Nonprofit GPS

Many not-for-profit organizations are getting ready for their June 30, 2010 audits, and being as prepared as possible will make for a smoother and more efficient audit.  Here are some tips to be “audit ready:”

• Make sure that you have all of your assets, liabilities, and net assets accounts reconciled.  This should be done a regular basis, so take a look just to be sure.

• Consider any adjusting journal entries that were recorded as a result of your previous audit.  Do any of these same scenarios apply?  If so, consider if you can make the entry prior to the start of fieldwork.

• Establish an understanding of the expected audit timeline. 

- What deadlines are involved? 
- When do your auditors need certain information? 
- How many days or weeks will they be at your office?  
- What accommodations are needed (space, Internet access, etc.)
- When can you expect to receive a draft of the audit?

• Carefully review the listing of requests provided by your auditors.  Ask any questions you may have about what they are asking you to provide.  If a request seems confusing to you, your auditor will appreciate your questions in advance to ensure you aren’t wasting your time putting together the wrong data.

• Give yourself plenty of time to gather all requests.  Waiting until the last minute is stressful, and it doesn’t allow you to address any unexpected issues before your auditors arrive for fieldwork.  Having all audit requests completely ready for your auditors will allow them to work as efficiently as possible (and, as a result, be out of your hair as soon as possible!)

• Make yourself as available as possible while your auditor is working in your office.  Of course, you’ll still have business to address while they’re at your office, but keeping your schedule as open as possible will keep things running smoothly.  The same goes for critical staff – can everyone plan to be available if needed?

It all boils down to communication and preparation!  Spending a little extra time working on these things prior to the start of the audit will go a long way in improving the efficiency and quality of your audit process. 

Jessica Puckett, CPA, CFE

Not-for-profit organizations can hold significant investments.  Funds may be invested to safeguard endowments, to set aside reserves, to provide earnings to the programs, etc.  Not-for-profit organizations and their investment committees may decide to invest a portion of funds in alternative investments.  Alternative investments are not the traditional stocks, bonds and cash.  They are generally not registered with the SEC and do not have to comply with regulations that other investments do.   There may be restrictions with an alternative investment as far as the timing for when shares can be redeemed or if they can be redeemed at all.  Alternative investments can include hedge funds, real estate funds, managed futures, and other types.

Because these investments are not actively traded on an open market, it can be difficult to determine the fair value on the statement of financial position.  Typically, these investments are valued at net asset value per share (NAV).  This means that if the hedge fund (for example) is a limited partnership (which many are), the NAV is calculated as the total of net assets (assets minus liabilities) on the balance sheet of the hedge fund, divided by the number of shares. 

So is NAV an accurate fair value measurement?  And if so, what level in the fair value hierarchy would this fall under?  This can also be difficult to determine.  However, there is relatively new guidance from the Financial Accounting Standards Board that provides some clarification on this topic.  The guidance generally states that NAV can be an accurate measure of fair value.  The full text of Accounting Standards Update 2009-12 should be read to understand the guidance in its entirety, but here are some general points about the fair value hierarchy for NAV:

• If you have the ability to redeem shares in the alternative investment at the measurement date or in the near term, then the investment would generally be Level 2.
• If you never have the ability to redeem, then generally Level 3.
• If you don’t know when you will be able to redeem, then generally Level 3.

The new guidance also requires additional disclosures in the footnotes to the financial statements about the timing of redemptions and the investment strategies of the funds.

Colette Kamps, CPA

Limited resources make internal controls and segregation of duties quite challenging to small not-for-profit organizations.  Perhaps there are only a couple of employees to share responsibilities.  Maybe there is only a volunteer staff.  Regardless of size, there are some basic controls that are essential to be in place to protect the organization from fraud or errors.

First of all, just because you’re small doesn’t mean you don’t need policies.  You need them.  Take the time as a board to implement basic policies so that staff and volunteers have the guidance they need when issues arise.  Often I’ll hear board members say, “We don’t need an expense reimbursement policy because only our executive director submits them.”  Fine, but then that’s what your policy should state.  If you don’t have a policy that states who may have expenses reimbursed and what types of expenses are allowed, you may find yourself in an awkward position when a board member or volunteer submits a request for a reimbursement the organization doesn’t think it should have to pay (or may not have the budget to pay!)  What if your executive director submits one giant expense report a year and the board wasn’t expecting the amounts or types of expenses included?  What if receipts are lost?  These are just a few scenarios that commonly occur where having a policy in place will protect your relationship with your board, employees and volunteers.

Once you have those policies in place – insist that everyone follow them!  Know that behavior of management (or board members) will set the tone for the entire organization.  Employees and volunteers will watch your behavior.  If you’re sloppy with documentation or make frequent policy exceptions for yourself they will have a much easier time rationalizing that same behavior or worse!

Second, when dealing with actual cash it’s imperative that it’s always counted with two people present.  Do you collect money at special events or while serving lunch at your senior center?  If so, your risk of theft decreases when two people are handling it at the same time.

Next, that cash needs to be reconciled!  Every month!  Without exceptions!  Someone other than the person who writes checks and makes deposits should reconcile the bank accounts.  If you sincerely don’t having someone outside of this function to handle this, you should at a minimum have someone else receive the bank statements and scan through them before handing them over to be reconciled.  You should also have a board member review the bank recs on a regular basis.

Finally, never underestimate the value of a lock!  Computers should be physically locked whenever possible, and there should be password protection to access data.  The same goes for check stock, petty cash, gift cards and bus passes.

Jessica Puckett, CPA, CFE

A few months ago, I was watching a segment on the CBS evening news about hard drives on copiers.  Copiers are generally leased, and they are often sold to resellers when they are turned in at the end of the lease term.  The data left on the copier hard drives could be confidential, and – if left on the copier hard drive – organizations could unknowingly share that data with outsiders.  To make their point, the CBS reporters went out and purchased four secondhand copiers that had previously been leased for about $300 each at random, and then they had the copier hard drives analyzed.  Surprisingly, there was data saved on each of the hard drives including medical records, social security numbers and bank information.

The CBS news segment was so popular that it became a You Tube sensation.  When a recent article in CFO magazine covered the same topic, it got me thinking about some of the sensitive information not-for-profit organizations copy in their normal course of operations – social security numbers of employees and individuals receiving assistance, salary information, donor information, etc.  IT managers and specialists are often used when dealing with computer hard drives, but that isn’t always the case with copiers; therefore, I can see how this risk could be overlooked.  I think most organizations are very careful to shred all of their sensitive documents, but have you considered having your copier hard drives wiped clean before trading it in for a newer model when your lease is up for renewal? 

Jessica Puckett, CPA, CFE