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The IRS has included a section on “Failure to File Penalties” that can be assessed against a tax exempt organization or against a responsible person in the instructions to the 2008 Form 990.
The following is the language in these instructions:
H. Failure to File Penalties
Against the organization. Under section 6652(c)(1)(A), a penalty of $20 a day, not to exceed the lesser of $10,000 or 5% of the gross receipts of the organization for the year, may be charged when a return is filed late, unless the organization can show that the late filing was due to reasonable cause.
Organizations with annual gross receipts exceeding $1 million are subject to a penalty of $100 for each day failure continues (with a maximum penalty with respect to any one return of $50,000). The penalty begins on the due date for filing the Form 990.
Tax exempt organizations that are required to file electronically but do not are deemed to have failed to file the return. This is true even if a paper return is submitted.
The penalty may also be charged if the organization files an incomplete return, such as by failing to complete a required line item or a required part of a schedule. To avoid penalties and having to supply missing information later:
Also, this penalty may be imposed if the organization’s return contains incorrect information. For example, an organization that reports contributions net of related fundraising expenses may be subject to this penalty.
Against Responsible Person(s). If the organization does not file a complete return or does not furnish correct information, the IRS will send the organization a letter that includes a fixed time to fulfill these requirements. After that period expires, the person failing to comply will be charged a penalty of $10 a day. The maximum penalty on all persona for failures with respect to any one return shall not exceed $5,000.
There are also penalties (fines and imprisonment) for willfully not filing returns and for filing fraudulent returns and statements with the IRS (see sections 7203, 7206, and 7207).
On December 11, 2008, the IRS announced it has provided an extension of time for public schools and exempt organizations to complete written plans for 403(b) retirement plans. The original press release is below:
Retirement Plans for Public Schools and Exempt Organizations
Get Extension on Time to Complete Written Plans
IR-2008-140, Dec. 11, 2008
WASHINGTON — The IRS issued a notice today announcing relief for certain retirement plans that do not have a written plan in place by January 1, 2009. The new guidance is for retirement plans covering employees at public schools, colleges and universities, and other tax exempt organizations. These retirement plans are often referred to as 403(b) plans after the relevant section in the tax code.The IRS is extending the deadline for plan sponsors to adopt new written plans or amend existing plans to satisfy the requirement of the final 403(b) regulations because of difficulties expressed by numerous plan administrators in meeting the current deadline of January 1, 2009. This extension will give plan sponsors additional time to put their plan documents in place.
The IRS will treat these plans as meeting the requirements of 403(b) and the regulations during the 2009 calendar year if:
The IRS plans to issue further guidance on 403(b) plans, including a revenue procedure establishing programs for 403(b) plans to obtain IRS approval of the plan document and allowing these plans to make remedial amendments to retroactively fix plan provisions under rules that similar to those that apply for 401(a) qualified plans.
Notice 2009-3 is available on IRS.gov.
Ten Tips for Effectively Reviewing Bank Statements
The review of monthly bank statements and cash reconciliation is an important internal control for any entity, regardless of size or industry. Even though it’s a key detective control against errors and irregularities, many people don’t know what to look for when performing the review. Below are ten practical tips to enhance your review of the monthly bank statement and improve its effectiveness.
Sound financial management is crucial to the vitality of every not-for-profit organization. An organization that is soundly managed is more likely to attract contributions than one that is not. But what financial information should board members—especially those with limited financial expertise—review? This question is common in the not-for-profit arena, where board members’ backgrounds vary considerably more than in commercial industry.
While meeting with boards, I’ve heard from some board members who feel they’re not provided with enough financial information. Others tell me they’re overwhelmed by what they receive and are unsure what to zero in on for meaningful analysis. In general, board members feel they need more focused information to properly govern their not-for-profit organization.
How much is enough?
There are several aspects of financial management that are of special concern to board members of a not-for-profit organization: the budget process, overseeing assets, raising revenue, and controlling non-program expenses. However, the amount of financial and other information provided to individual board members does—and should—vary.
Committee members typically receive more detailed reports, while the full board receives more information in summary form. Using this approach, the full board is included in financial decisions while the audit and finance committees have access to more detailed information to effectively analyze the organization’s finances, control deficiencies, etc.
The following are newer communication concepts that should be considered to ensure all board members receive the right amount of information by which to govern the organization:
How much is too much?
From the above list, it’s easy to see that open channels of communication between those in charge of financial reporting and those charged with governance are imperative to the oversight process. However, it’s also important not to overload board members with too much information. As you circulate information to the board, be sure to consider both the environment and board members’ level of interest before printing or copying pages of information. While you may want to print key information for distribution during board meetings, make more detailed information available on the organization’s intranet for interested board members to view online or download.
As board members become more immersed in understanding and governing the organizations they serve, more pressure will be placed on management teams to ensure that the right, most relevant, and properly focused information is provided. This is a critical factor in ensuring that not-for-profit organizations are well-governed.
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) replaces the Uniform Management of Institutional Funds Act (UMIFA). The National Conference of Commissioners on Uniform State Laws approved UPMIFA in July 2006.
The UPMIFA provides statutory guidelines for the management, investment, and expenditure of endowment funds held by charitable institutions and brings the law governing such institutions in line with modern investment and expenditure practices. Substituting a more flexible standard of prudence, the new act eliminates the “historic dollar value” rule and makes it easier for charities to identify new uses for older and smaller endowments dedicated to obsolete or impractical purposes.
The Uniform Prudent Management of Institutional Funds Act is only model legislation and must be adopted by individual state legislatures. UPMIFA was enacted into law by the 2007 Montana legislature. As of the date of this article, the State of Washington has not adopted the new act and continues to be governed by UMIFA.
Specifically, UPMIFA accomplishes the following:
The Uniform Prudent Management of Institutional Funds Act contains provisions that significantly affect non-profits. Please let us know what we can do to help you understand and comply with this important law.
The current recession is widening the gap between expected revenues and planned expenditures for state and local governments across the nation. The national economy has shrunk for the last three quarters and the recession is expected to continue throughout the summer.
Facing Budget Deficits
Tax revenue is a function of economic activity. During economic downturns, state and local governments are forced to stretch their budgets. At the state level, this has made headlines across the country for the last six months. Currently, 42 states are facing a combined $53 billion gap between projected income and anticipated expenses. Many of the nation’s largest cities are in a similar position. Philadelphia is confronting a $175 million budget deficit, and Chicago, Washington, DC, and Los Angeles are also experiencing serious revenue shortfalls. In our current economic conditions, it may be helpful to step back for a moment and review how local governments have responded to significant budget deficits in the past.
Government Behavior in a Recession
In a 1993 study by MacManus, 67 counties, 67 school districts, and 133 municipalities in Florida were surveyed during the 1991 recession. The study found that financial stress appeared to be the highest in school districts and the lowest among municipalities. The most popular method for coping with the financial crisis was expenditure reductions, largely because revenue raising methods take longer and are unpopular while spending cuts have an immediate effect. The survey also found that across-the-board cuts are used more often than reductions in capital expenditures or eliminating entire programs. Among school districts, cuts in labor intensive functions and activities, including staff reductions, were the most frequent. To cut personnel spending, local governments typically employed the following methods:
Most of the school districts implemented hiring freezes because schools are so labor intensive.
The 1991 recession was not without its benefits. It caused many local governments in Florida to improve their financial management techniques through better risk management, competitive purchasing procedures, adoption of self-insurance programs, participation in insurance pools, and improvements in inventory control systems. In addition, local governments increased the contracting of jobs to the private sector to avoid unnecessary capital expenditures.
The recession forced Florida local governments to increase their reliance on the bond market. Despite the possibility of downgraded credit ratings, many local governments used general obligation bonds and revenue bonds to balance their budgets. The study found that counties were the most likely to sell bonds, followed by cities and then school districts.
Revenue generating techniques are less popular and as such, were used sparsely. Local governments increased revenue by raising current user fees, increasing property tax millage rates, improving cash management and investment efforts, and imposing new user fees. County governments were more likely to engage in revenue enhancement than cities or school districts. School districts have limited options for generating revenue, forcing them to rely heavily on cash management and investment techniques to increase income.
Current Budget Challenges
Although it’s too early to clearly see how local governments are reacting to our current economic problems, some observations can be made. Facing a $600 million deficit, the Los Angeles school board terminated 5,400 teachers in April. Also in California, the municipalities of San Jose, San Francisco, and Los Angeles will terminate hundreds of city workers to balance their budgets.
The New York Times reported in April that local governments are increasing or creating new fees to enhance revenues. A few dozen cities across the country have started charging “accident response fees” for services rendered by fire departments and police officers. The state of Wisconsin is considering a slaughterhouse fee that would be levied on each animal slaughtered. Washington, DC is considering a “streetlight user fee” of $4.25 a month.
Benefiting from the Economic Slow-Down
The current recession has produced a large decrease in the demand for new construction, and the Raleigh News and Observer reports that local governments in North Carolina are benefiting from this. Raleigh, Durham, Wake County, and other local governments have seen construction projects coming in under budget by as much as 30 percent. At the height of the housing boom, public works projects brought few bidders due to low profit margins. Times have changed; Raleigh recently solicited bids to renovate its downtown district police station and the winning bid was $1.2 million (15 percent) less than the city had budgeted.
