Form 990 Governance Questions: What’s the IRS Really After?

If you’ve worked at all with the 2008 Form 990, or if you’ve talked with any nonprofit accountant about it, you know that it’s been greatly rearranged, redesigned, and made much longer. While the balance sheet and statement of activities haven’t changed all that much, there are new sections full of questions that seem to be causing a great deal of worry and flurry, and this seems to be true most of all of Part VI: Governance, Management and Disclosure. If management hasn’t gotten around to passing and instituting a whistle-blower protection policy, a conflict of interest policy, or a document retention and destruction policy, they feel concern at answering “no” to those questions.

I offer you some soothing words about this section. First, remember that your organization will only need to file the full-length Form 990 for 2008 if its gross receipts hit $1,000,000 in the fiscal year that began sometime in that year and its total assets exceed $2.5 million on the last day of the year. The alternate form for smaller organizations, the 990 EZ, doesn’t include the section on Governance, Management and Disclosure, which is not to say that it won’t in the future. (Remember, though, that the filing threshold drops next year to $500,000 and again the year after, to $200,000 where it stays. The total asset threshold drops, too.)

Secondly, in its 2009 Work Plan, IRS explains that it is conducting five compliance initiatives, and Governance is one of them. Form 990 Part VI makes it very clear that the policies being asked about are not required by the Internal Revenue Code – it says so in parentheses right after the title. So why is IRS asking about them?

In the description of their “compliance initiative”, they say they “will begin identifying Form 990 governance questions that could be used in conjunction with other Form 990 information in possible compliance initiatives, such as those involving executive compensation, transactions with interested persons, solicitations of noncash contributions, or diversion or misuse of exempt assets.” I understand that to mean they are gathering information about the best questions they could ask to uncover abuse in these arenas. They have made it clear that there will be no negative consequences to organizations that answer “no” to these questions when it seems that “yes” should be the only acceptable answer. At least for the time being.

That said, the advice I heard from more than one presenter at the Not-for-Profit Conference I attended earlier this month is that each and every organization should take these issues seriously, putting the policies and practices in place in the coming year. For some organizations, this will not be easy due to lack of interest on the part of management or to understaffing or to board meetings spaced months apart, so I encourage you to read Part VI Sections A & B and make a work plan now to address each issue.

Two issues that will require more than simply passing a policy are conflict of interest and the process for setting executive compensation.  Line 12a asks about a written conflict of interest policy and 12b asks “Are officers, directors or trustees, and key employees required to disclose annually interests that could give rise to conflicts?” Further, 12c asks “Does the organization regularly and consistently monitor and enforce compliance with the policy? If yes, describe in Schedule O how this is done.” Questions about the process for setting executive compensation are in 15 – 15b and they are equally specific.

Start now to get these policies and procedures in place, if you haven’t already. The effort of getting any needed changes underway will bear fruit soon and leave you feeling good after filing your next 990 rather than wishing you could hide under your desk.

Posted in Form 990-Nonprofit Tax Return | No Comments »

Booster Club’s Embezzler Is Caught

Anna Mueller was a volunteer bookkeeper for the Booster Club at Benson High School in Portland, Oregon. As reported by the Portland Tribune newspaper, she has now pled guilty to embezzling more than $10,000 from the club, which supports athletics at this technical high school. How was she able to take that much money? She had total control over both the records and the money, and she had access to the bank account.

The Booster Club’s predicament is a common one. It’s an all-volunteer organization and last year was its first year. At the time he started the Club, the coach was more than willing to accept help from an experienced parent who had skills he knew were important and didn’t possess. Through the school district, he ran a background check on Mueller, but it failed to uncover her prior conviction in another state for a similar crime because the district’s procedure only checks for crimes involving children.

He left the door of opportunity wide open by not setting up relationships and procedures so that Mueller would be dependent on others to complete her work, others who could participate in the processes so that duties were at least somewhat segregated, others who could review the records she kept.

Benson High’s athletic director, Bruce Alton, now says he thinks that the amount embezzled was closer to $17,000, but because “most of it was undocumented cash, it couldn’t be accounted for”. Booster clubs sell things:  refreshments, sweatshirts, other “school spirit” items. It seems that Mueller must have been the enthusiastic volunteer, waving away help from others, saying she was happy to take care of everything so others could have a good time. And nobody documented a cash count or looked to make sure the amounts they had documented actually made it into the bank.

