Nonprofit Agendas - July, 2017July 12, 2017
The 2017 OMB Compliance Supplement Helps Recipients of Federal Funding Enhance their Audit Readiness
By Sibi Thomas
Cooper Union is an NYC-based private college that was founded in 1859 with a mission to be “open and free to all.” For more than 150 years, the school relied on its significant endowment to provide a tuition-free education to its students.
But in 2013, Cooper Union suddenly began charging its students $20,000 a year. President Jamshed Bharucha said at the time that the charge was necessary for the institution to remain financially viable. The New York Times had reported the problem was decades in the making.
In 2015, NY Attorney General Eric Schneiderman began an investigation of Cooper Union, reportedly as a direct result of the failure of their board to manage their $735 million endowment and physical assets properly.
The action also reflected a broader interest from the NY State Attorney General in “…working hard to prevent mismanagement before it starts and, whenever possible, get troubled charities back on track.”
Schneiderman pointed out that, for many years, regulators exercised little scrutiny over nonprofits, likely based on the assumption of moral authority and goodwill about such organizations. The NY AG went on to warn that it’s easy for well-meaning donors and paid nonprofit executives to become ill-informed managers, running their organizations into the ground.
In September of 2015 Scheiderman announced a comprehensive reform package to resolve the Cooper Union investigation and lawsuit – including a board restructuring, financial monitoring and transparency measure.
Lessons to be Learned from the Cooper Union Debacle
To avoid financial problems or the failure of a nonprofit, it is imperative to monitor the organization’s financial health by employing good corporate governance. Governance is defined as the process of providing strategic leadership and exercising sound fiduciary oversight for an organization.
Nonprofit Governance is No Easy Task
To protect their financial health and viability, nonprofits should focus on the financial factors that can affect corporate integrity. As noted earlier, many of the recent bankruptcies and financial mishaps in the nonprofit sector can be attributed to a failure to properly monitor and manage its fiscal resources.
The following guidelines will help nonprofits take a proactive approach to good governance.
Use financial dashboards for decision making:
Most organizations produce monthly or quarterly financial statements that consist of a balance sheet, income statement and budget-to-actual expenditures report. But to the untrained eye, all these reports can be hard to decipher.
“Financial dashboards” can be used by decision makers to analyze tailored financial information using graphs and visuals that are easier to understand. They keep everyone on the same page by presenting information in a digestible format. Consistent monitoring of dashboard metrics can help avoid unpleasant surprises.
Remember that better financial information leads to better financial decision making.
Understand Your Liquidity and Availability of Resources:
Liquidity is the term used to describe how easy it is to convert assets into cash. The liquidity scale then ranges from fairly-liquid assets like CDs or shares of stock, to illiquid assets like real estate, because it can take weeks or months to sell.
Liquidity ratios can be used to measure an organization’s ability to meet its near-term financial obligations like rent, payroll, mortgage payments or payments against a line of credit. For example, the “current ratio” is the proportion of current assets available to cover current liabilities. Availability of resources for general operating expenses is key when considering liquidity. The measure should be to assess “Liquid and Available” resources.
Bankrate.com offers a great current ratio calculator that compares current assets to current liabilities. This ration can give you the information you need to plan for covering upcoming payments.
It’s a smart idea to benchmark your organization’s financial health and liquidity ratios against your “peer group.” The financial statements for most New York state charities can be found on www.charitiesnyc.com.
Pay Close Attention to the Balance Sheet
Nonprofit organizations tend to overlook the importance of the statement of financial position or “balance sheet” and focus instead on the “income statement” or “statement of activities” showing net income or loss for each period reported.
The balance sheet measures the financial strength of an organization, while the income statement reports the profitability for one particular reporting period. For example, the income statement doesn’t reflect when your accounts receivable will come in. You must also review line items on the balance sheet that need to be reassessed to determine whether they should be written off or written down.
The board should focus on the balance sheet and obtain periodic reporting on specific balance sheet items such as accounts receivable. Use an “aging report” to identify old receivables that may become uncollectible.
Provide Ethical Leadership by Example
The ethical environment created by the organization’s board of directors and top management has a trickle-down effect. The tone set by the board and management should promote ethics, integrity, honesty and transparency by clearly communicating expectations and leading by example.