As the recession continues, the gap between expected revenues and planned expenditures will also grow. Whether it’s through revenue enhancement or cuts in spending, local governments across the nation will face difficult decisions as they balance their budgets in the months ahead.
The newly revised (2008) Form 990 packs a triple punch: more pages, more required schedules, and more in-depth questions to answer about the internal operations of your organization. This article will focus on governance issues addressed in the new form.
The Need for Greater Disclosure and Improved Governance
Part VI of the core form on Governance, Management and Disclosure contains questions specific to your organization’s governing body and management, policies, and disclosure practices. As indicated on the heading for this part of the form, most of the disclosures relate to policies and procedures not required by federal tax law. These questions are the Internal Revenue Services’ (IRS) reaction to concerns expressed by key committees of Congress about the need for greater disclosure and improved governance of tax exempt organizations. The IRS has determined from past audits that organizations with appropriate governance policies and practices are more likely to comply with applicable laws and regulations.
Part VI requires “yes” or “no” responses to whether organizations have specific policies in place. To answer “yes,” the organization must have adopted the policy before the end of the year. If organizations have adopted policies after the end of the fiscal year covered by this return but before the filing, they must answer “no” to the question on Part VI. However, a statement on Schedule O about adoption of the policy after the fiscal year end may demonstrate to the IRS that the organization has made an effort to satisfy the new reporting requirements.
Conflict of Interest Policy
Part VI asks if your organization has a written Conflict of Interest Policy. If the answer is “yes,” a follow-up question asks if disclosure of interests that could give rise to conflicts is required annually and if the policy is monitored and enforced on a regular and consistent basis. A Conflict of Interest Policy should define conflicts of interest, identify the classes of individuals within your organization who are covered by the policy, and specify the procedures for identifying and managing conflicts of interest.
Whistleblower and Document Retention Policies
Part VI includes disclosures relating to the presence of written Whistleblower and Document Retention and Destruction Policies. The Whistleblower Policy should encourage staff members and volunteers to come forward with information on illegal practices and violations of the organization’s policies and procedures. The policy should provide protection from retaliation and also identify how the information can be reported. The Document Retention and Destruction Policy needs to identify individuals who are responsible for maintaining, storing, and destroying documents. The policy should also identify retention rules and terms and the process for destroying documents.
New Compensation Disclosures
Compensation disclosures have been expanded in many parts of the new Form 990. In the Policy section of Part VI, the process for determining compensation for the CEO, Executive Director and top management personnel must be disclosed. Questions ask if there was review and approval by independent persons, if data on comparable positions was examined, and if there was contemporaneous substantiation of the deliberations and decisions pertaining to compensation for these key positions. The form also requires a written description of these processes on Schedule O. Tax exempt organizations should adopt a written policy for determining key employees’ compensation that includes review and approval by the board of directors or a compensation committee, how the compensation is determined, and the requirement to have these procedures documented in a contemporaneous manner. IRS instructions specify that contemporaneous means by the latter of (a) the next meeting of the governing body or committee or (b) 60 days after the date of the meeting or written action.
Organizations that pay their key employees more than $150,000 are required to complete Schedule J. This schedule asks if the organization has a written policy regarding payment or reimbursement for personal expenses paid by the organization. If the answer is “no,” the organization must provide additional information on who determined the organization would provide such benefits and the decision-making process.
Joint Venture Arrangements
The last question in the Part VI Policy section asks if your organization has invested in, contributed assets to, or participated in a joint venture or similar arrangement with a taxable entity during the year. To answer “yes,” an organization must have adopted a written policy or have procedures requiring the organization to evaluate its participation in joint venture arrangements and take steps to safeguard the organization’s exempt status with respect to such arrangements. The IRS is looking for organizations’ participation in business ventures that may generate Unrelated Business Income (UBI). Tax exempt organizations with more than an unsubstantial amount of UBI run the risk of losing their tax exempt status.
Conservation Easements
If your organization holds conservation easements, it must complete Part II of Schedule D, Supplemental Financial Statements. This part of the form asks if your organization has a written policy regarding the periodic monitoring, inspection, violations, and enforcement of the conservation easement it holds. If the answer is “yes,” a brief summary of the policy must be provided with details on how the policy is enforced. If your organization is a school or hospital, there are other policy questions that require answers and explanations.
Non-Cash Contributions
Organizations required to complete Schedule M, Non-Cash Contributions, must indicate if they have a Gift Acceptance Policy that requires the review of any non-standard gifts. The instructions for Schedule M identify a non-standard gift as (1) an item that is not reasonably expected to be used to satisfy or further the organization’s exempt purpose and for which there is no ready market, and (2) an item for which the value is highly speculative or difficult to ascertain.
Organizational Transparency
The IRS developed the new form with the intent of making the organization transparent to anyone who reads the form. With the new form, both the government and the organization’s donors should have a clearer view of how the tax-exempt organization is operated and managed. Fiscal year organizations that have not already adopted these policies should consider adopting and implementing them before their fiscal year ending in 2009.
In a time when more and more people are losing their jobs and finding it difficult to make ends meet, the pressure to commit fraud is stronger than ever. Additionally, as organizations find it necessary to cut back on wages, benefits, etc., their employees may also find it easier to rationalize fraudulent behavior.
The following information was included in the Association of Certified Fraud Examiners’ (ACFE) 2008 Report to the Nation on Occupational Fraud and Abuse. The full report can be viewed at http://www.acfe.com/documents/2008-rttn.pdf. The report summarizes the results of a survey sent to ACFE members.
For small businesses or businesses with fewer than 100 employees, billing schemes were the most common type of asset misappropriation reported during 2008 and accounted for 28.7% of fraud cases during the year. A common example of this type of fraud is an employee creating a false vendor and submitting invoices for payment. The median loss for these types of schemes was $100,000. Many businesses and public entities would be devastated by this size of a loss.
Check tampering schemes were the second most reported type of asset misappropriation during 2008. A typical example of this scheme is an employee obtaining blank employer checks and then writing them to himself or herself. This type of scheme was reported by 25.4% of those surveyed. In these cases, companies lost an average of $138,000 per scheme.
Not surprisingly, the most likely department to produce fraud perpetrators was the accounting department. This underscores the need for auditors to practice professional skepticism when working with accounting departments.
Unfortunately, internal and external audits are uncovering fewer and fewer fraud schemes. In their 2006 report, internal/external audit functions uncovered 37.4% of the fraud schemes reported by the ACFE. In 2008, only 28.5% of such cases were uncovered by internal or external auditors. Many organizations don’t believe they’re large enough, or they find it unnecessary, to implement strong internal controls. Establishing rigorous controls could keep you from becoming a victim of fraud.
by Brooke Risa
The strengths of conscientious board members may also prove to be their downfall. People who are regarded as individuals of integrity, who are fueled with enthusiasm and have the community’s interest at heart, and who possess the ability to articulate their views on important issues may also be inclined to believe that due diligence means “getting their hands into the mix.” However, if board members can define and adhere to guidelines that clearly identify the differences between their responsibilities and the duties of the executive director and staff, and then ensure accountability throughout the organization, the sailing will be smooth.
The division of responsibilities between board members, the executive director, and the staff must be clear and concise. Here are some thoughts to consider in describing this important separation of duties.
Staff
Staff members receive assignments from the executive director that help the organization run smoothly from day to day. In most non-profits, these assignments fall principally into three categories: administrative, financial, and marketing. Individuals holding positions in these three areas need to know the non-profit’s policies, procedures, and goals from their very first day so they can perform their duties in harmony with the organization’s master plan.
Executive Director
To keep things running smoothly, the executive director must have extensive knowledge of the responsibilities of each staff member, exercise appropriate control over job performance, hold employees accountable for their daily duties, and ensure the staff is competent. In addition, the executive director must respond to questions and concerns the staff may have regarding the organization’s daily operations and their particular responsibilities. The executive director must understand the board’s vision for the organization, including long and short-term goals. He or she must also have a firm grasp of the organization’s financial matters, its policies and procedures, and the actions required to implement those policies and procedures.
Board Members
The board of directors identifies the organization’s vision, formulates policies and procedures, creates both long and short-term goals, and holds the executive director accountable for implementation of goals and for staff performance. The only other role board members should play is one of active participation in the organization’s events, as volunteers working under the direct supervision of staff.
Board Members Do:
• Identify the organization’s mission, goals, and objectives
• Establish policies and procedures
• Hire the executive director
• Hold the executive director accountable
• Manage the organization’s risk
• Volunteer at the organization’s activities and assist with special projects
• Identify/avoid situations and/or transactions that may portray (or in fact be) conflicts of interest
• Value and respect donor restrictions
• Avoid chronic involvement
• Review financial reports
Board Members Do Not:
• Participate in or manage day-to-day operations
• Assign, supervise, or discipline staff
• Implement the organization’s policies and procedures
• Take over a task because of “specialized knowledge” or other justifications
• React impulsively in a crisis situation
• Hide or manipulate any information that is (or potentially should be) public information
Following and implementing these guidelines is the first step in creating and maintaining the public’s trust. Any failure to adhere to the prescribed duties of the board of directors, the executive director, and the staff will undermine accountability, erode public trust, and make it more difficult for the organization to accomplish its mission.
The information provided in this discussion is not all-inclusive and should not be relied upon or substituted for qualified legal or financial advice. For more information, please contact Dan Miller in our Billings office.