The Tribune quotes Alton as saying he will make sure he follows any protocols for any volunteers, district employees, everybody. “I tried to use her sincerity to my advantage as well. I own that.” Other groups, he says, should take his experience to heart when accepting the services of eager volunteers.

Posted in Fraud in nonprofits, nonprofit accounting | No Comments »

Balance Sheets With Classes in QuickBooks

Balance Sheets With Classes in QuickBooks

My client - let’s call him Bob - is a mild-mannered guy, so when I heard him muttering swear words under his breath the other day, I had to ask what was wrong. “QuickBooks!” he exclaimed. “I wish it would export to Excel without wiping out everything I had set up in my financials last month!”   

A few days later, K2 Enterprises sent their April e-newsletter and a highlighted article about QuickBooks caught my eye. (K2 is a technology education firm based in Louisiana that puts on high-quality training for CPAs and others. I’ve taken two or three of their classes over the years and found them excellent.) Intuit has put out a report writer for QuickBooks. It’s called ISW, or Intuit Statement Writer, and it functions by pulling data out of QuickBooks into Excel. Before you get too excited, you should know that ISW is for QuickBooks Premier only, and it doesn’t work with versions prior to 2009. Still, if you spend hours every month formatting and proofing financial statements, upgrading QuickBooks and purchasing ISW at $149.95 may be worth it to you.

According to K2, ISW makes producing a balance sheet with classes in columns– similar to income statements by class – very easy. If you’d like to see a demonstration of how it works, you can go to http://www.youtube.com/watch?v=WOzPORNs-NA and view K2’s video. Why would you want a balance sheet by class? The most common instance in the nonprofit world is probably to separate restricted assets from unrestricted ones. A columnar balance sheet by class could also be useful for organizations with fixed assets in different locations, where locations were set up as classes, or for reporting operations and capital projects separately. You can probably think of an application for your organization.

When you report balance sheets this way, remember that in each class, assets should still be equal to liabilities plus net assets. Achieving that in QuickBooks will almost assuredly take you some extra time each month. As you do your daily work, you’ll need to remember to post accounts payable, accounts receivable, and all journal entries affecting balance sheet accounts to classes – something QuickBooks doesn’t normally prompt you to do. Then, as part of your month-end closing, run a balance sheet by class and verify that each class is in balance. Don’t expect that it will be, and allow enough time before any deadlines to correct errors.

Once you’ve gotten each class to balance, you’ll need to run an unclassified balance sheet and compare it to the total column on your classified one to see that they agree. This will ensure that the classes you’ve set up truly capture all of the balances in the GL.

Posted in Nonprofit Finance, Nonprofit Financial statements, QuickBooks formatting, nonprofit accounting | No Comments »

For Those Prone to Clutter

I’ve had a very busy winter with lots of client work in addition to writing this newsletter and getting my next project ready to announce to you. My desk top – the physical one – is beginning to show signs of incomplete projects, plans not yet realized, and working until interrupted by the next appointment. What does that look like? Clutter, in a word.

The worst clutter I think I’ve ever seen was many years ago during my accounting studies. I served for a couple of years on the finance committee of a local grass-roots organization (Let’s call it GRO). I was quite inexperienced; I didn’t know a journal from a subsidiary ledger. The bookkeeper at this GRO had always kept books by hand, but computers had arrived and it was time to make the switch. He was very nervous about the change, but was more or less told by the executive director and the more experienced members of the finance committee that he needed to do it.

At the time of the conversion, his office was neat but there were stacks of undone work here and there. He was clearly not caught up. I only hope he had some good help with the conversion and got some training in the new software – I don’t really know because I wasn’t involved in the process. What I do know is that about nine months later, IRS suddenly impounded about $10,000 from the GRO’s bank account for nonpayment of payroll taxes and the bookkeeper took a mental health leave of absence. He never returned to his job.

The executive director’s response was to engage a contract bookkeeper to come in and straighten things out. Her first challenge was organizing all the papers in the office, and she tackled the project with energy and skill. It wasn’t long before she found a cardboard box, about the size of a box of copy paper, full of unopened mail. In that box were months worth of IRS notices about the payroll tax problem.

