general ledger and the contribution database can be performed on a monthly, quarterly or yearly basis.

One way to stay on top of reconciliations is to create a checklist of reconciliations to be performed on a monthly, quarterly, and yearly basis.  This checklist would serve as a reminder of what reconciliations to complete when and could also provide a sense of accomplishment when the reconciliations are checked off each time they are completed.

This is part 7 of a continuing series on common management letter comments and how to avoid them.  Click to read part 1, part 2, part 3, part 4, part 5, and part 6.

Approval of Journal Entries (avoiding management letter comments, part 6)

One part of a good system of internal controls is having all general journal entries reviewed.  This is also a key part of the segregation of duties in that someone other than the person making the journal entry reviews it.  This review is done to help prevent errors such as adjusting the wrong accounts and transposing numbers.  It also helps protect against fraud by making sure there is a valid reason for the journal entry and someone is not just increasing revenue to make the organization appear better.

Depending on the size of the organization, it can be difficult to determine who should be reviewing the journal entries.  If there are two or more people in the accounting department, one person can be the reviewer while the other person makes the entries.  If there is only one person in the accounting department, then it is necessary to go outside the department to get the journal entries reviewed.  This can be done by have the president or executive director be involved.  A Board member is also a good person to have review the journal entries.

There are also different ways to review the journal entries.  At some organizations each journal entry is reviewed prior to posting.  Other organizations review the entries on a weekly or monthly basis after they are posted.  One of the important things to remember is to document the review and approval.  The simplest way to do this is to print out the journal entries and have the reviewer initial them.  This should then be saved as support.

This is part 6 of a continuing series on common management letter comments.  Click here to read part 1, part 2, part 3, part 4, and part 5.

#nonprofit #nonprofitaccounting #fraud #internalcontrols

CEO Expenses and the Board

An Op-ed piece by Michael Peregrine at the Chronicle of Philanthropy provides a good reminder about why it is so important to pay attention to CEO expense account spending. The head of the foundation of the University of Texas Southwestern Medical Center, Dr. Wildenthal, is stepping down after an internal investigation concluded inappropriate spending including mingled business and personal purchases.

Dr. Wildenthal led the foundation for 22 years before tips reporting lavish international travel, fine wines and other extravagances spurred an internal investigation. Peregrine states “the entirety of the report leaves an impression – fairly or unfairly – of a respected executive who developed a sense of ‘entitlement‘ based on a record of extraordinary accomplishment.” He notes this created an atmosphere of excessive deferential attitudes to Dr. Wildenthal’s judgment in spending.

There’s only so much an auditor can do if we take issue with the exact nature of spending, in terms of whether this is really best way to meet your program or fundraising objective. We can bring it to the board’s attention but if the board isn’t willing to question it themselves or has bought into an executive’s reasoning for spending, all we can really do is repeatedly point at it. An audit opinion speaks to whether the numbers are free from material misstatement. This does include whether program spending was actually spent on the program (as opposed to personal spa days), but we don’t and can’t actually opine on whether the spending was particularly wise or frugal.

The board bears fiduciary responsibility to monitor spending and make sure there is sound judgment involved. When it comes to nonprofit organizational structures, the board is the highest authority and should not defer to an executive when it comes to questionable expenditures.

Read more of Peregrine’s piece here.

Exchange Transaction or Contribution (avoiding management letter comments, part 5)

Organizations receive many different types of revenue including contributions, grants, contracts, and dues.  Some of these revenue types are recorded in a similar manner while others are very different.  It can also be hard to tell the difference between of the types.  For example, grants and contracts usually have a written agreement, but they are recorded differently.

One of the most important questions to consider is who is receiving the benefit.  If the benefit is going to be received by the public or a group not related to the donor, then money is probably a contribution.  If there is some product or service that is going back to the organization that is providing the money, then it is probably an exchange transaction.

The first step is to determine if the revenue is an exchange transaction or a contribution.  Exchange transactions are recorded based on when the revenue is earned and affect revenue, receivables, and deferred revenue.  Contributions are recorded when received or pledged and affect revenue, receivables, and temporarily restricted net assets.

Below are some things to consider when deciding if there is an exchange transaction or a contribution: Continue reading »