Can a public charity engage in lobbying activities to influence legislation? The answer is ”yes,” but the amount the charity can expend in its lobbying efforts is subject to limitations. A public charity—a tax exempt organization under IRC section 501(c)(3)—that exceeds these limitations risks losing its tax exempt status.
The recent increased availability of federal money for social programs has resulted in many public charities engaging in lobbying activities to influence their chances of receiving part of these funds. What are the limits on lobbying expenditures? There are two methods of answering this question.
Substantial Part Test
The first method is the Substantial Part Test. This is a very subjective test based upon specific facts and circumstances. The Substantial Part Test examines a variety of factors, such as the time devoted to the activities by both paid and volunteer workers and if substantial expenditures are devoted to the activity. “Substantial” is not defined in any code or regulation, but the courts have often viewed less than 5% as not being substantial. However, this is not always the case. Some courts have determined that smaller percentages were substantial and the organization was determined to have engaged in excessive lobbying activities.
Section 501(h) Method
The second method is much more concrete and defined. Guidance for this method is found under the regulations that accompany IRC section 501(h). Under this code section, a public charity can elect to use the expenditure limits set forth in the regulations. Form 5768, entitled “Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation,” is used to make or revoke the 501(h) election. The election may be made by filing the form with the IRS any time during the tax year it is to be effective and remains in effect for all future tax years unless it is revoked. Revocation is made on the same Form 5768 and is effective for the year following the tax year in which the revocation is filed.
The benefit of this election is having a specific dollar amount the organization can spend on lobbying during the year without the burden of proving the amount is not substantial. Making the election is a simple process, but calculating the limitation is not. Lobbying expenditure limitations are a percentage of the total expenditures (with some exceptions) of the organization during the tax year.
The total lobbying limit is 20% of the first $500,000 of total expenditures, plus 15% of the next $500,000, plus 10% of the next $500,000, plus 5% of the remainder. There is a $1,000,000 cap on the lobbying expenditure amount. Grass roots lobbying expenditures are limited to 25% of the total limit (5%). Members of an affiliated group are treated as a single organization for purposes of calculating the annual dollar limits. Any year an organization exceeds the annual lobbying expenditure limit, it pays a 25% excise tax on the excess lobbying expenditures. If over a four-year period the organization exceeds the lobbying expenditures limit by 50%, it automatically loses its tax exempt status.
Here’s an example of how this limit is calculated. If a public charity’s total expenditures in 2007 were $455,000, the 501(h) limitation would be $91,000 ($455,000 x 20%). Out of this total limitation, the organization could expend $22,750 on grass roots lobbying ($91,000 x 25%). If the organization did not engage in grass roots lobbying activities, the entire $91,000 could be spent on direct lobbying.
Types of Lobbying Expenditures
Lobbying expenditures include communications with any member or employee of a legislative body or with any government official or employee if the principal purpose is to influence legislation. Attempting to influence the opinions of the general public in a referendum, initiative, constitutional amendment, or similar procedure is a lobbying activity. Overhead and administrative costs must be allocated to lobbying expenditures.
Political campaign activities are not considered lobbying expenditures. Public charities are prohibited from directly or indirectly participating in any political campaign on behalf of, or in opposition to, any candidate for public office.
As charities struggle to find additional sources of funds, lobbying expenditures to obtain government grants may be a prudent use of the organization’s funds. If your organization is currently lobbying or is contemplating lobbying activities, we are available to answer your questions on making the 501(h) election and accounting for your lobbying expenditures.
By: Kelsey Ferro
At Anderson ZurMuehlen, we’re committed to providing unique, comprehensive services to our clients.
We believe that continuing education is vital to the longevity and vigor of both our firm and the many organizations we serve. Our CornerStones conference, held this past April and May in Billings and Missoula, is evidence of our commitment to continuing education. The conference focused on the challenging issues public entities are facing during this time of economic instability. Session topics included transparency and accountability, effective governance, prudent investment practices, information technology security and best practices, and human resource management. Participants enjoyed wonderful opportunities to interact with exceptional speakers from Crowley & Fleck PLLP, Montana Legal Services Association, Yellowstone Boys & Girls Ranch Foundation, Dorsey & Whitney LLP, Employee Benefit Resources, LLP, and Anderson ZurMuehlen. Conference attendees included many leaders of non-profit organizations and local government entities.
Due to the response to this year’s conference, we are excited to announce that CornerStones will be an annual event. The 2010 conference will address fresh, vital issues and offer engaging sessions with many opportunities for participants to interact with knowledgeable, dynamic speakers. “Save the Date” cards will be mailed in late July; please feel free to contact us at (406) 442-1040 for additional information.
Section 1512 of the American Recovery and Reinvestment Act (ARRA) is drawing a lot of attention from potential recipients. This section requires primary recipients and delegated sub-recipients to submit quarterly reports to the Office of Management and Budget (OMB). The quarterly reports detail the following:
These reports are due within ten days after the end of the calendar quarter. The first reporting deadline is October 10, 2009 and will be cumulative since the enactment of the legislation (February 17, 2009).
If your agency expects to receive ARRA stimulus funds, it should create a plan to meet the reporting requirements. Timely registration is important. Primary recipients of ARRA money must be registered in the Central Contractor Registration (CCR) database at www.ccr.gov/FAQ.aspx. Also, all reporting entities must have a D-U-N-S number (see http://fedgov.dnb.com/webform). The OMB is expected to have registration available no later than August 26, 2009. Registration will be available at www.FederalReporting.gov. For additional information regarding reporting requirements, see Read Cover Memo and Guidance at http://www.recovery.gov/?q=node/579.
ARRA’S IMPACT ON SINGLE AUDITS
Appendix VII of Circular A-133 discusses the implications ARRA has for single audits. Single audits are vital to the OMB achieving the following accountability objectives:
To meet these objectives, the OMB will update cluster programs for major program determination monthly beginning in June 2009. Auditors will need to use the update that corresponds with the fiscal year end. An important effect of ARRA awards on major program determination is that all Federal programs with expenditures of ARRA awards are considered to be high risk in accordance with Section .525(c)(2) and .525(d) of OMB Circular A-133. When using the risk-based approach, Type A programs with expenditures of ARRA awards should not be considered low-risk except when the auditor determines and clearly documents the reasons for a low risk consideration.
What does this mean? Usually a program is considered Type A if federal awards are greater than $300,000. Under the risk-based approach as detailed in section .520(c)(1), low risk Type A programs need to be audited once every three years, whereas high risk Type A programs need to be audited once every year. The implications of this requirement could be significant. Government agencies or non-profits that have low risk Type A programs only need these programs to be audited once every three years. However, if these programs accept ARRA awards, the consideration of the program could change to high risk. If this occurs, they will need to be audited annually and these entities could see a significant increase in auditing expense.
As additional information becomes available, the OMB plans to issue addenda to Appendix VII of Circular A-133. For additional guidance regarding the treatment of ARRA expenditures in a single audit, please see Appendix VII to Circular A-133 or the OMB Management website at http://www.whitehouse.gov/omb/management.
Funds received from federal grant awards often provide significant capital and financial relief to organizations; this may be especially true in today’s turbulent economy. However, these funds often come with strings attached. The federal funds an organization spends in a fiscal year may exceed the threshold set by the Office of Management and Budget, requiring a single audit. Adequately preparing for a single audit is essential to the success of the process and could affect the likelihood of receiving future funds.
Identifying the relationship under which the funds are received is the primary factor in evaluating whether a single audit is applicable. Only those funds that are received as federal grant awards are considered in the evaluation process. This excludes any funds received through a vendor-type relationship. If expenditures for federal grant awards exceed $500,000 in a fiscal year, a single audit is required. In addition to evaluating the type of funds received, it’s essential that an accurate Schedule of Expenditures of Federal Awards (SEFA) is maintained. The SEFA is the basis for determining the number and types of programs selected for testing by auditors. An inaccurate SEFA can result in under or over testing of federal programs.
Both a proactive approach and an evaluation process are imperative when managing federal funds. The evaluation process should include an analysis of the organization’s internal control structure, its personnel manuals, and the competency of employees in charge of the programs. Effective controls and competent employees provide the perception that the funds are being adequately managed. This perception can reduce the auditor’s risk of identifying questioned costs or noncompliance relative to the programs being tested. In addition, the strength of an organization’s internal control system aids the federal agency in determining how funds are being safeguarded and how future funds will be managed.
The federal government posts many of the compliance supplements for federal programs on its website, which provides a general basis for audit procedures. In addition to being familiar with the grant terms themselves, reviewing the applicable compliance supplements prior to the audit can help directors and program managers determine if program requirements are being met. It is also important to gain a thorough understanding of the cost circulars that are applicable to the organization to determine if cost allowability requirements are being met. This includes retaining documentation that supports all costs charged to the federal programs. A review of the costs charged to the programs can drastically reduce the chance of the auditors assessing a finding for questioned costs.
The success of a single audit can have both current and future economic consequences. Adequate preparation can only increase the likelihood that an organization will continue to receive federal funds. For additional information regarding single audit requirements and compliance supplements, log on to www.whitehouse.gov/omb.
By: Mitch Thompson
Statement of Auditing Standard (SAS) No. 112 established requirements and provided guidance on communicating matters relating to an entity’s internal control over financial reporting identified in an audit of financial statements. The AICPA’s Auditing Standards Board (ASB) recently superseded SAS No. 112 by issuing SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit. SAS No. 115 becomes effective for audits of financial statements for periods ending on or after December 15, 2009.
