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Making Cents of Your Accounting Services Firm –

Views from Both Tax and Audit

Kristen Wicke, Sean Holcomb, Dena Jansen & Shannon Peterson

Maxwell Locke & Ritter LLP February 28, 2012

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Tax considerations Board governance Internal controls Financial audit –

Overview of the audit process

What to be prepared to answer

What will we cover in this presentation?

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Tax Considerations

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2010 (and later) 990-N e-postcard Gross receipts < $50,000 (no supporting orgs)

990-EZ Gross receipts < $200,000 AND

Total assets < $500,000

990 Gross receipts > $200,000 OR

Total assets > $500,000

Form 990 – Filing Thresholds

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Due 15th day of 5th month following year end Two 3-month extensions available

Electronic filing 990-N must be filed through IRS website

E-filing required if file at least 250 returns of any type during the calendar year ending with or within the organization’s tax year AND total assets > $10 million

• Note – IRS e-filing system for 990s is down until February 29th. All returns due (whether required to e-file or not) from January 1, 2012 – February 29, 2012 now have until March 30, 2012 to file

When, Where, How 990 filed

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Original and amended annual information returns for previous 3 tax years available for public inspection

Form 1023 also subject to public inspection Not all information subject to disclosure

Schedule B – names and addresses of contributors

Public Inspection Copy

Transparency

Public Disclosure

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12 page core form, 16 possible additional schedules Increased focus on Governance

Part VI

“Good governance and accountability practices provide safeguards to help ensure that the organization’s assets will be used consistently with its exempt purpose.”

A big focus of the questions on the 990 is not to necessarily focus on policies, rules, and procedures required by the IRS, but assist those charged with governance that the financial policies and procedures of the NPO support sound governance and demonstrate to potential donors and the public the NPO’s compliance.

More documentation on policies and procedures required to be disclosed

2008 Form 990 Redesign - Governance

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Increased focus on Governance IRS now using “check sheet” to capture governance

practices and the related internal controls of organizations it examines.

• Analyze data collected over long term to understand intersection between governance practices and tax compliance.

2008 Form 990 Redesign - Governance

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Schedule L Excess benefit transactions

Loans outstanding

Grants or assistance

Business transactions

• Directly, with family members, or organizations owned

Form 990, Part VI, Section A, Line 2

• Did any officer, director, trustee or key employee have a family or business relationship with any other officer, director, trustee or key employee?

IRS looking for potential inurement/excess benefit/self-dealing

Board member relationships with each other and the Organization

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Compensation Part VII

Increased reporting – Officers, Directors, Trustees, Key Employees and Highest Compensated Employees

• Officers/Directors/Trustees (Current and Former) – any amount

• Key Employees - $150,000

• Highest Compensated Employees - $100,000

From the organization AND related organizations

Description of compensation policies and procedures

Compensation

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Quid pro quo – this for that Donor makes donation and receives goods or services from

organization

Contribution amount is amount by which the donation exceeds the fair market value (NOT cost) of the goods or services received from the nonprofit

Fundraising events

Exceptions

• Token items, low-cost items, intangible religious benefits, membership benefits

Contributions

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See Chester D. Tripp, TC Memo 1963-244 Donations earmarked for a particular person are not

tax deductible Must be to charitable class, not single individual Organization must have final authority on use of

funds

Earmarked Contributions

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Would normally be the status indicated in the IRS determination letter Can be different if organization feels that a different status

more accurately reflects sources of support

• IRS only changes its records if the organization files for a determination letter to confirm qualification for new public charity status

Public Charity Status

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Congress imposed additional restrictions on certain types of supporting organizations and addressed certain abuses.

Change from 509(a)(3) to 509(a)(1) or 509(a)(2) governed by procedures of Revenue Procedure 2009-4

Procedures under which a supporting organization could request a change in public charity classification for reasons related to the changes made by the PPA.

Pension Protection Act and 509(a)(3)

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FY 2010 Examinations – 11,449 FY 2010 Compliance Checks – 3,893 Examinations are up, compliance checks are down

IRS Examinations

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Board Governance

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Those charged with governance. The person(s) or organization(s); i.e.,

A corporate trustee with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity

This includes overseeing the financial reporting process

Those charged with governance may include management personnel; for example, executive director or chief financial officer

Definition of “Those Charged With Governance”

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The Board is the ultimate governance body for the organization

The Board sets the organization’s business and ethical standards - “the tone at the top”

The Board sets the policies, oversight, and direction of the organization’s activities

The Board selects the organization’s management, monitors management, and changes management when necessary

Financial Reporting Responsibility of the Board

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Responsibilities: Can be a number of responsibilities assigned to the board in

oversight capacity, but none of the responsibilities of management should be assigned to the audit committee

Should be unique to the NPO’s needs and its culture - “one size does not fit all”

Should not be so great and so detailed the audit committee may lose sight of its major objectives or start to perform its duties at “too high of a level”

The Audit Committee

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Responsibilities typically include: Appointing, compensating, retaining, and evaluating the

external auditor Overseeing the external audit plan Discussing the annual audited financial statements Overseeing the external audit process and audit results Monitoring internal control over financial reporting Discussing interim financial statements and the external

auditor’s review of those statements Monitoring the external auditor’s independence Approving audit and non-audit services

Audit Committee Responsibilities

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Establishing and monitoring the NPO’s whistleblower procedures

The Board of Directors also frequently assigns additional responsibilities to the audit committee involving the oversight of the company’s: Code of ethical conduct

Conflicts of interest

Related parties

Special investigations involving possible fraud and related problems

Compliance with laws, rules, and regulations

Communications from attorneys about potential violations of law

Litigation matters

Audit Committee Responsibilities (continued)

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It is a traditional role of the Board to monitor conflicts of interest and related party transactions. Steps to consider:

Identify and review at pre-determined frequency related parties to the organization

Maintain current listings of management, BOD and their relationships (e.g. company ownership, employer, etc.)