At a minimum, organizations should enforce their conflict-of-interest policy and communicate the code of ethics to employees. The board should conduct annual performance evaluations of its paid senior staff, including all its “C-Suite” executives.
There is no single factor or “silver bullet” that a nonprofit can seek nor rely on to provide a comprehensive evaluation of the effectiveness of its governance policies. There are numerous elements on financial statements that need to be viewed in a holistic manner.
Comprehensive reporting, in an easy-to-understand format, will help board members and senior staffers better meet their fiduciary responsibility, and avoid costly (and potentially fatal) financial mistakes.
Join Marks Paneth and your peers from New York State’s nonprofit community at 7:30 AM on October 12, 2017 to discuss the critical issues affecting the sector. Marks Paneth’s nonprofit leaders, and special guest speakers, will facilitate lively discussion and share the latest tax and accounting updates most relevant to you.
By John D’Amico
In a January 2017 NYN Media article, my colleague Sibi Thomas provided a great overview of the new liquidity disclosure requirements that are part of a significant amendment to the nonprofit accounting standards and explained some key changes that nonprofits, their executives and their financial staff should keep top of mind when preparing financial statements.
Expanding on Sibi’s article, I’d like to explain how the Financial Accounting Standards Board’s recent Accounting Standards Update – its first change to nonprofit financial reporting in over 20 years - helps nonprofits better tell their financial story to donors and grantors. While these revisions, which include presentation changes and additional disclosures, are not required to be implemented until fiscal years beginning after December 15, 2017, some nonprofits may choose to adopt it early.
Nonprofits that are at least partially funded through government contracts face two ongoing challenges. One is finding funding for any associated administrative costs that are not covered by the grant. The second is managing cash flow when governmental agencies are notoriously late in reimbursing nonprofits for expenses they have already incurred. It is common for nonprofits to wait three to six months or more for reimbursement. This can result in serious liquidity issues. Combined, these issues often make it difficult for nonprofits to provide potential private donors a true picture of their financial status.
The Accounting Standards Update disclosure enhancements require that the following information is included:
* Amounts and purposes of governing board designations, appropriations and similar actions that result in self-imposed limits on the use of resources as of the end of the period.
* Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
* Qualitative information that communicates how nonprofits manage the liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date
* Quantitative information, either on the face of the balance sheet or in the notes – and additional qualitative information in the notes where necessary – that communicates the availability of a nonprofit’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.
FASB provided this example disclosure:
|Financial assets, at year-end||$ 234,410|
|Less those unavailable for general expenditures within one year, due to:|
|Contractual or donor-imposed restrictions:|
|* Restricted by donor with time or purpose restrictions||(11,940)|
|* Subject to appropriation and satisfaction of donor restrictions||(174,700)|
|* Investments held in annuity trust||(4,500)|
|* Quasi-endowment fund, primarily for long-term investing||(36,600)|
|* Amounts set aside for liquidity reserve||(1,300)|
|Financial assets available to meet cash needs for
general expenditures within one year:
Currently nonprofit financial statements have no information at all regarding liquidity. The newly required footnote disclosure will clearly indicate a nonprofit’s liquidity position and can be used to show donors and grantors the nonprofit’s need for additional resources. These enhanced disclosures will help improve the usefulness of information provided to donors, grantors, creditors and other users of a nonprofit’s financial statements and hopefully can be used to help secure more unrestricted donations to help fund the nonprofit’s mission.
The other changes that the FASB ASU will require are:
Two asset classes instead of three:
The number of net asset classes have been reduced from three to two by combining temporarily and permanently restricted net assets into one category: Net Assets with Donor Restrictions. Unrestricted Net Assets are renamed Net Assets without Donor Restrictions.
Changes in expense classification:
Another significant change is that all nonprofits will have to categorize their expenses by both functional and natural classifications. Currently, only voluntary health and welfare organizations have to do this. Functional expenses include program, management and general, and fundraising costs. Natural expenses include salaries and wages, employee benefits, supplies, rent, and utilities.
In addition, an analysis of expenses by both functional and natural classification will have to be shown in one location, such as in a statement of functional expenses, on the face of the statement of activities or in the footnotes to the financial statements. The analysis cannot be presented across footnotes or in supplemental schedules.