What Has Changed Under SAS No. 115?
There are four significant differences between SAS No. 115 and SAS No. 112:
|
SAS No. 115 |
SAS No. 112 |
Definition of a “material weakness” |
“A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.” |
“A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control.” |
|
SAS No. 115 |
SAS No. 112 |
Definition of a “significant deficiency” |
“A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.” |
“A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the organization’s internal control.” |
Other Management Considerations
Management may know about existing significant deficiencies or material weaknesses, and it is their responsibility to decide, likely through cost-benefit analysis, whether to accept the risks posed by these deficiencies. However, management’s decision does not affect the auditor’s responsibility to communicate significant deficiencies and material weaknesses in writing.
Management or those charged with governance may request a written communication indicating no material weaknesses were identified during the financial statement audit (there is an illustration of this type of communication in SAS No. 115). The auditor should not provide a written communication stating that no significant deficiencies were identified during the financial statement audit.
Management may prepare a written response to the auditor's communication regarding significant deficiencies and material weaknesses identified during the financial statement audit. If this management response is included in a document with the auditor's written communication concerning identified significant deficiencies and material weaknesses, the auditor may add a paragraph to his or her written communication disclaiming an opinion on management's response.
Do you or your employees get nervous just at the thought of discussing fraud with your auditors? Talking about fraud can be uncomfortable. Why? Because many employees feel that if they’re asked about fraud it’s because someone suspects them of committing it.
When your auditors talk with your employees about fraud, they’re not making accusations. They’re just following professional standards. Since Statement of Auditing Standards No. 99, “Consideration of Fraud in a Financial Statement Audit,” became effective several years ago, auditors have had the responsibility to ask management and employees about their knowledge of any fraud that has occurred and if there are any areas where they feel fraud could occur.
The focus on fraud helps us fulfill our professional responsibility to ensure that the financial statements are free of material misstatements, whether due to error or fraud. When we ask about fraud, our objective is not to make employees feel uncomfortable nor is it our intention to intimidate employees or accuse them of perpetrating fraud. We’re simply trying to determine if there are any high risk areas that weren’t considered during audit planning procedures. No one knows the operations of your organization better than your employees, which makes it imperative for auditors to talk with employees about day-to-day operations and any weaknesses they may see in internal controls.
Auditors do not have the responsibility to find fraud if it has no direct and material effect on the financial statements. However, they are required to be aware of it and determine if any potential fraud exists. Being aware of the potential for fraud allows us to provide a value-added service to our clients as we help them assess whether their internal controls are adequate to safeguard their assets and ensure that transactions are handled appropriately.
Does your organization receive federal funds? If so, there’s a good chance you’ll be required to have a compliance audit. Commonly referred to as a “single audit,” the purpose of this audit is to confirm that your organization is following the rules and regulations applicable to the terms of your major federal awards. Compliance audits are currently being performed in accordance with Statement on Auditing Standards No. 74, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance. However, the Auditing Standards Board has proposed a new Statement on Auditing Standards (SAS). The intent of the proposed SAS is to clarify requirements relating to compliance audits conducted in accordance with Generally Accepted Auditing Standards and to minimize current audit deficiencies.
National Single Audit Sampling Project
Specific deficiencies related to audits performed under OMB Circular A-133 were the focus of the National Single Audit Sampling Project, developed by the President’s Council on Integrity and Efficiency in 2007. The Council issued a report based on the findings of the Project that discussed the deficiencies found in a statistical sample of 208 audits for the period April 1, 2003 to March 31, 2004. Based on the sample, it’s estimated 16% of all single audits have significant deficiencies and 35.5% are unacceptable. Further evidence shows that audits reporting smaller federal award amounts (expended awards less than $50 million, but more than $500,000) are more likely to be unacceptable than those audits with large federal awards (greater than $50 million).
The most prevalent deficiencies cited in the report included:
Although not as common, the report also discussed the incorrect reporting of major programs, a significant error in the single audit process.
Improving the Quality of Single Audits
The President’s Council recommended a three-pronged approach to reducing the deficiencies noted and improving the quality of single audits. Their recommendations were to:
To read the full report, click here.
The AICPA has focused on resolving and eliminating these issues in the proposed SAS, which becomes effective for fiscal periods ending on or after June 15, 2010. The revisions provide numerous benefits, including clarifying the standards’ applicability, providing auditors with guidance on when to adapt and apply Generally Accepted Auditing Standards, and helping the auditor decide which requirements are necessary in a particular compliance audit. They also give specific guidance on what should be included in a compliance audit report. The proposed SAS relates solely to compliance audits and is not applicable in a financial statement audit or internal control examination.
What does all of this mean to you and your organization? The goal is to produce better trained audit staff and more effective and efficient compliance audits. Those being audited may see increased fees for compliance audits as auditors will be required to perform more work than in the past.
Fraud can occur in any organization. Fortunately, you can implement preventive, detective, and corrective information technology (IT) controls to strengthen internal controls and reduce your risk of fraud. This process is referred to as “defense-in-depth.” An organization that employs multiple layers of controls is more likely to reduce the risk of a single point of failure.
Preventive controls work to prevent security breaches from occurring. They include training for staff and management, authentication and authorization controls, physical and remote access controls, encryption of sensitive material, and hardware application procedures.
The effectiveness of internal controls depends on employees’ understanding of security policies. Your employees should recognize why security measures are important to the survival of the organization. Training should include safe computing practices, such as never opening unsolicited email attachments, using only approved software, never sharing passwords, and physically protecting laptops and other equipment containing sensitive data.
Authentication controls include passwords, tokens, and biometrics to verify the identity of the individual or device attempting to gain access. Passwords are a common method of strengthening internal controls. Typically, a password should be changed every 90 days. Employees should not write passwords down, as this makes the passwords more susceptible to theft and misuse. Dual-factor authentication methods, such as a smart card with a PIN number, can also be used in lieu of a password.
Authorization controls restrict access of authenticated users to specific areas and actions of the system. Physical access can be limited by restricting entry to rooms housing computer equipment. Cables and wiring should not be exposed to areas accessible to casual visitors. Wiring closets should be secured. Employees should lock laptops to immovable objects and sensitive data should not be stored on hard drives. Hardware application procedures such as routers, firewalls, and intrusion prevention systems work to protect the network’s perimeter and reduce the risk of unauthorized access.
In addition to preventive controls, you can implement detective controls to enhance security. These controls monitor the effectiveness of your preventive controls and detect incidents that occur. Log analysis is the process of examining logs to monitor security and form an audit trail of system access. A regular review of periodic performance through managerial reports can also be helpful in ensuring that IT controls are sufficient. Security testing is helpful in determining the effectiveness of existing security procedures. Security websites may be used to obtain information on best practice measures and to evaluate how well an organization’s security conforms. Remember, detective controls are only useful when they’re performed on a routine basis.
As important as detective controls are to your organization’s survival, they’re insignificant without corrective controls. To take corrective action, you should establish a computer emergency response team, designate an individual responsible for security throughout your organization, and establish a patch management system. The computer emergency response team is responsible for effectively responding to an incident and should include technical specialists and the operation’s management. A chief security officer who is independent of other IT functions and understands the security environment should design, implement, and promote security policies and evaluate the risks and vulnerability of these procedures. Segregation of duties is critical. Patch management refers to the process of regularly applying patches and updates to your organization’s software (e.g., anti-virus, firewalls, and application programs).
Implementing a number of these simple IT controls can strengthen internal controls and reinforce a healthy operational environment for your organization.
Accounting and reporting standards in the United States have undergone a major restructuring, and everyone in the accounting industry needs to be aware of and prepared for significant changes.
On July 1, 2009, the FASB Accounting Standards Codification became the single official source of authoritative, non-governmental U.S. generally accepted accounting principles (GAAP). The new codification supersedes existing FASB, AICPA, EITF, and related literature. Below are responses to five frequently asked questions regarding this project and its impact.
What is the FASB codification?
The new FASB codification is an on-line repository and search system that integrates and categorizes all existing U.S. generally accepted accounting principles for non-governmental entities. It includes all guidance by such standard setters as FASB, the AICPA, and the Emerging Issues Task Force. The new codification eliminates all non-authoritative levels of GAAP, but does not change GAAP.
How will this benefit me?
In the past, the standards lacked a defined organization and were located in multiple places in various forms. The codification has created a database for all authoritative guidance. As of July 1, 2009, all guidance is located in one spot and continually updated as new guidance is accepted. FASB has created an easy to use search engine as well as cross-referencing tools to easily convert from the old system.
How does it work?
The codification is a web-based program that breaks all guidance into five main areas: General Principles and Objectives, Presentation, Financial Statement Accounts, Broad Transactions, and Industries. These five areas have been further broken down into 90 topics, sub-topics and sections. You can search by area, topic, sub-topic, or key word.
Do I need to change how I report my financial statements?
The only change in the reporting of financial statements is how companies reference their authoritative guidance in footnote disclosures. In the past, companies would reference guidance by citing a specific FAS Number. Under the new system, any references need to be a citation of the FASB Accounting Standards Codification. Here’s an example of the new reference format: ASC 480-10. However, since all authoritative guidance is now located in one place, companies may choose not to reference the codification.
How do I access the codification?
