• 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

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

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

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

So how should you manage your I.R.S. audit? As in any compliance matter, you may want to have your attorney and/or CPA involved.  This up front cost will save you in the long run, especially if this is an on-site audit.

The guidelines to manage the audit are easy to understand and important to follow:

1. Respond promptly to all communications from the I.R.S.  Putting off responding to the I.R.S. is never a good idea.  Your responses should be thorough and neatly presented.  Carelessness and disorganization sends an unfavorable impression to the auditor and creates an unfavorable impression of your organization, as well.
2. The auditor will send you a request for information.  Documents furnished to reply should be in the same sequence as the request.  A memo can accompany the documents, for further explanation or reference.
3. Have a key person in your organization as the point person for the I.R.S.  This can be your accountant, attorney, experienced board member or someone in executive management.  All communication should be reviewed by your attorney and a thorough list maintained of everything that has been given and communicated to the auditor.  Including questions of staff and their responses.
4. Everyone involved with the audit should be courteous and respectful.  However, do not allow anyone to volunteer information or answer questions about issues or documents, unless they are very knowledgeable in dealing with audits.  You should answer their questions clearly and concisely, not vaguely or too friendly.

As we discussed last Tuesday, documentation is the key.  Complete, organized and easy to follow documentation will go a long way with an I.R.S. agent. 

If your Form 990 is prepared by an outside CPA, they should definitely be heading up the communication and providing of documents. 

The experience is never pleasant but can be less painful, and even enlightening, if handled properly and with care.

Kathy E. Hostetler, CPA

You should be audit ready before you receive any kind of audit notification from the I.R.S.  You can achieve this by being aware of what they normally target and what you have disclosed when you complete your Form 990.

Documentation is the key.  Complete, organized and easy to follow documentation will go a long way with an I.R.S. agent.  Providing them with your determination of worker status as we discussed in Part I, how you determined key employee compensation and benefits, your documentation of related-party transactions and other back-up documentation on questions from the 990 will speed the process and show them that you are ready and willing to cooperate.   Being proactive in answering their requests is a must. 

Be sure your minutes are up to date.  This means they are written in the proper format, signed and approved.  They should include a review of the financial information of the organization and approval of all significant financial decisions. 

Any transactions that the I.R.S. may consider to be with disqualified persons should be documented, reviewed for propriety and approved by the governing board.  An annual disclosure of related party transactions by all board members and employees is an excellent tool to document that these transactions are at arms length and are not an excess benefit transaction.  This includes your policy on conflicts of interest and reasonable compensation research and comparisons.

Key policies should be adopted, in writing, and followed.  The I.R.S. maintains a document titled Governance Check Sheet that they use during audits.  This is available on their website and an excellent tool to insure that you are audit ready.  Regardless of whether you feel that you need to be audit ready, this is an excellent “best practice” aid.
 
As we discussed in Part 2 we recommend your organization be “audit ready” before you are selected for any type of audit. We will discuss how you should manage the audit in Part 4 on Thursday.

Kathy E. Hostetler, CPA

What triggers an I.R.S. audit?

• Your organization can be audited by random choice.  This type of “luck of the draw” audit may now occur more often with the addition of 100 I.R.S. agents!
• Disclosures in your new 990 may trigger an audit.  Basically, adopting and documenting in writing the policies that the I.R.S. is asking about (not requiring) on the 990 is important.
• Results of your compliance with other required filings can lead the I.R.S. to investigate further.  Have you filed your employment taxes and reports timely?  Have you filed your 990 timely?   Have you reviewed the compliance questions on the new 990 carefully and answered them completely and correctly?
• The I.R.S. may have received information from a whistleblower reporting noncompliance or impropriety by the organization.  This is becoming more prevalent as employees and others become aware of the rules and regulations that not-for-profit organizations must follow.
• If you receive unfavorable coverage in the media, the I.R.S. may want to find out more information about you, what caused the problem and they then may conclude that they want to audit you.
• The I.R.S. can receive a direct complaint filed against your organization for abuses of your tax-exempt status.  These types of complaints are filed by individuals, other not-for-profit organizations or federal and state governmental agencies.

If you are chosen for an audit, there are two types:  correspondence and field.

