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An introduction to Board members to understand accounting concepts that are unique to nonprofit organizations so that they can better exercise their fiduciary responsibilities.
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Nonprofit Finances: Its Mysteries Revealed
A Primer for Board Members
Alfonso Perillo
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Nonprofit Finances: Its Mysteries Revealed
A primer for Board Members
Alfonso Perillo, CPA, CFE
Partner, Nonprofit Division
Edelstein & Company LLP
Board Oversight is Critical
The nonprofit is responsible for its internal
controls
The outside accountant’s responsibility is
limited to ensuring that the financial
statements are fairly stated
There is no substitute for good governance
© Edelstein & Company LLP,
Boston, Massachusetts
Typical Financial Documents
Received by Board Member
Audited financial statements
Budgets
Budget–to-actual reports
Form 990
© Edelstein & Company LLP,
Boston, Massachusetts
Numbers Are Important and They Tell a
Story
Numbers can be manipulated
Watch for discrepancies
Budget to actual – accrual and cash
Compare reports (audited financial statements
to internally prepared statements)
Are answers to questions asked plausible?
Have the auditors present to the board or a
subgroup of the board (audit or finance
committee)
© Edelstein & Company LLP,
Boston, Massachusetts
The Balance Sheet (Statement
of Financial Position)Assets =
Liabilities +
Net Assets (Equity)
Asset = provides a future benefit
Liability = represents a future obligation
Net assets = cumulative earnings
© Edelstein & Company LLP,
Boston, Massachusetts
The Financial Statements
Statement of financial position: Represents the organization’s assets and liabilities at a point in time. Usually at the end of the nonprofit’s year end, but can be quarterly or monthly
Statement of Activities: Represents financial activity for a period. Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this
can be presented on a quarterly or monthly basis.
Inflows are revenues, outflows are expenses
Changes in net assets (net income) represent the difference between revenues and expenses.
Statement of Cash Flows: Represents cash inflows and outflows for a period. Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this
can be presented on a quarterly or monthly basis.
© Edelstein & Company LLP,
Boston, Massachusetts
Accrual v. Cash Basis of
AccountingCash
Revenue recorded when received
Expense recorded when paid
Not GAAP
Accrual
Revenue recorded when earned and is realized or realizable
Expense recorded when the obligation is incurred and in the same period in which related revenue is recognized (matching principle)
GAAP
© Edelstein & Company LLP,
Boston, Massachusetts
Strange Timing Differences
Accrued revenue: before cash is received [Accounts receivable; pledges receivable; grants receivable]
Accrued expenses: before cash is paid
Deferred revenue: cash is received before earnings process is complete [Deferred tuition, advances]
Deferred expense: cash is paid before the obligation is incurred [Prepaid expenses,]
© Edelstein & Company LLP,
Boston, Massachusetts
Funky Things You Need to Know
About Nonprofit Accounting
2010 2011 Revenue or Expense Recorded
in:
Accounts receivable; pledges receivable; grants payable
Service provided or commitment from donor
Cash received 2010
Accrued expenses; accounts payable
Service provided by vendor; obligation incurred
Cash paid 2010
Deferred revenue; deferred tuition
Cash received before the earnings process is complete; before the term starts
Service provided by the nonprofit
2011
Prepaid expenses (deferred expenses)
Payment made for future year expense
Service received by the vendor
2011
© Edelstein & Company LLP,
Boston, Massachusetts
Funky Things You Need to Know
About Nonprofit Accounting
Contributions are recorded when a promise to
make a donation is made by a donor
In-kind gifts of specialized services are recorded
in the period the service is received
Gifts can be for restricted purposes
Natural versus functional classification
© Edelstein & Company LLP,
Boston, Massachusetts
Statement of Financial Position:
ExampleGOOD WORKS, Inc.
Statement of Financial Position
December 31, 2010
Assets
Cash $ 120,775
Unconditional promises to give 25,000
Prepaid expenses 3,600
Furniture and equipment 3,225
Security deposit 1,500
Total assets 154,100
Liabilities and net assets
Liabilities
Accounts payable 7,500
Accrued expenses and other liabilities 5,800
13,300
Net assets:
Unrestricted 40,800
Temporarily restricted 95,000
Permanently restricted 5,000
Total net assets 140,800
Total liabilities and net assets $ 154,100
© Edelstein & Company LLP,
Boston, Massachusetts
Statement of Activities: An ExampleGOOD WORKS, Inc.