A basic view of the new codification is accessible free of charge on FASB’s website, www.fasb.org. For those who need more integrated and detailed access, an enhanced version of the codification is available by subscription. Just log on to www.fasb.org and start researching!
By Paul Sepp, CPA, CBA, CISA, CGFM
The old saying goes, “There’s nothing certain except death and taxes.” Well, over the past three years, the accounting world has been talking a lot about UNcertainty in income taxes … and that’s the subject of this article.
In 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 essentially required companies to disclose in their financial statements all significant tax positions, to identify which of those positions it considered “uncertain,” and, in some cases, to recognize a liability in their financial statements for the uncertain tax positions that management believed might not be sustainable upon examination by taxing authorities.
In simple terms, a “tax position” is a position taken or expected to be taken in a company’s income tax return that affects the amount of income taxes currently payable or deferred to future periods. Clearly, the focus of attention is those positions that significantly reduce or defer a company’s income tax liability. The “uncertain” criteria is based on a “more likely than not” assessment; that is, at least a 50% likelihood that a tax position may not stand up under examination.
If only the rules were that easy.
FIN 48 imposed significant implementation requirements on smaller non-public companies that do not have full-time tax specialists on staff. In addition, many questions arose about whether the provisions of FIN 48 applied to pass-through and non-profit entities. For these and other reasons, FASB deferred (on two separate occasions) the effective date of FIN 48 for non-public companies to years beginning on or after December 15, 2008.
In the middle of all this and to make matters more confusing, FASB reorganized all of its pronouncements into what is now called the FASB Accounting Standards Codification (ASC). The standards previously referred to as FIN 48 are now included in ASC Section 740.
All of which brings us to the present. Just this month, FASB issued its long-awaited final standards that apply to non-public companies, including pass-through entities and non-profits. This latest guidance, called Accounting Standards Update No. 2009-06, eliminates some of the more onerous requirements for non-public companies and only requires them to disclose the following:
We expect that many of our clients will not have any significant uncertain tax positions that would require disclosure of unrecognized tax benefits. We’ll be working with our clients to develop the required disclosures for their 2009 and later financial statements.
If you don’t already have a presence on a social networking website, it may be time to reconsider. Results of a recent survey indicate over 85% of your peer organizations are already there.
In April 2009, the results of the Nonprofit Social Networking Survey were released. Interviewing 980 non-profit organizations about their use of such websites, the survey found that 86% of those who responded use a commercial social networking site. Commercial social networks are communities owned and operated by a commercial entity, such as Facebook, MySpace, or Twitter. Facebook was the clear winner among those using commercial sites; 74% reported a Facebook presence, with an average community size of 5,391 members. A little less than a third of those participating in the survey indicated they use a networking community on their own website (referred to as a “house” social network).
Approximately three-quarters of those organizations using either type of social networking website—commercial or house—reported that the primary purpose of their site is traditional marketing to promote their services, brands, and programs. What about fundraising? Only 39% of those organizations using Facebook indicated they’ve generated any income through their presence on the social networking giant.
Survey participants reported they have ¼ to ½ of a full-time employee dedicated to their social network. Of those organizations that are not using a commercial site, 44% felt they didn’t have the expertise in-house to develop and maintain a network community. Nearly half of the organizations that do not currently have a house social network said the biggest reason was budgetary constraints.
Social networks are becoming increasingly popular and many organizations are using this medium to reach younger generations, create new interest in their organizations, and increase support for their missions. Social networks may never be a large source of income for non-profits, but they are quickly becoming an important tool for organizations to reach new potential donors.
The full survey document can be accessed by clicking here.
FASB Statement 164 and the Merger or
Acquisition of Not-for-Profit Entities
By Heather Ryan
The Financial Accounting Standards Board recently completed a long-awaited project with the issuance of Statement 164, Not-for Profit Entities: Mergers and Acquisitions. This statement provides specific guidance and requirements in the following areas:
Statement 164 is effective for mergers in which the merger date is on or after the beginning of an initial reporting period beginning on or after December 15, 2009. It’s effective for acquisitions for which the date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009.
The FASB issued this statement based on the belief that there are significant differences between combinations of non-profit organizations and combinations that involve for-profit entities. Non-profit entities’ ownership structures differ significantly from those of businesses or for-profit enterprises, as not-for-profits lack the ownership interests typically found in businesses or for-profit entities. In addition, acquisitions and mergers of not-for-profit entities usually occur to further promote the entities’ defined missions or to provide some other type of public benefit. As such, many mergers and acquisitions of for-profit entities are not fair value type exchanges, but rather nonreciprocal transfers. Thus, the FASB felt it was necessary to develop a standard and accounting guidance relating to mergers and acquisitions of not-for-profit entities.
The new statement requires the not-for-profit to properly distinguish between a merger and an acquisition. A merger is a combination in which the governing bodies of two or more not-for-profits cease control of those entities and form a new not-for-profit entity. As mentioned above, the new guidance requires the carryover method be used to account for mergers. Under the carryover method, the financial statement of the combined entity reflects the carry forward basis of assets and liabilities of the combining entities at the merger date.
If the combination is not considered a merger, it is then by default classified as an acquisition. An acquisition is defined as when one not-for-profit gains control of another, without ceasing control of itself. Combinations that fall under this definition are required to be accounted for under the acquisition method, which requires the following:
One of the most significant differences in FASB 164 is the guidance related to goodwill in the non-profit acquisition. The FASB concluded that if an acquiree’s operations, when combined with the acquirer, would be primarily supported by contributions and returns on investments, the amount that would be typically recognized as goodwill is to be written off against earnings at the date of acquisition.
Statement 164 also identifies specific disclosure requirements for each type of transaction. Visit www.fasb.org > Standards tab > Standards Issued in 2009 for further details on these disclosure requirements and FASB 164.
IRS Sends Erroneous Request for Form 990
In late September, many nonprofit organizations received a notice from the IRS telling them that their Form 990 for the year ending June 30, 2009 had not yet been received and was now considered delinquent. The only problem is that Form 990s for the year ending June 30, 2009 are not due until November 15, 2009.
A firm representative contacted the IRS via the hotline and learned that the notices were sent out in error. No response is required to resolve the matter, and the IRS is in the process of clearing the notices from its system (Notice Number CP259A).
It remains unclear if the distribution of the erroneous notice was widespread, but several firm clients in Montana and Wyoming reported receiving it.
With unemployment nearing double digits, there’s a large population of professionals in the marketplace. The recession has also had a negative impact on donations to not-for-profit organizations. Encouraging unemployed professionals to volunteer for your organization could be a “win/win” arrangement. Volunteers get to keep their skills up to date while seeking employment, and your organization gets services you’d normally have to pay for; what could be better than that? There are, however, some things you need to keep in mind.
If your organization has any professionals donating services you would normally pay for, you should be recording that time as an “in-kind” contribution. Financial statement accounting standards state if donated services that (a) create or enhance nonfinancial assets or (b) require specialized skills are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, the organization should record them.
These donated services are not income for tax reporting, so the value of these services is not an expense. However, the revised Form 990 requires your organization to report the number of individuals who volunteered during the year.
How do you record these services? Like most donated items, you should record them at their fair market value or, in other words, the price you would have paid had you actually contracted the services. How you actually record such services depends on the nature of the services.
If the services provided by the volunteer are current expenses, such as accounting, legal, or consulting, the entry would be as follows:
Account Name |
Debit |
Credit |
| In-Kind Service Expense | $1,000 |
|
| In-Kind Service Revenue | $1,000 |
As you can see, this entry hits both your expense and your income in equal amounts, so there isn’t an “equity or net asset” affect. However, if you were to receive donated construction management services (capitalized as a component of construction costs), here’s how you would record them:
Account Name |
Debit |
Credit |
| Construction in Progress | $1,000 |
|
| In-Kind Service Revenue | $1,000 |
This type of donation affects “non-financial assets” and is capitalized/recorded on the statement of financial position, ultimately increasing net assets.
If your organization is fortunate enough to have professionals volunteering their services, don't forget to record the in-kind services as contribution revenue on your financial statements.
Gearing Up for Year-End Compensation Reporting
We’d like to remind you of some of the year-end procedures that your organization should consider now that we’re in the final months of the calendar year. Some of these issues may not be directly relevant to your organization for the current year, but they should be reviewed to determine their usefulness to your organization’s needs. These year-end procedures apply to governmental agencies and not-for-profits, as well as for-profit businesses.
Let’s first consider whether or not your organization is required to process W-2s. If your organization has any employees, you will be required to process W-2s. W-2s include information on employee wages for the calendar year and amounts withheld from those wages, as well as information on qualified benefit plans, tip income, and other deductions from wages. Now is the time to make sure all employee information is up to date. Also, be sure you have the correct mailing address for each employee and the employee’s Social Security number.
For the 2009 calendar year, all employees must receive their copies of Form W-2 (copies B, C and 2) by February 1, 2010. You must also send Copy A and Form W-3 to the Social Security Administration by March 1, 2010. Form W-3 is a transmittal form sent to the Social Security Administration that shows total earnings, Social Security wages, Medicare wages and withholding for all employees for the calendar year. Send copy 1 of this form to your state’s department of revenue by March 1, 2010 and keep copy D for your records. For more information, see IRS Publication 15 (Circular E).
You must also file Form 940 annually. Form 940 shows the total amount of Federal Unemployment Tax for the year and must be mailed to the IRS by February 1, 2010. For more information, see IRS Publication 15 (Circular E).
