The toolkit is available for free download at:

www.aicpa.org/Audcommctr/toolkitsnpo/homepage.htm

A wealth of governance topics are covered by the toolkit, ranging from developing an audit committee charter and hiring the chief audit executive, to conducting an executive session and evaluating independent auditors. This new toolkit specifically designed for NPOs complements a toolkit the AICPA developed for audit committees of public companies in response to the Sarbanes-Oxley Act.

Reproduced with permission from the American Institute of Certified Public Accountants

Responsibilities of an Audit Committee

By Barbara Green, CPA

Boards of directors of nonprofit organizations often appoint audit committees with the rationale that a full board is too large to deal with the complexities of an audit.  While the entire board is ultimately responsible for approving the financial reports, appointing and audit committees of three to five directors who are not employees, but who have an understanding of general financial matters, can provide the board with the diversity of views needed to serve this increasingly sophisticated area.

The committee’s first responsibility should be to evaluate the pros and cons of having an audit and to make a recommendation.  If the board decides to have an audit, the audit committee’s next task is to select an auditor.  Subsequently, the audit committee monitors the auditor’s progress and results.

The audit committee should be concerned with the following items, at a minimum:

• Adequacy of internal control (a system in which the operation or recording function can be broken down into elements that are performed by different people, each checking the work of the others)
• Accuracy of the records and reports to the board of directors
• Proper authorization of activities and expenditures
• Determination of the physical existence of assets
• A review of the tax-exempt status and identification of any activities which may endanger it
• Ascertaining if payroll taxes, licenses, sales taxes, other taxes and corporate reports are properly filed in a timely manner

Increasingly, nonprofit audit committees and the independent auditor find that communicating with each other on a regular, detailed basis helps to better accomplish their goals and responsibilities.  It is important that the audit committee members know enough about financials to understand what the audit finds in terms of management, accounting or financial problems that exist, as well as what must be done to solve the problems.

Audits generally begin with an entrance conference in which the auditor and representatives of the nonprofit discuss the scope, timing and implementation of the audit.  One of the final steps in the audit process is the exit conference, in which the audit team and nonprofit representatives review and discuss the audit report and its specific findings and recommendations.  Participation in this meeting and follow-up reporting to the full board is essential if the board is to understand and carry out its responsibilities with respect to the audit findings.

The audit committee plays a critical role in maintaining the integrity of the nonprofit organization’s financial reporting.  Committee members need a basic familiarity with how the organization operates and some understanding of the audit process.  Your auditor should be able to provide guidance in carrying out your work and be willing to work with you to implement recommendations that result from the audit.

Reprinted from Disclosures with permission from the Virginia Society of Certified Public Accountants

Public Disclosure Requirements

Effective June 8, 1999, non-profit organizations must make available for public inspection and provide copies the following information for individuals upon request:

•  Its application for recognition of tax exemption (forms 1023 or 1024) including all attachments and related correspondence.

• Its three most recent annual information returns, Form 990, including all schedules and attachments filed with the IRS.

 Issues:

The copy you provide to the public should not include the names and addresses of contributors.  Accordingly, you should remove these schedules from the return or ask your accountant to provide you with a “Public Disclosure Copy” of the return.

 Note:  Lists of contributors should also be removed from Form 990’s Schedule A for 501(c)(3) organizations.

 For security reasons, officers, directors, and employees may not wish to have their personal addresses listed on a public document.  Therefore, we recommend that you use the organization’s address for those disclosure requirements.

 There is a penalty for failure to provide these documents.  Therefore, staff members dealing with the public should be made aware of these requirements.

 A reasonable fee, which does not exceed the IRS rate for copies of $1 for the first page and 15 cents for each subsequent page, may be charged by the organization.  The organization can also charge for the actual cost of postage to mail the copies. 

 The organization can avoid the burden of providing copies of the documents by placing the information on its own internet web page or making it available on the internet.  The Internal Revenue Service requires that copies of Form 990 placed on a web page must be in conformity with the format of Form 990.  However, since such formatting techniques are not available at this time, the organization is allowed to provide a web page format that is similar in layout to the current Form 990.

Overhead Allocation

Identifying costs associated with each program and allocating related overhead (costs such as rent, administrative salaries, telephone) is required by generally accepted accounting principles (GAAP).

This method of reporting helps an organization to assess the actual costs and profitability of program operations, i.e. membership, publications, conferences and seminars, fundraising, and management and general operations.

Organizations seeking Federal or private grants and contributions increase the likelihood of receiving funding when a larger portion of total revenues is spent on programs.  For example, in order to participate in the Federal Combined Campaign Appeal, at least 75% of an organization’s expenditures must be used for program activities.

In order to meet these requirements, an organization must establish a system of functional reporting, including accounting procedures for coding and recording expenses that allows for natural expense classification, as well as functional or program identification.  In addition, a method for allocating overhead to each program must be established. 

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