To this day, I believe the bookkeeper was well-meaning:  he thought he was doing what he needed to do to manage cash when GRO didn’t have much. But he kept silent about it when he should have alerted the executive director and the finance committee so they could do their jobs and manage the situation. Not only were the consequences tough for the GRO, but the bookkeeper’s reputation suffered, too.

Ever since, I’ve understood clutter as a signal that overwhelm is on the horizon. Sometimes the workload is too great, sometimes clutterers are too optimistic about what they can accomplish, sometimes there’s a simple lack of filing cabinets or storage space, sometimes skills to do the work are lacking, sometimes procrastination is a factor. Whatever the cause, the person at the center is at risk for reduced performance and perhaps worse.

If you work for or supervise someone with a clutter problem, take it seriously enough to find out how long-standing a problem it is and notice whether it gets better or worse over time. Don’t let it go on long if you’re the supervisor. If you’re the one supervised, be extra careful to get what you need to do your job – including an annual review.

And if you’re the clutterer, devote some time to addressing the elements of chaos in your immediate surroundings. Consider using experts:  a recently-arrived executive director I know hired a professional organizer to help him get settled in the disorganized office he inherited and she did a great job. What works best for me is setting an intention before I go into my office that I will not read email or do any research or writing; I am going there to create a desk-top that won’t distract me the next time I sit down to work. Looking around me, I see that it’s time.

Posted in Nonprofit Finance, nonprofit accounting | 1 Comment »

Barack Obama’s Example for the Nonprofit Accountant

Recent client engagements have reminded me how easy it is to become overwhelmed with requests and expectations from our colleagues. On any given day, you could find that one comes to you for help with her time sheet, another needs a check by 3:00, the development assistant “reminds” you – for the first time! – that a grant report is due tomorrow and she needs the financial report from you. Your own work plan can get lost amid the distracting requests. It can be challenging to both accomplish it  and serve the needs of the organization your department is there to help.

It is certainly key to making progress that procedures be clearly and efficiently designed so that accurate information is gathered timely and you can be as efficient as possible. But just as important is managing your own reactivity.

Today is inauguration day. The news is full of information about Barack Obama, yet there’s one story I recall hearing on the election day evening news that I haven’t heard again. On that night, the NPR reporters said that the reason Obama hadn’t spoken on the news shows as early as people expected him to was that he was having a family dinner with his wife and daughters and he wasn’t answering his pager or his cell phone. Yes, it was the night he would learn whether the time and energy he had spent over the last two years of his life had been enough to achieve a most daring goal. Important as that was, he and Michelle isolated themselves from all speculation, drama, excitement and news so that they could have a quiet homecoming dinner with their children in their own dining room. They decided what mattered most and then protected it from everything until they were ready.

The kernel of this story that relates to the common predicament of nonprofit accountants is that you don’t need to let other people throw you off course. You don’t need to get caught up in their drama. You don’t need to comply immediately with their requests. It helps, certainly, to have an executive director or some members of your management team who can help reduce reactivity in an organization, but even without that, you can set your timelines, priorities, and processes and stick to them.

When someone comes to you with a demand, talk with them until the reasons for urgency are clear, and then make your own determination about the critical timeline. Keep smiling, keep listening, keep asking questions, stay calm, and when you have a clear picture of the task, tell them what you will do and when they can expect the finished product. Then follow through and deliver it. Letting them down will cause a breach of trust it may take a long time to repair. Performing as you said you would places another solid rock in the foundation of a great working relationship.

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Alert Accountant Discovers Fraud - But Not Soon Enough

The accountant for a nonprofit pays the bills each week. After she cuts the checks, she clips them to their backup, puts them in a folder marked “for signature”, and puts them on the executive director’s desk. If the ED is out for a while, she puts them in a locking drawer in his office. Once he has signed them, the ED hands them back to the accountant; if she’s not in, he puts them back in the locking drawer and emails her that they’re ready to be mailed.

The accountant then places each check and any remittance advice in an envelope, seals it, and hands the stack to the office manager, who runs them through the postage meter and then puts them in a box marked “outgoing stamped mail” that sits on a shelf behind the receptionist’s desk so it’s easy for all staff to toss mail into it. Around noon each day, the mail carrier picks up everything that’s in that box.