Another issue to consider is IRS Form 1099-MISC for vendors you paid in 2009. An organization is required to file Form 1099-MISC to report payments of $600 or more to persons not treated as employees (such as independent contractors) for services performed for your organization. As you start now to review your list of vendors to see who should receive Form 1099-MISC, make sure you have the vendor’s mailing address, Social Security number for individuals, and employer identification number (EIN) for partnerships and LLCs. Recipients must receive their copy of Form 1099-MISC by February 1, 2010. Form 1099-MISC and Form 1096 must be mailed to the IRS by March 1, 2010. Form 1096 is a transmittal form sent to the IRS totaling all of the Form 1099-MISC amounts sent out to vendors. See IRS General Instructions for 1099s for more information.
Other required federal employment forms include Form 941 for quarterly filers and Forms 943 and 944 if you qualify as an annual filer. Forms 941, 943 and 944 recap Social Security taxes and Medicare taxes paid by employees and employers as well as the federal withholding for the quarter/year.
Below is a table showing due dates for the forms discussed above.
To Balance or Not to Balance . . .
As we’re now in the fourth quarter of 2009, many of you whose organizations have calendar year-ends are probably well into your budgeting process for 2010.
One common misconception is that revenues must equal expenses on your budget. This is simply not true. You can choose to budget for a surplus or a deficit; non-profits aren’t required to end each year at a break-even status. When possible, it’s always better to end the year with some excess cash to give your organization a jump-start on the next year. However, many organizations feel they must always budget for revenues to equal expenses to show fiduciary responsibility over donor’s contributions. Many organizations don’t want donors to feel they’re hoarding donations and failing to spend them to further the organization’s purposes. Please remember that the only requirement for non-profits is that they keep any surplus year-end cash within the organization to continue its mission.
The other option for non-profits is to budget for a deficit at the end of the year. Given our current economic climate, this may be a reality for more organizations this year. With the economy just starting on its path to recovery, it may not be realistic to balance your budget in 2010. If you need to budget for a deficit in the coming year, the Board of Directors and Finance Committee should be involved in this decision from the beginning and understand why you’re taking that course. Budgeting a deficit can have a significant impact on the future of your organization and should not be done lightly. Hopefully, this is a rare occurrence that will not happen again in 2011.
Budgets are tools for planning financial performance and evaluating results. They also give your staff a road map to follow during the year so that Board approval doesn’t have to be obtained for every single expenditure. Budgets need to be realistic and achievable. A realistic budget will define success for your organization and give you a tool to measure that success.
As a leader, you’re acutely aware of the increased government and public scrutiny of your organization. New reporting requirements exist for nearly every aspect of what your organization does. Form 990, the tax return used by entities exempt from income tax, has been revised and expanded and now requires information not only on your financial status, but also on how your organization is governed. The Internal Revenue Service has made it clear that boards of directors are responsible for safeguarding the assets and protecting the tax exempt status of their organizations. As part of this new direction, the IRS expects each organization’s board of directors to review the Form 990 before it’s filed.
Over the past year, this e-newsletter has included articles on board member responsibilities, governance disclosures on the Form 990, expenditures for lobbying, and other issues that affect tax exempt organizations. A number of readers have printed articles and then given them to board members to explain important new procedures or reporting requirements.
Why not ask your board members if they would like to receive this monthly e-newsletter? We’d suggest that for your next board meeting you print off a copy of the newsletter and send it around with a signup sheet. The more your board knows about new reporting requirements and other key issues, the easier your job will be.
Funding from non-profit organization supporters comes in more than one form. To properly record this revenue in the financial statements, non-profits need to look at the contract, letter, or language used by the donor/grantor and decide if the money received is a contribution/donation or a grant. This can be difficult to determine in certain situations. The following is a brief summary of the guidance the “Not-for-Profit Entities AICPA Audit and Accounting Guide” offers on how to distinguish between these two funding sources and how to record the revenue in your organization’s financial statements.
Contribution/Donation Accounting
Grant Accounting
Attachments to 990 Returns.
By Iris Owen
The federal Form 990 was redesigned, in part, to promote uniformity in reporting and to help ensure nonprofit organizations comply with applicable tax laws. The new Form 990 includes a core form and 16 additional schedules.
Schedule O is a blank schedule created to provide structured space to report supplemental information required for responses to specific Form 990 questions. It should not be used to provide the information required in the following four categories. For the 2008 tax year, attachments to the core form and schedules are allowed in these four categories.
Name Changes
If an organization changes the name shown on the organizing document (as reported in Item B in the heading of page 1 on the core Form 990), then the following documents must be attached, depending on the type of organization:
Affiliated Organizations
If an organization has an affiliated organization or organizations as reported in Item H(a) and has not included those affiliates as reported in Item H(b) (located in the heading of page 1 on the core Form 990), then the organization must include an attachment with the following documentation:
Terminations, Liquidations, Dissolutions and Mergers
If an organization liquidates, terminates, merges, or dissolves operations as reported in Part IV, line 31 of the core Form 990, then the organization is required to complete and include Part I of Schedule N. In addition, the organization must include an attachment with the following supporting documents, as applicable:
Delinquent Returns
If an organization has not filed the Form 990 tax return by the due date (including any extensions granted), it is required to attach a reasonable cause explanation instead of including this information in Schedule O. Be aware that including a reasonable cause explanation as a separate attachment is contrary to the 2008 Form 990 Schedule O instructions, which were superseded due to issues of public inspection. Schedule O is open to public inspection, while the four categories of outlined attachments to Form 990 are not.
All attachments must be provided separately by attaching a PDF file or photocopies on the same size paper as the Form 990. The Internal Revenue Service will reject any electronically filed Form 990 that includes unstructured attachments not outlined in the previous four categories.
During this holiday season more than ever, we want to thank our clients, the people who have made our progress possible. And in this spirit we say simply but sincerely, thank you and best wishes for the holiday season and a happy new year.
Wishing you the joy of family and the happiness of friends.
New IRS Check Sheet for Not-for-Profit Exams
In December, the IRS published the Governance Check Sheet and a guide sheet on how to use the check sheet when agents are examining not-for-profit organizations. This check sheet covers specific areas of not-for-profit compliance, including governing body and management, compensation, organizational control, conflict of interest, financial oversight and document retention. These are all areas addressed in the Form 990 filed by not-for-profit organizations. The Governance Check Sheet can be viewed and downloaded at www.irs.gov.
The guide sheet for completing the Governance Check Sheet can be viewed and downloaded at www.irs.gov.
We recommend you review this new IRS exam document and see how your organization would answer the questions. This document points to the areas the IRS is focusing on when examining not-for-profits.
Implementing Internal Controls in a Changing Economy
In response to the recession, many economic reform bills have been signed into law over the past two years. The most recent, the American Recovery and Reinvestment Act of 2009 (ARRA), was designed to stimulate the economy in the wake of the downturn. As federal relief flows in and Americans continue to feel the impact of the recession, the potential for unapproved spending and fraud is high.
Risks often exist due to weak or nonexistent controls. Organizations can address these risks by implementing effective internal controls. These controls are reviewed by auditors during Yellowbook audits (required for those organizations that receive $500,000 or more in federal funds) and performance audits. These audits help managers understand how well their internal controls are operating.
Auditors only review information from events that have already occurred. It’s management’s responsibility to set the tone for the organization by designing and implementing adequate controls for daily activities. This starts with a risk assessment. Management should conduct an assessment to identify operations that are susceptible to fraud. This step is crucial; if management doesn’t know a problem exists, it’s impossible to fix the problem. Once the risk assessment is complete, management should design and implement appropriate controls. By including effective internal controls that monitor and review the organization’s activities, management ensures that the risk assessment process is ongoing.
Staff should also play an active role in designing, implementing, and monitoring internal controls. They are often more aware of how these controls can be applied in daily activities than management is. Managers should foster a culture that encourages staff to submit concerns and recommendations. Staff members should be recognized for the part they play in strengthening the effectiveness of internal controls.
The auditor’s role is to review the controls implemented and monitored by management and ensure they’re operating with maximum effectiveness. Managers should continually strive to improve the organization’s internal controls. If the external auditor does not spot any weaknesses or issue any findings, if staff members actively participate in the risk assessment process as well as the design and implementation of controls, and if the risk assessment process is an ongoing activity, managers can rightfully be proud of the control environment they have created.
Managers may want to seek advice from the organization’s external auditor regarding ongoing risk management efforts. This advice, combined with the actions outlined above, will decrease the risk of fraud or unapproved spending during these challenging economic times.
The economy is struggling, and non-profits across the nation are feeling the pressure. Income is down. Budgets are tight.
Hardly headline news, right? But did you know your organization has a greater risk of insider theft than a for-profit business? A 2009 study conducted by the Association of Certified Fraud Examiners indicated a 50% expected increase in insider fraud cases due to current economic conditions. During hard times, financial pressures create incentives for theft within organizations. Small organizations are especially vulnerable, as they often lack the internal checks and balances to prevent fraud from occurring. Frequently run by volunteers, small organizations often rely on trust rather than on a properly structured system of internal controls.
Larger non-profits could also be at increased risk in today’s economic environment. Budget cuts and layoffs can result in weakened internal controls and short-circuited processes.
