Anderson ZurMuehlen Blog

Audits Are Essential To Your Organization’s Health

Audits have become more important due to increased public and government scrutiny of not-for-profit organizations, their management, and their boards. Audits serve the purpose of determining whether an organization’s financial information is fairly stated in accordance with prescribed accounting standards.  Audits can also be a valuable tool in determining whether an organization’s internal controls are effectively designed and operating as intended, which in turn enhances the reliability of financial information. Perhaps most importantly, regular audits provide a level of assurance to donors, members, and other stakeholders who are relying on your financial information.

Ins and Outs

Audits come in two forms, serving different purposes:

1. Internal audit. This type of audit is a function of your board’s fiduciary responsibility to the organization and is typically performed by an independent individual or department within the organization, or by an independent third party.

The auditor examines whether your financial policies and processes meet your standards and those of outside agencies. He or she may look at how well your nonprofit’s accounting and financial policies conform with Generally Accepted Accounting Principles (GAAP) and applicable state and federal laws. The auditor also may review the accuracy of financial information, assess how efficiently your organization handles money matters, and test your internal controls.

2. External audit. An external audit is conducted by a financial professional outside of your organization. This type of audit is completely separate from an internal audit. Although external audits are optional for not-for-profits in some states, they’re required in others and may also be required by third parties, such as donors or federal agencies.

In an external audit, a CPA examines your organization’s financial statements and issues an opinion on whether those statements offer a fair picture of your finances and adhere to GAAP. To support this opinion, the auditor tests underlying records, such as bank reconciliations, accounts payable records, and contribution classifications. The auditor also evaluates your organization’s internal controls.

It’s essential to choose an external auditor who has no ties to your organization. For example, a board member’s spouse who happens to be a CPA — no matter how qualified the spouse may otherwise be to perform an audit — wouldn’t be able to accept an engagement to perform your audit.

Audit Committee

Another major component of the not-for-profit audit process is your organization’s audit committee, financially knowledgeable people who provide oversight of your organization’s reporting and internal controls. Some states mandate who can serve on an audit committee. Others allow board members, as well as non-board member volunteers, to serve. Depending on the size and complexity of the not-for-profit organization, the committee generally has three to five members.

The audit committee’s primary role, besides selecting external auditors, is to maintain open communication with internal and external auditors to discuss audit processes and results. The committee also should ensure internal controls are in place throughout the year. The key to a successful audit committee is its independence and ability to bring to the table financial expertise specifically related to nonprofits.

Preparing for an Audit

To help ensure you get the most useful results from an external audit, carefully assemble the relevant documents. This includes financial statements, bank correspondence, budgets, board meeting minutes, and payroll, accounts receivable and accounts payable records. Your auditor also may ask to review records related to loans, leases, grants, donations and fundraising activities. Typically your auditor will provide a detailed list of required documentation.

Expect the auditor to ask questions during the audit process. He or she also will want to question board or staff members about your internal controls, including procedures for fraud prevention and detection. Among the issues likely to be reviewed are how money and other resources are received and spent, what the organization does to comply with applicable laws, and how financial transactions are recorded.

Ideally, you should keep a running file of appropriate paperwork so you’re prepared when the audit takes place. You also should communicate with your auditor as questions arise during the year about (for example) launching a program to sell items to raise funds or accepting a large grant. This ongoing approach can make the annual audit smoother and faster.

Good Reasons

Audits take considerable time and effort, but are well worth it, especially in light of the increased focus on transparency and accountability in recent years. Although the IRS Form 990 doesn’t mandate audits, it does ask organizations to discuss their audit activities, as well as the role their boards play in that process.

 Read more from the Anderson ZurMuehlen blog

Substantiating Charitable Contributions

By Shirlee Walker, Shareholder

Most 501(c)(3) organizations place great importance on cultivating and nurturing donors. Individuals contribute to charitable organizations for many reasons. However, the tax benefit of making a contribution is often a key factor in a donor’s decision. The Internal Revenue Service has tightened the rules for taxpayer deductions of charitable contributions, making it imperative for charities to be proactive in ensuring their donors receive the tax benefits they deserve.