A correspondence audit is normally just that.  The I.R.S. will talk with a representative of the organization on the phone or will send you a letter with a request for information.  This type of audit will focus on one or two items.  A correspondence audit can lead to a field audit if the examiner needs additional information or if an issue arises that causes them concern.  You can trigger a field audit if you are uncooperative or unresponsive to their requests.

A field audit will take place at your office.  It will involve one or a team of auditors, depending on the size of your organization and/or the size of the audit issue.  It can last one hour or many days, weeks, or months.

Your organization should be “audit ready” before you are selected for any type of audit. We will discuss the type of defensive/proactive measures you should consider in Part III of this blog series next Tuesday.

Kathy E. Hostetler, CPA

The I.R.S. is now ready to test compliance with their new rules.  The Tax Exempt and Governmental Entities Division of the I.R.S. has hired 155 new employees, with 100 of these new employees working on not-for-profit examinations (audits).  Not only will this new division be auditing compliance with the new 990, they are planning on conducting random audits on employment tax rules on 500 organizations.

An important part of employment tax rules, is the compliance with employee/independent contractor classification.  Determining a worker’s employment status is very important to the organization and to the worker.  Substantial penalties and tax can result when a worker is not classified as an employee and the I.R.S. examination determines that they are.  As is detailed on the I.R.S. website, generally an employer must withhold incomes, withhold and pay Social Security and Medicare taxes and pay unemployment tax (federal and state) on wages paid to an employee.  You generally do not pay or withhold taxes on an independent contractor.

To determine the status of someone providing services to your organization, the degree of control and the independence allowed that person must be determined and documented.

Kathy E. Hostetler, CPA

(a) Your computer repair guy who has a sole proprietorship business.
(b) Your grant writer.  She is paid as an independent contractor.
(c) J&J Janitorial Services, LLP.  They provide you with monthly janitorial services.
(d) Staples.  You buy all of your office products from them.
(e) Jason’s Deli.  Each month your organization buys lunch from them for the Board meetings.
(f) Best Buy.  This year, you replaced 3 of your organization’s computers and purchased them from Best Buy.
(g) None of the above.
(h) All of the above.

CORRECT ANSWER:   H

Currently, the general rule is that you complete and mail a Form 1099 for each calendar year to individuals or companies that are not incorporated for amounts you have paid them for services, if that amount is $600 or greater for the year.  Embedded in the health care reform bill, is a new rule on this.  Beginning in 2012, you will have to complete Forms 1099 for ALL payees, whether for goods or services, and whether to individuals or corporations.

So you can look at this in two different ways…

(1) This is so much simpler than before!  Now I don’t have to figure out each year who I have to send the 1099 to and who I don’t.  I will just prepare Forms 1099 for any payee to whom I paid $600 or more.

(2) What??!!?  You mean I will have to get W-4 forms completed from all of those companies?  I have to develop a system or process that will enable me to print all of these Forms 1099?  I might have to pay someone to do this for me?  What a headache!

If your response is #2, the good news is that there are currently efforts to repeal this part of the legislation.  We will have to wait to see what happens….

Colette Kamps, CPA

The four proposed requirements are described below.  The first three would be effective for years beginning after March 23, 2010, and the last one would be effective for years beginning after March 23, 2012.  So a tax-exempt hospital with a year-end of June 30 would be required to implement the first rules for their year ending June 30, 2011.  The new requirements in summary are:

(1) Financial Assistance Policy:
A tax exempt hospital must have a financial assistance policy in place that relates to emergency medical care.  The policy needs to cover what the eligibility criteria is, how amounts are charged to patients, how patients apply, what the organization may do in the event of nonpayment, and how the organization plans to make it known that the policy exists.

(2) Limitation on Charges:
The organization will not be able to bill those eligible for assistance any more than they would normally bill other patients for similar services.

(3) Billing and Collection:
The hospital cannot start collection efforts against the patient before they first determine whether or not the individual would qualify for assistance under the policy.

(4) Community Health Needs Assessment:
An assessment would have to be conducted every three years.  There will be space on the Form 990 to include this information.

Tax exempt hospitals should start preparing now by developing or updating their financial assistance or charity care policies, and by ensuring that actual procedures are in line with the policies.

Colette Kamps, CPA