Statement of Activities
For the Year Ended December 31, 2010
Temporarily Permanently
Unrestricted Restricted Restricted Total
Support and revenue:
Contributions $ 200,000 $ 150,000 $ 5,000 $ 355,000
Program service 50,000 - - 50,000
In-kind contributions 12,000 - 12,000
Membership dues 13,500 - - 13,500
Interest income 1,300 - - 1,300
Net assets released from restrictions 95,000 (95,000) - -
Total support and revenue 371,800 55,000 5,000 431,800
Expenses:
Program services:
Education services 240,000 - - 240,000
Support services 79,000 - - 79,000
Advocacy 66,000 - - 66,000
Total program services 385,000 - - 385,000
Management and general 39,000 - - 39,000
Fundraising 50,000 - - 50,000
Total expenses 474,000 - - 474,000
Change in net assets (102,200) 55,000 5,000 (42,200)
Net assets - beginning of year 143,000 40,000 - 183,000
Net assets - end of year $ 40,800 $ 95,000 $ 5,000 $ 140,800
© Edelstein & Company LLP,
Boston, Massachusetts
Quick RatioCash + Unconditional promises (accounts receivable) /
Current liabilities
Cash 120,775
Unconditional promises to give 25,000
145,775
Accounts payable 7,500
Accrued expenses and other liabilities 5,800
13,300
145,775
Divided by
13,300
Equals
11 :1
© Edelstein & Company LLP,
Boston, Massachusetts
Months of Cash Reserves
Cash / Average Monthly Expenses
Total expenses 474,000
Less: in-kind (12,000)
462,000
Divide by 12
Average monthly expenses 38,500
Cash 120,775
Cash divided by average monthly expenses 3:1
© Edelstein & Company LLP,
Boston, Massachusetts
Efficiency Ratio
Program expenses / Total expenses
Program services 385,000
Divided by
Total expenses 474,000
81%
© Edelstein & Company LLP,
Boston, Massachusetts
Being Properly Registered To
Fundraise
Certificate of Solicitation
Gaming Activities
Raffles
Gaming and Bingo
Poker Tournaments
© Edelstein & Company LLP,
Boston, Massachusetts
Watch the Language You Use to
Solicit Funds
Don’t inadvertently create a restriction by
the language used
It is hard enough getting unrestricted
support
Language like “Funds raised will be used
to support Good Works Inc.’s programs”
can create a restriction
© Edelstein & Company LLP,
Boston, Massachusetts
Internal Controls
Tone at the
Top
Internal Control Policies
and Procedures
Policies and Procedures
are Followed
Nonprofit Achieves
Its Mission
The process by which information and authority flows across an organization so that it can
accomplish its goals
© Edelstein & Company LLP,
Boston, Massachusetts
Segregation of Duties
There is a wall between the receiving of asset function and the task of
recording the transaction in the accounting system
Those having responsibility for handling assets are not responsible for
recording the assets in the accounting system
© Edelstein & Company LLP,
Boston, Massachusetts
Fraud is Concealed
Most common fraud schemes
Fictitious vendor: a billing scheme
Check tampering: process of altering checks
Skimming: taking money before it is recorded
The myth of the trusted employee
Source: Association of Certified Fraud Examiners, 2010 Report to the Nations on Occupational Fraud and Abuse
© Edelstein & Company LLP,
Boston, Massachusetts
The Fraud Triangle
RATIONALIZATION
OPPORTUNITY
PRESSURE
© Edelstein & Company LLP,
Boston, Massachusetts
Simple Fraud Prevention
Techniques
The appearance of oversight is a deterrent
Other simple techniques Someone independent of the accounting process (like
the treasurer) receives duplicate copies of the bank
statements
Limit access to the accounting software by providing
read only rights
Have two check signers for checks deposited over a
certain amount
© Edelstein & Company LLP,
Boston, Massachusetts
Contact Information
Alfonso Perillo, CPA, CFE
aperillo@edelsteincpa.com
© Edelstein & Company LLP,
Boston, Massachusetts
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