All deductible donations must be supported by bank records or written receipts from the charity. If the amount of the gift is $250 or more, the donor must obtain a written acknowledgement from the charity. This written acknowledgement must be “contemporaneous.” It must be obtained no later than the due date of the donor’s tax return for the year the contribution is made. The donor must possess the written acknowledgement at the time the tax return is filed to meet the “contemporaneous” requirement.

If the donation is in cash, the written acknowledgement must state the amount contributed and whether the organization provided any goods or services in consideration for the contribution. If goods or services were provided, the organization must provide a good faith estimate of their value. The importance of this statement on goods and services cannot be overemphasized. Recently the IRS has disallowed numerous (and substantial) charitable contribution deductions due to the absence of the required statement.

The donor—not the charitable organization—is responsible for obtaining proper written acknowledgement. However, organizations that fail to provide donors with written acknowledgements in compliance with the IRS rule could lose substantial donors if the IRS disallows deductions for their contributions. IRS publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements, provides the rules for documenting charitable deductions.

For more information, please contact Suzanne Severin, Shareholder, or Shirlee Walker, Shareholder to discuss your particular circumstances.

 Read more from the Anderson ZurMuehlen blog



Re-incorporating in a New State Can Be Costly

By Shirlee Walker, Shareholder

Revenue Rule 67-390 makes it clear that “an exempt organization incorporated under the laws of one state” and then “reincorporated under the laws of another state with no change in its purposes” is a new legal entity.  This new entity must apply for an exemption and cannot qualify under the old entity’s exempt status.  If the new entity does not apply for exempt status, donor contributions will not be deductible and the organization will be required to file Form 1120, U.S. Corporation Income Tax Return.  This ruling has been cited in an IRS exemption revocation as recently as 2012. 

In 2003, the Advisory Committee on Tax Exempt and Government Entities addressed the requirement to file for a new tax exempt status when an exempt organization relocates to a new state.  The committee concluded it would be difficult to ensure that no other changes had taken place in the re-incorporation and recommended no change in the process.  The committee did state that a “new” organization reincorporating under these circumstances should be able to obtain a definitive public support ruling based on the financial data of the “old” organization.  The committee pointed out that if an exempt organization moves to a new state without reincorporating, the organization is not required to file a new exemption application.  In this case, the organization would maintain its incorporation in the old state as a domestic corporation and register in the new state as a foreign corporation. 

The American Bar Association (ABA) Section of Taxation asked the IRS to address this issue in the 2012-2013 Treasury-IRS Guidance Priority List.  The ABA requested that the IRS provide guidance on how to obtain a revised determination letter without having to file a new exemption application when there is a mere change in the form or state of incorporation.  The IRS did not include this issue in the Guidance Priority List.

This brings up another question.  Revenue Rule 67-390 is silent on the status of the old corporation’s Employer Identification Number (EIN).  Several sources believe the re-incorporated entity is required to obtain a new EIN.  Revenue Rule 73-526 indicates that when a corporation re-incorporates in a new state under a section 368(a)(1)(F) type of restructuring, the corporation should continue to use the same EIN.  Other rulings have made this same determination where for-profit corporations were involved. 

If your tax exempt organization is considering a move from one state to another, please contact Suzanne Severin, Shareholder, or Shirlee Walker, Shareholder to discuss your particular circumstances.

 Read more from the Anderson ZurMuehlen blog



Anderson ZurMuehlen Participates in UM School Of Business Administration Employer Fair

Rick Reisig, Shareholder, Appointed to National Auditing Standards Board

Rick Reisig, a certified public accountant and shareholder in the Great Falls office, was appointed to the American Institute of CPAs Auditing Standards Board. The Auditing Standards Board is the senior technical committee of the AICPA that develops, updates, and communicates auditing, attestation, and quality control standards for the CPA profession to follow in providing auditing and attestation services to non-public company clients. It consists of 19 members representing various industries and sectors, including public accountants and private, educational, and governmental entities.

Read the Great Falls Tribune Business Brief

Read more from the Anderson ZurMuehlen blog