Toolkit for Audit Committees
of Not-for-Profits
The American Institute of Certified Public
Accountants Audit Committee Effectiveness Center has available
for audit committees of not-for-profits a set of best practices
to help them discharge their responsibilities appropriately.
The Audit Committee Toolkit: Not-for-Profit Organizations
was created by a task force of volunteer members employed
in NPOs or providing service to NPOs.
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
Sarbanes Oxley and the Nonprofit
Organization
The implementation of Sarbanes Oxley
has raised many questions regarding application of the new
legislation to the nonprofit organization. Many organizations
are addressing best practices and evaluating the overall
structure of organization policy. There are only two aspects
of Sarbanes Oxley that apply to the nonprofit organization.
They are as follows:
WHISTLE-BLOWER PROTECTION
The Sarbanes-Oxley Act provides protections
for whistle-blowers and imposes criminal penalties for
actions taken in retaliation against those who risk their
careers by reporting suspected illegal activities in the
organization. It is illegal for any entity — for-profit
and nonprofit alike — to punish the whistle-blower
in any manner.
Nonprofits must start by protecting
themselves. They must evaluate current policies and eliminate
careless and irresponsible accounting practices. They
need to identify weak spots in current policy and installs
processes that are not vulnerable to fraud and abuse.
Written policies that are actively enforced by executive
staff and the board sends a message that misconduct is
not tolerated. These policies should consider all unethical
behavior within the organization — including conflicts
of interest and sexual harassment. Each organization must
develop procedures for handling employee and volunteer
complaints, including the establishment of a confidential
and anonymous mechanism to encourage employees and volunteers
to report any inappropriateness within the entity's financial
management. No retribution for reporting problems —
including firing, demotion, suspension, harassment, failure
to consider the employee for promotion, or any other kind
of discrimination. Even if the claims are unfounded, the
organization may not reprimand the employee. The law does
not force the employee to demonstrate misconduct; a reasonable
belief or suspicion that a fraud exists is enough to create
a protected status for the employee.
Nonprofits must develop, implement,
and disclose a formal process to deal with complaints
and prevent retaliation. Nonprofit leaders must take any
employee and volunteer complaints seriously, investigate
the situation, and fix any problems or justify why corrections
are not necessary.
DOCUMENT DESTRUCTION
The Sarbanes-Oxley Act addresses destruction
of litigation-related documents. The law makes it a crime
to alter, cover up, falsify, or destroy any document (or
persuade someone else to do so) to prevent its use in
an official proceeding (e.g., federal investigation or
bankruptcy proceedings). The Act turns intentional document
destruction into a process that must be monitored, justified,
and carefully administered.
Nonprofit organizations need to maintain
appropriate records about their operations. For example,
financial records, significant contracts, real estate
and other major transactions, employment files, and fundraising
obligations should be archived according to guidelines
established by the organization. Because of current technology,
electronic files and voicemail can become complicated
for permanent file storage.
A nonprofit organization should
have a written, mandatory document retention and periodic
destruction policy. Such a policy also helps limit accidental
or innocent destruction. The document retention policy
should include guidelines for handling electronic files
and voicemail. Electronic documents and voicemail messages
have the same status as paper files in litigation-related
cases. The policy should also cover back-up procedures,
archiving of documents, and regular check-ups of the reliability
of the system. If an official investigation is underway
or even suspected, nonprofit management must stop any
document purging in order to avoid criminal obstruction
charges.
DISTRICT OF COLUMBIA NONPROFIT
CORPORATION ACT - In addition
to the provisions of Sarbanes Oxley, nonprofits should
look to the governing laws of the non-stock corporation
for assurance of best practices. The most common applicable
to the nonprofit organization is based on the Uniform
Non-stock (Nonprofit) Corporation Act adopted by many
states, including the District of Columbia, Virginia and
Maryland. Key elements that must be present in an organization’s
organizing documents are available on the Internal Revenue
Service web site http://www.irs.gov/instructions/i1023/ch02.html#d0e1484
Conflict of Interest Policy
Nonprofit organizations are continually
subject to public scrutiny. A conflict of interest policy
is a strategy, in keeping with best practices, that will
help avoid the appearance or actuality of private benefit
to individuals who are in a position of substantial authority
and documents the organization’s policy for such matters.
The 2005 Federal Form 990 requires disclosure of whether
or not an organization has implemented a written conflict
of interest policy http://www.irs.gov/instructions/i1023/ar03.html
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.
Sample indirect cost allocation plans
are available on the U.S. Department of Health & Human
Services web site http://rates.psc.gov/fms/dca/np_exall2.html
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