Follow policy for annual representations and actions at BOD meetings (i.e. abstaining from related party transaction decisions)

Have current Conflict of Interest Policy that is presented and available to management and BOD

• National Council of Nonprofits has example templates available at http://www.councilofnonprofits.org/conflict-of-interest

Maintain listing of related party transactions for disclosure

• Generally accepted accounting principles allows for materiality to be applied, but often in practice, conservative approach taken and includes full disclosure.

Conflict of Interest Policy

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Consider conducting an orientation session for new Board or finance or audit committee members

Certain basic information required: Information about the entity and environment in which it operates -

regulatory and economic

Biographies of senior management

Minutes of the previous year or years

Committees, including structure and duties

Self assessment conducted by the NPO or by a third party

Prior financial statements and tax filings

Prior communication letters from the external auditor

History of non-attest work performed by the external auditor

Information regarding legal counsel and previous communications from legal counsel

Educating Those Charged With Governance

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Traditionally management provides financial reporting information for BOD analysis and oversight

What to include?

• Financial statements and supporting detail to provide BOD with understanding of activity and any new, significant or unusual transactions

How frequently?

• No accounting requirement for frequency of reporting

• Look to organizational documents to see if any required frequency or level of reporting

Some investment policies will require quarterly reporting of specific investment information

• Monthly reporting would be ideal frequency to provide consistent opportunities for analysis and oversight

What action should be taken?

• Management should be prepared to respond to inquiries and address any requests for action and report back at next meeting (or earlier if requested)

Management Responsibilities

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Internal Controls

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Internal controls are the process, affected by the NPO’s board, management, audit committee (if one is in place), and other entity personnel, and designed to provide reasonable assurance about the NPO’s Financial reporting reliability

Compliance with applicable laws and regulations

Effectiveness and efficiency of operations

Efficient and effective internal controls starts with their design

Internal Controls

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Management and those charged with governance have the responsibility for overseeing the risks and controls

over financial reporting

overseeing the tax, legal, and certain other regulatory and compliance matters; i.e., grants, environmental, etc.

Management and those charged with governance can delegate the performance, but not the responsibility of any of these areas

The external audit is not and cannot be an internal control.

Internal Controls (continued)

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Financial Audit: An overview

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Planning Engagement letter Fraud procedures – discussions with management

and governing body Preliminary analytics – will include inquiries,

comparisons of current year to prior year or budget to actual

Internal controls – gain or update understanding of significant processes (revenues/ receipts, expenses/disbursements, payroll, etc.) and possibly testing for operating effectiveness

ALWAYS highlight new/changed items to avoid surprises

The Audit Process

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Fieldwork Specific account balance/activity testing Materiality concept Sampling or substantive analytics

Reporting Financial statements are management’s but

auditors can assist in preparation Footnote disclosures SAS 114 letter - Required communications to

those charged with governance SAS 115 letter – known as Management Letter or

Internal Control Letter

The Audit Process (continued)

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Common items requested by auditors during: Planning

Copies of any NEW or UPDATED agreements (e.g. lease, debt, bank accounts or lines of credit)

Copies of any NEW or UPDATED organizational documents (e.g. by-laws, employee handbooks, financial policies and procedures)

CHANGES or UPDATES to internal controls documentation

CHANGES or UPDATES to organizational operations (e.g. org chart, rate structures, investment policies)

Minutes – all meeting minutes for full Board and potentially Finance or Audit Committee if applicable for entire fiscal year through report issuance

Prepared By Client (“PBC”) Items

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Common items requested by auditors during: Fieldwork

Bank account statements and reconciliations to G/L

Investment statements and reconciliations to G/L

Rollforward activity for promises to give (include information on discounts and allowances for long term promises)

Details of G/L balances that agree to G/L (A/R, Prepaids, A/P, Accrued Expenses)

Property and equipment – rollforward of activity with support for activity

Debt statements and any correspondence to support debt covenants, if applicable

Net asset rollforward – by restriction classification (unrestricted, temporarily or permanently)

Endowment specific rollforward

Support for amounts released from restrictions

If sampling - will request specific items (checks, invoices, etc.)

If performing substantive analytics – will request explanations for variances over their determined threshold

Prepared By Client (“PBC”) Items

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Common items requested by auditors during: Reporting

Support for footnote disclosures:

• Accounts receivable and/or promises to give

• Investments – by type and fair value level

• Property and equipment

• Debt

• Retirement plans

• Commitments and contingencies – leases, litigation

• Endowments

• Related parties – BOD transactions, any other known related parties, actual amounts and any amounts outstanding owed or due

• Subsequent events – continue through report issuance

Management representation letter

Prepared By Client (“PBC”) Items

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IRS Web Site - www.irs.gov

Stayexempt.org - additional training and instructions

GuideStar – web site for tax returns of Non-profits - www2.guidestar.org

AICPA Not-for-Profit Audit Committee Toolkit – See also Appendix A for other specific resources http://www.aicpa.org/interestareas/businessindustryandgovernment/resources/notforprofitresourcecenter/pages/aicpanot-for-profitauditcommitteetoolkitdownloads.aspx

Resources

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MAXWELL LOCKE & RITTER LLP

Phone: (512) 370 3200

Fax: (512) 370 3250

Austin: 401 Congress Avenue, Suite 1100

Austin, TX 78701

Round Rock: 303 East Main Street

Round Rock, TX 78664

Affiliated Company

ML&R WEALTH MANAGEMENT LLC“A Registered Investment Advisor”

This firm is not a CPA firm

Questions?