Most non-profits rely heavily on donations, an unpredictable revenue source. A fraud-driven downturn in recorded donations may erroneously be viewed as the product of our current economic conditions, with theft—the real cause—not even considered as an explanation for the decrease.
Donors want to know that their charitable contributions will be used to fund important programs and that the charity’s funds are being protected from theft. All non-profits need to be aware of the risk of fraud and should perform an internal risk analysis. Begin the conversation at your organization today.
A recent article posted on msnbc.com highlights this issue with timely examples. Check it out at www.msnbc.msn.com.
Helpful IRS Website for Government Entities
The IRS website has a section specifically for government entities. This section provides tax information for federal, state, and local governments, as well as Indian tribal governments. The link for federal, state, and local government entities has additional links to information on independent contractors, payroll returns, COBRA subsidiaries, and other tax information applicable to government entities. Here’s a link for this section:
http://www.irs.gov/govt/fslg/index.html
The tax exempt bond community also has a link on the IRS website, offering a wealth of information on the specialized reporting required for various types of tax exempt bonds. Below is the link for this information.
http://www.irs.gov/taxexemptbond/index.html
These web pages are frequently updated and provide valuable information to government entities.
Ten Steps to a More Effective and Less Stressful Audit
By Andrea Struznik and Heather Ryan
Even though the audit process interrupts your normal work flow and requires you to focus on transactions that occurred months earlier (while still juggling current transactions), your annual audit has many positive aspects. What can you do to accelerate the audit process and make it as painless as possible? The following ten steps will help produce a less stressful and more effective audit:
The success of any audit relies heavily on the ability of management and the auditor to work together.
The 2010 dollar limits for elective deferrals, employer contributions, and Individual Retirement Accounts (IRAs) are unchanged from 2009.
Elective deferrals to 401(k), 403(b), and 457 plans are limited to $16,500. SIMPLE IRA and SIMPLE 401(k) deferrals cannot exceed $11,500. Catch-up contributions for 401(k), 403(b), and 457 plans remain limited to $5,500. Catch-up contributions to a SIMPLE IRA or a SIMPLE 401(k) can’t be greater than $2,500.
2010 IRA and Roth IRA maximum contributions are $5,000. The catch-up contribution for the IRA and Roth IRA is limited to $1,000. This contribution is the additional amount participants age 50 or older can contribute to their plans or IRAs.
To review all of the retirement plan limits for 2010 and prior years, go to http://www.irs.gov/retirement/article/0,,id=96461,00.html.
How does a non-profit organization distinguish between a taxable unrelated business activity and nontaxable related activities? Does it matter if the organization has unrelated business income?
Most non-profit organizations are engaged in active business endeavors. These activities generally are required to accomplish the organization’s mission. Profits generated from activities to carry out the organization’s tax exempt mission are not taxable. Sometimes, however, it’s difficult to draw the line between activities related to the organization’s tax exempt mission and unrelated activities.
Example 1: Go Anywhere, an organization whose mission is to encourage healthy outdoor youth activities, publishes a monthly newsletter, which it sends to its members. The newsletter contains up-to-date information on local outdoor events, as well as health tips. Members receive the newsletter as part of their annual dues. The newsletter is not for sale to nonmembers. The profit from membership dues associated with the newsletter is related activity income and not taxable.
Example 2: Local retailers pay Go Anywhere for advertising in the newsletter. The purpose of the advertising is to sell sports equipment and health products. The advertising sales income is taxable to Go Anywhere as unrelated business income.
A non-profit organization is allowed to engage in unrelated business activities and pay taxes on the profits. If the unrelated business income is an insubstantial portion of the organization’s income and activities, the activity will not jeopardize the non-profit’s tax exempt status. However, if an organization’s resources and income from unrelated activities are substantial, the non-profit may be at risk of losing its tax exempt status. Non-profit organizations with more than $1,000 in gross receipts from unrelated business activities are required to file Form 990T.
The Internal Revenue Service has complex rules on what is unrelated business income and what is not. If you would like more information on these rules, experts in our office can assist you.
By Iris Owen
Board members often incur travel expenses driving privately owned vehicles while they conduct business on behalf of exempt organizations. While tax law does not clearly address whether board members are eligible for mileage reimbursement at the charitable standard rate or at the business standard rate, the IRS has provided some guidance on this matter through two Associate Chief Counsel letters. These letters provide three possible methods of reimbursing volunteers.
The first letter, issued June 30, 2000, allows exempt organizations to reimburse volunteer vehicle mileage using either the standard charitable mileage rate or actual substantiated costs of oil and gasoline (not repairs, depreciation, or insurance). Because of the complexity of reimbursing a volunteer’s actual vehicle expenses, most exempt organizations prefer the simplicity of using a standard mileage rate. The second letter, issued September 30, 2000, provides a third reimbursement method. This method allows use of the business standard mileage rate to reimburse bona fide volunteers under Reg. §1.132-5(r)(1).
Regardless of the method used, it’s imperative that the exempt organization adequately document the reimbursement according to an accountable plan. The key requirements for an accountable plan are that the board member a) is conducting business on behalf of the exempt organization, and b) that he/she properly substantiates the time, the purpose of the trip in relation to the exempt organization, and the number of miles driven for each trip. When an organization properly follows an accountable plan, board members can be reimbursed at the business standard mileage rate.
Reimbursements to volunteer board members for out-of-pocket travel expenses incurred on behalf of the exempt organization and following an accountable plan are not considered compensation and are therefore not included in the board member’s gross income.On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (HIRE), a $17 billion jobs package that includes temporary tax incentives to encourage employers to hire new workers. So how does this act affect you as a tax-exempt organization?
Payroll tax exemptions comprise a large portion of the tax incentives included in the act. HIRE allows non-profit organizations to keep the 6.2% federal payroll tax on certain new hires, thereby reducing the cost of hiring new employees. All 501(c) non-profit organizations are eligible for this tax exemption. The exemption applies to employees hired after February 3, 2010 and can be claimed from March 19 through December 31, 2010.
To be eligible for the exemption, new employees must sign IRS Form W-11, the Hiring Incentives to Restore Employment Act Employee Affidavit, certifying they have not worked more than 40 hours in the previous 60 days. A new hire cannot replace an existing employee; you can, however, fill vacancies for individuals who left voluntarily or for cause. It is also permissible to rehire a laid-off employee who otherwise qualifies as an eligible employee. The new hire cannot be related to the fiduciary of the organization, and the work the employee is hired to perform must further the organization’s tax-exempt purpose.
Non-profit organizations can claim the payroll tax exemption on their quarterly Form 941. The exemption applies to the employer’s 6.2% share of social security tax on all wages paid to qualified employees. The employee’s 6.2% share of social security tax and both the employer’s and employee’s share of Medicare taxes still apply to all wages.
The Form W-11 and updated Form 941 are available on the IRS website at www.irs.gov.
By Heather Ryan
Small offices face unique challenges. One of those challenges is safeguarding assets. Large offices typically have the resources to install sophisticated internal controls. Small non-profits often operate on shoe-string budgets, with internal controls being the least of their worries. Internal controls, however, are not a luxury; they’re a necessity for every organization.
Designing effective, practical internal controls can be difficult in small offices. Internal control systems should always be custom-built to respond to each office’s particular circumstances. Most non-profit organizations have an easily overlooked “ace in the hole” when it comes to internal controls: members of their board of directors. Board members are often able to provide the extra help necessary to adequately segregate duties in vital areas.
The most important asset to safeguard is cash, the asset that’s most easily stolen. Internal controls over cash should focus on three areas: cash received, cash disbursed, and cash reconciliation.
Cash Received
If a non-profit receives significant donations through the mail, controls need to be in place to ensure the cash is properly deposited in the organization’s bank account. A good internal control system for cash receipts requires three people: a receptionist, a bookkeeper, and an executive director. The receptionist opens all mail except the monthly bank statement. He or she gathers the donations and totals them on a spreadsheet. The donated funds are given to the bookkeeper, and the spreadsheet goes to the executive director. The bookkeeper prepares the deposit slip, records the deposit in the general ledger, and takes the deposit to the bank. The executive director periodically checks the spreadsheet against the amount deposited by the bookkeeper.
Cash Disbursed
Controlling the outflow of cash is very important. Again, an effective internal control system requires three people. In the case of cash disbursements, it’s the bookkeeper, the executive director, and the treasurer of the board of directors.
It’s imperative that the bookkeeper never be authorized to sign checks. The bookkeeper prepares the checks and gives them to the executive director, along with the supporting documentation (invoices, etc.). The executive director then reviews the documentation and signs the checks that fall below a pre-determined threshold. The dollar amount of that threshold should be set to catch unusual checks that wouldn’t normally be written as part of the day-to-day operations of the office. Expenditures above the threshold should require the signatures of both the treasurer and executive director. If the executive director is unavailable (out of town, on vacation, etc.), the treasurer should be authorized to review supporting documentation and sign checks that fall below the threshold for dual signatures. Most importantly, a person with the authority to write checks should never sign blank ones!
Cash Reconciliation
Bank accounts should be fully reconciled every month. Ideally, the bookkeeper should not be the one to do this. Here are some scenarios for accomplishing this important task.
The receptionist provides the treasurer of the board with an unopened monthly bank statement. The treasurer reconciles the account and provides the bookkeeper with any necessary adjusting entries. If this approach isn’t feasible, the receptionist should give the monthly bank statement directly to the executive director. The executive director opens the bank statement and performs the reconciliation. If, however, this method is also impractical, the executive director should review the checks for reasonableness and give the statement to the bookkeeper for reconciliation.