Last month, this accountant cut a check to her state taxing authority and was reminded that, according to the normal tax remittance schedule, she should have sent them a check last summer. She didn’t remember cutting such a check, so she reviewed her records, which showed that a payment had indeed been made. She remembered that she had been on vacation at the time and someone else had done her job. When she was telling me this story, a puzzled look crossed her face at this point.

“I don’t know what made me do this,” she said, “but I went to the bank statement envelope and actually found the physical check. I couldn’t believe what I saw there:  it wasn’t made out to the taxing authority! It was made out to another company that I’d never heard of!”

Then she called the taxing authority and discovered not only that they hadn’t received the check, but that they had levied thousands of dollars in fines and interest on her agency in the meantime without sending any notice that the taxes were late. Puzzled and shocked, she took a closer look at the check: the font was the same throughout and the signature was clearly that of the executive director…but then she realized that the payee’s name was written in a slighter larger version of the font. She didn’t understand how this could have happened. Fraud had clearly been committed…but how?

The check was probably intercepted someplace along the way – either as it waited in the box behind the receptionist’s desk or after it arrived at the taxing authority’s office – and then it was washed. That is, the original payee’s name was washed away carefully with a solvent and then a new payee was carefully added. The bank didn’t notice when it accepted and paid the check. The organization now has its work cut out. It may never get the fines and interest waived and it will almost certainly not recover the original $20,000 – the face value of the check.

Here’s what you might do to prevent this:  Follow closely the route checks take through your office and make sure they are secure until they are handed over to a postal worker. Professional thieves need only a few seconds to take your valuables; deny them the chance.

Visit www.NFPAccountingHelp.org for more resources - some free, some not - related to internal control, accounting and finance for nonprofit accounting folks.

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Is That Money Really Yours?

One day a check arrives from a foundation with a letter that says, “We have approved your request for funding and enclosed is a check for $60,000.” Is that money really your organization’s to spend as it wishes? How can you, the accountant, record this transaction correctly?

To record the receipt of the check properly, you’ll need to know quite a lot about the terms of the grant, so locate the application and any budgets that were submitted with it and copy them for your own files, if you haven’t already. Using a “grant summary form” can be very helpful because you can use it to document all the information you’ll need to locate repeatedly over the life of the grant, making the task of looking up this information an easy one to accomplish. You’ll want to note the following:  the term of the grant, the date the grant was awarded, how and when the money will be paid to your organization, reporting requirements, including the due dates of the reports, and the number the grantor has assigned to this grant.

Once you have answered these questions for yourself, you’ll need to understand your accounting system, especially how and whether it handles more than one fund (QuickBooks cannot, by the way) as well as how to record the spend-down of the grant.

A new article posted at www.NFPAccountingHelp.org in the free resources section tells you a lot more about how to navigate accounting for restricted cash. It’ll be there for a week or so; after that, email me for a copy.

Nancy@NFPAccountingHelp.org

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Can Your Auditor Prepare Your Financial Statements?

The new clients I’ve been working with have shown me that there’s still wide misunderstanding about the new auditing standards that went into effect more than a year ago. Statement on Auditing Standards No. 112 is titled, “Communicating Internal Control Related Matters Indentified in an Audit”, but the guidance it provides to auditors isn’t limited to “communicating”. It describes standards, responsibilities and procedures they must follow in order to conduct an audit and pronounce an opinion on financial statements. Auditors have to follow what it says.

The three experts I’ve read on the subject agree:  there is no question that a client cannot make their auditor “part of their internal control system”. If that were to happen, the auditor’s independence would be impaired and they wouldn’t be able to express an opinion on the financial statements. So can your auditor prepare your financial statements without becoming part of your internal control system?

What’s your experience with auditors who’ve prepared - or helped prepare - your financial statements? Are you worried that you’re not ready for an audit that’s coming up soon? Read the full article at www.NFPAccountingHelp.org and then post your comments here.

Posted in Nonprofit Financial statements | No Comments »

Those Form 990 Governance Questions!

Have you looked at the new Form 990, the one for years beginning in 2008? Last summer, three issues of the Not-for-Profit Accounting Help newsletter were devoted primarily to the financial sections of the 990, but I think you’ll agree that the biggest changes to the form are in the non-financial parts. IRS has taken it upon itself to gather a lot of information about how exempt organizations are governed, and there’s a fair amount of discomfort with that decision among my professional colleagues.