Other expense-related changes:
* You must now disclose how costs are allocated between program and support services. An example of this can include wording such as: “The cost of providing various programs and activities has been summarized in the statement of functional expenses. Costs that can be attributable to a specific function are charged to that function. Other costs are allocated using estimated personnel hours and/or square footage.
* For underwater endowment funds, the difference between the original gift amount – or level required by law – and the fair value of the fund must be disclosed.
* External and direct internal investment expenses no longer need to be disclosed, though investment return, net of these expenses, must be reported.
* In the absence of donor restrictions, nonprofits will have to use the “placed-in-service” approach for buildings or other long lived assets and record them as an unrestricted gift. Prior to this update, a time restriction could be implied and the asset recorded as temporarily restricted and released to unrestricted over the asset’s useful life. Organizations that did imply a time restriction in the past will now have to fully release the remaining temporarily restricted net assets to unrestricted when the update is implemented.
Early adoption of the changes required by ASU 2016-14 is permitted and even encouraged. Hopefully this information will help you prepare. Originally published in New York Nonprofit Media, June 2, 2017
The 2017 OMB Compliance Supplement Helps Recipients of Federal Funding Enhance their Audit Readiness
By John D’Amico
While the Office of Management and Budget’s (“OMB”) Compliance Supplement (the “Supplement”) was originally intended to assist auditors performing Single Audits, recipients of federal awards should also be using it to assess their audit readiness; gain a better understanding of their programs’ specific compliance requirements; ensure that appropriate internal controls, policies and procedures have been implemented; and avoid disallowances of expenditures, as well as unfavorable audit findings. This also applies to those receiving direct federal funding, as well as for federal funding passed-through from a nonprofit, city, county or state agency.
Nearly all Federal funding is assigned a number in the Catalog of Federal Domestic Assistance (“CFDA”). Each Federal Agency has its own unique two-digit number and each individual program funded by the Agency is assigned its own three-digit extension number. For example, the US Department of Health and Human Services (“HHS”) is assigned “93”, and “.600” corresponds to its Head Start Program – which renders the program’s CFDA number “93.600”. That said, each CFDA number has specific requirements that fall into twelve overall compliance requirements.
In the case of HHS’s Head Start Program, almost all of the twelve overall compliance requirements are applicable. Therefore, organizations that receive federal funding for the Head Start program must have policies and procedures and corresponding internal controls in place for Eligibility; Activities Allowed/Allowed costs; Cash Management; Equipment and Real Property Management; Matching, Level of Effort, Earmarking; Period of Performance; Reporting; Special tests; and Subrecipient Monitoring (if any of the federal funds are passed through to another entity).
The Supplement consists of seven parts and nine appendixes. The Federal agencies developed “audit programs” for their specific federal programs that the auditor should follow when performing audits. There are more than 200 specific audit programs that the Federal agencies wrote programs for. These specific programs are included in Part 4 of the Supplement. Part 2 is a matrix by Federal program and is the best place to start in the Supplement. If your Federal program is in Part 2 then there is a specific audit program in Part 4 for that Federal agency. Part 4 just has the specific compliance requirements that the Federal Agency wrote for that particular program. Auditors will use that information in conjunction with the generic compliance requirements that are in Part 3 for each of the 12 overall compliance requirements to perform their tests.
Therefore, organizations can look up the specific requirements by Federal agency in Part 4 by CFDA number. The better an organization understands the specific compliance requirements for their federal programs and the tests that their auditors will be performing, the more they will be prepared come “audit time”.
The OMB just released the draft Supplement and the final version is expected to be published soon. The OMB does not expect any major changes between their draft and the final version. The draft compliance supplement can be downloaded here.
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Nonprofit, Government and Healthcare Leadership Team
Michael McNee, Co-Partner-in-Charge, Nonprofit, Government & Healthcare Group
Hope Goldstein, Co-Partner-in-Charge, Nonprofit, Government & Healthcare Group
Jacob A. Beniawski, Partner
Joseph Frohlinger, Principal
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Sibi Thomas, Partner
Alan Becker, Director
Howard Becker, Director
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Frances McKenna, Tax Director