The Key
Segregation of duties is the most important aspect of internal control. The key to segregating duties in a small office is to use non-accounting personnel (including board members) to perform smaller portions of the larger task.
As a non-profit organization, do you struggle to manage your volunteers effectively? Once you select the right volunteer, is it difficult to retain him or her? Are you learning from your volunteers? The NonProfit Times website offers a number of suggestions on volunteer management. Here are some that may be useful for your organization.
Questions to Ask Your Next Volunteer Candidate
Training
For volunteers to be successful, certain things must be in place. Clear expectations should be set. Help your volunteers understand the big picture goals, not just the tasks assigned to them. Train volunteers at times that are convenient for them. Treat your volunteers with respect and never ask them to participate in unethical or illegal behavior. Make sure they have all the information they need to complete their tasks effectively.
Motivation
Like anyone else, volunteers need to be properly motivated. That motivation may be external or internal. Those who are internally motivated will likely give greater effort and devote more creativity to their tasks than those whose motivation is external. Joseph Albert, Ph.D., of Gonzaga University has suggested the following ways to increase internal motivation:
Choice: Give volunteers the authority to make decisions. Trust their judgment, and don’t blame them for mistakes.
Competence: Build competence by modeling, providing growth opportunities, and giving feedback.
Meaningfulness: Volunteers need to understand the organization’s overall goal or mission. Give them tasks that produce a sense of pride or accomplishment.
Progress: Share customer feedback, recognize benchmarks, and celebrate milestones.
Feedback
Get feedback from your volunteers. Consider holding exit conferences to learn why they decide to stay or leave. Feedback from your volunteers can help you see what needs to be changed for the future.
For other helpful hints and articles on volunteer management, visit: http://www.nptimes.com/howtos/volunteer.html.
Mike would like to raise funds to provide Christmas presents to children in the local hospital. His town has been hit hard by the recession and he feels this year will be especially hard on these children. This is a one-time project. Mike realizes most individuals and businesses will not contribute to his project if the contributions are not tax deductible.
Your organization, Friends of Families, is tax exempt under section 501(c)(3) and contributions by donors are deductible on their tax returns. Providing assistance to families in need is part of your tax exempt mission. Mike has suggested contributions for his project are donated to your organization and would qualify for tax deductions. What do you tell Mike?
This is common scenario for many tax exempt organizations. Mike is asking Friends of Families to become a fiscal sponsor. As a fiscal sponsor your organization will be responsible for the funds received and the disbursement of those funds. The project must be consistent with your tax exempt mission. The funds and disbursements will be reported on your annual Form 990. There are pros and cons to being a fiscal sponsor and the Board should carefully review the arrangement before agreeing to it.
We will address the different types of fiscal sponsorship arrangements in greater depth at a later date. If you have questions on fiscal sponsorships, please contact us.
The last issue of the Public Perspectives E-news had an article that discussed new payroll tax breaks for businesses that hire unemployed workers. These tax breaks were contained in the HIRE Act signed into law last March by President Obama. Another important piece of the HIRE Act often overlooked is the expansion of the Build American Bonds program.
Build American Bonds (BAB) was initially created in the Economic Recovery and Reinvestment Act. The legislation created two types of BABs. The first type of BAB provides a federal subsidy to investors equal to 35% of the interest payable by the issuer. The second type of BAB provides a direct federal subsidy that will be paid to state and local governments in an amount equal to 35% of the interest. Both types of bonds must be issued before January 1, 2011.
The BAB program has been largely successful. According to an article by CNN, as of November 2009, the program has issued over $50 billion in BABs. The article went on to explain that the legislation has lowered borrowing costs for states and other local governments. The bonds have also renewed and expanded investor interest in the municipal-bond sector.
Building on this success, the recently signed HIRE Act contains provisions expanding this program. The HIRE Act pays federal subsidies for the following types of municipal bonds:
Federal subsidies range from 70% to 100% of a state or municipalities' interest expense on these types of bonds. Generally CREBs and QECBs are limited to the lesser interest payable on the bond or 70% of the amount of interest which would have been payable on the bond on such date if the interest were at the applicable credit rate determined under Section 54A(b)(3) of the Act. The credit for QZABs and QSCBs will be the lesser of the amount of interest payable on the bond or the amount of interest which would have been payable on the bond on such date if the interest were at the applicable credit rate also under Section 54A(b)(3) of the act.
The HIRE Act expanded BABs to accelerate spending by state and local governments. Municipalities that were debating if they should build a new school or wait a few more years are likely to issue bonds and start construction rather than delaying an eligible project. If you are a part of a government body that is in a similar position, taking advantage of BABs could save your treasury considerable borrowing costs.
Past issues of our e-newsletter have featured a number of articles on fraud. We’re addressing it again in this issue because fraud has become a very real and significant concern for our non-profit and government clients.
The Association of Certified Fraud Examiners recently released its 2010 Report to the Nations on Occupational Fraud and Abuse. In this report they note that the typical organization loses 5% of its annual revenues to occupational fraud and abuse.
Think it couldn’t happen in your organization?
According to the study, small organizations are disproportionately victimized by occupational fraud. The increase in fraud in small entities is due to a lack of internal controls. According to the study, the most commonly victimized are the banking/financial services, manufacturing, and government/public administration sectors.
Occupational fraud is defined as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. The most obvious case of occupational fraud is misappropriation of assets, such as theft of cash or equipment. What many don’t realize is that fraud may be occurring in more subtle ways, such as employees manipulating timesheets, using the organization’s funds to upgrade air travel or rental cars, or paying personal expenses through the entity’s accounts payable process.
In today’s economy, many non-profits and governments are faced with declining revenues and tight budgets. Losing 5% of revenues to occupational fraud or abuse can have a significant impact on an organization’s ability to fulfill its mission. The most effective and efficient ways to prevent fraud are to a) implement internal controls designed to ensure proper segregation of duties and b) be aware that fraud can be perpetrated by anyone in the organization. If you have any questions about internal controls and how to implement them, please contact us.
The 2010 Report to the Nations on Occupational Fraud and Abuse can be found at http://www.acfe.com/rttn/2010-rttn.asp.
Recent changes in the regulation of non-profit organizations have led to increased responsibilities for those who serve as board members. It’s especially important for new board members to be aware of these responsibilities.
Board members are responsible for overall governance; therefore, they need a sound understanding of the non-profit organization. Recruiting board members who have the knowledge and expertise to help your organization can be a difficult and daunting task. Once you have recruited a new board member, you should ask, “What information does a new person need to serve effectively on our board of directors?” In the following paragraphs, we’ll discuss several key items that should be given to each board member.
Every new board member should receive a copy of the policies and procedures that govern how the board operates. These documents will help the new board member understand the different roles of the board, what the board is authorized to do (or not do), and how meetings are conducted. New board members should also receive a copy of the policies and procedures manual that is given to new employees. This will help board members gain a broader understanding of how the non-profit functions on a daily basis. To be truly effective, board members need to understand how the organization operates both at the board level and in day-to-day activities.
All board members should receive a copy of the organization’s mission and vision statements. These documents describe the organization’s purposes and how it plans to achieve those purposes. New board members should also receive a copy of the organization’s conflict of interest and whistleblower policies. These policies will help the new board member recognize and deal appropriately with a conflict of interest as well as understand the process that will be followed should an employee exercise his/her rights under the organization’s whistleblower policy.
Many non-profit organizations have already adopted the policies and procedures described above as a result of the new reporting requirements established by the Internal Revenue Service. As you prepare a packet of information for a new board member, be sure to include any other items you believe will help that person become a positive, contributing member of your board. The more information you can give new board members about the operation and governance of your organization, the more likely they’ll meet their new responsibilities. If you have any questions regarding new board member information or board governance, please contact any of our offices.
The revised and expanded 2008 version of Form 990 included an 11-page core form, checklists, disclosures, and many new questions on governance and management. The 2009 version has a 12-page core form and some additional questions. It also offers additional clarification on reporting issues. This article will address a few of the changes and explanations in the new Form 990.
There are many other additions and changes in the 2009 version of Form 990. To view a complete list, go to http://www.irs.gov/charities/article/0,,id=218938,00.html. If you have any questions on these changes and how they might affect your 2009 Form 990 reporting, please contact us.
The recent recession has created revenue shortfalls for state and local governments across the nation (see the May 2009 Public Perspectives E-newsletter article, "Feeling the Squeeze, Local Government in a Poor Economy"). The prolonged length and depth of the recession is requiring auditors to take a closer look at the "going concern" capability of government entities. "Going concern" refers to an entity’s ability to continue functioning for at least one year beyond the date of the financial statements. Ghnay discusses going concern in "Measuring Financial Stress on State and Local Governments" in the October 2009 issue of The CPA Journal. GASB exposure draft 03D) requires auditors to disclose any factors that could impact a government entity’s ability to continue as a going concern. SAS 59 requires auditors to perform the following steps:
To assist auditors as they perform these steps, GASB contains indicators of substantial doubt about a governmental entity’s ability to continue as a going concern. These include the following:
The revenue climate for state and local governments has caused auditors to question the going concern capability of government entities more often. It’s important for managers of these entities to understand the process and issues auditors consider when they examine the ability of an entity to continue as a going concern.