Whether you agree that it’s a good move or think that IRS should stay out of these areas, you’ll be faced with preparing the form – or assisting your auditor or accountant in preparing it -  sooner or later. The task will require that you understand thoroughly the structure and authority of the board and its committees as well as the organization’s policies in more depth than you may otherwise have the need to.

Completing the 990 may be more of a challenge than you would like if your organization hasn’t completely achieved good governance yet. Do you know where the board policies are? I hope they’re collected safely in a binder that’s kept in the office, given to each new board member, and recorded digitally as well. Has your board passed a whistleblower policy or a conflict of interest policy? Has it written a job description for its members?

If you believe you’re not completely prepared, here’s a resource. Friends of mine, Randa Cleaves and Jonathon Abramson, are partners in Avenue2possibilities LLP. They provide planning, development and training services to non-profit organizations. They have put together a workbook and checklist of actions “to ensure that your nonprofit organization will be ready” for the changes in the 990. And they are making this wonderful tool available to you on their website. www.accga2p.com/materials takes you directly to the page you’ll want.  

“IRS Form 990 Revisions Made Easy” will lead you through those tasks you may have been putting off for months, such as finding the version of your mission statement that was submitted to the IRS with your application and making sure it’s up-to-date, or drafting a record retention policy for your board to pass. Each section discusses an issue thoroughly, giving background and a description of what IRS believes constitutes good governance, and then poses questions, suggests actions, and makes related recommendations.

Topics it covers include organizational documents, governing body, governance and management policies, investments, fundraising, conflicts of interest, and more. All the sources are footnoted so you can go to the original material if you want to for any reason.

In addition to the workbook, you’ll find examples of entire policies, such as fundraising, and whistleblower protection. If your board or management team has found the task of crafting policies to be difficult, these should be a great help.

Posted in Form 990-Nonprofit Tax Return | No Comments »

Protecting Your Bank Deposits Over $100k

October 21, 2008

Note: Lots has changed in the month since I wrote this post! Among other things, the FDIC insurance limit is now $250,000; otherwise, the article below remains current.

Quick, what does FDIC stand for? Most accountants, finance managers and board members know that cash deposits in banks are insured for up to $100,000 per depositor, and the Federal Deposit Insurance Corporation is the insurer. They also know that any deposits in excess of $100,000 are at risk: if the bank fails, you are not likely to get all of your money back.

A year ago, bank failures may have seemed like a remote bad dream. Now, we are watching as large banks go under. Is your nonprofit at risk? Its board or management team may think of their organization as small and cash poor, yet even small not for profits can find themselves with more than the FDIC insured amount deposited in their bank.

If your organization is at all successful in building reserves, it’s likely to have well over that $100,000 amount in cash or money market deposits. If it receives large grants in advance, chances are it’s in the same leaky boat. You can reduce your risk of losing those excess amounts to 0% (yes, zero) by opening accounts at several banks and moving money around when it’s needed. That means, if you have $500,000 in reserves, you’re dealing with at least five different banks. There’s an easier way to get to 0% risk that you may want to consider.

CDARS stands for Certificate of Deposit Account Registry Service, LLC. Banks become members of the Service and then make deposits on behalf of their customers at other member banks. The service makes sure that none of the deposit accounts carries a balance in excess of $100,000. The interest rate you negotiate applies to all the accounts, and they are all presented on one monthly statement to you.

More than 2,200 banks are members of CDARS as of this writing. Most of them are community or regional banks that are too small to be able to compete with big banks in this arena, so it’s likely that there’s a bank in your area that offers access to this system.

I’ve researched CDARS a bit in an attempt to find out what’s in it for the banks on the theory that someone is making money on this set-up. What I’ve discovered is that small banks benefit from having a network to help them with their own cash flow and depository issues, so they benefit directly without charging or - it seems - paying a fee.

The one draw-back to buying CDs through CDARS may also be an advantage. When you sign a CDARS agreement and deposit money with your bank, you will negotiate a CD rate that will apply to all the CDs your money purchases, even if the bank that ultimately ends up with your money would have offered you a higher rate if you had deposited it directly. It’s also true that you might have been offered a lower rate by said bank, in which case it becomes an advantage to be with CDARS. And you haven’t had to spend time making a phone call or visiting a bank or requesting a proposal - and that seems like a true advantage!

You can find a list of banks that participate in CDARS at www.cdars.com, where you can search by state or by bank name.

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