Welcome to the Board!

(and did we mention your Fiduciary Responsibility?)

Fiduciary Responsibility and Financial Reporting

An Overview

Topics for our discussion

• The basic financial statements and tax filings• Fiduciary responsibilities: cash management, investments,

spending policies• Best practice for policies and procedures• Typical organization structure • Board structure and governance – monitoring asset restrictions• Management’s responsibility- establishing a “tone” of

compliance• Preventing fraud

Basic Financial Statements and Tax Filings

• Statement of Financial Position (a balance sheet)• Statement of Activities (profit and loss)• Statement of Cash Flows (what generates cash

and how it gets used)• Notes to the Financial Statements (disclosures

and “the story behind the numbers”)• Federal tax filing on Form 990

Standard Audit ReportINDEPENDENT AUDITORS’ REPORT

To the Board of Directors ofABC Organization

Report on the Financial Statements

We have audited the accompanying financial statements of ABC Organization (a nonprofit organization), which comprise the statement of financial position as of June 30, 20X1, and the related statements of activities, functional expenses, and cash flows for the year then ended and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risk of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Organization’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Standard Audit Report Continued

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of June 30, 20X1, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Summarized Comparative Information

We have previously audited the Organization’s 20X0 financial statements, and our report dated October 2, 20X1, expressed an unmodified opinion on those audited financial statements. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 20X0, is consistent, in all material respects, with the audited financial statements from which it has been derived.

City, StateReport Date

Statement of Financial Position

20X1 20X0

ASSETS

Cash and cash equivalents $ 29,907 $ 15,655

Unconditional promises to give 198,188 190,304

Accounts receivable 4,635 1,355

Prepaid expenses 6,402 8,845

Long-term investments 64,875 13,282

Property and equipment 648,410 664,342

TOTAL ASSETS $ 952,417 $ 893,783

20X1 20X0

LIABILITIES

Accounts payable $ 6,291 $ 3,445

Accrued expenses 4,284 8,145

Notes payable 79,991 85,930

TOTAL LIABILITIES 90,566 97,520

NET ASSETS

Unrestricted 362,857 356,166

Temporarily restricted 492,125 435,932

Permanently restricted 6,869 4,165

TOTAL NET ASSETS 861,851 796,263

TOTAL LIABILITIES AND NET ASSETS $ 952,417 $ 893,783

Statement of Activities Temporarily Permanently Total

Unrestricted Restricted Restricted 20X1 20X0

Revenue and support Government contracts $ 1,265,431 $ - $ - $ 1,265,431 $ 1,062,785 Contributions and special events 400,301 64,823 2,704 467,828 362,791 Grants 53,879 13,751 - 67,630 65,430 Services and fees 21,652 - - 21,652 26,753 Other revenues 5,674 - - 5,674 4,568

Net assets released from restrictions 23,756 (23,756) - - - Total revenue and support 1,770,693 54,818 2,704 1,828,215 1,522,327

Expense Program 1,230,421 - - 1,230,421 943,376 Management and general 467,935 - - 467,935 443,991 Fundraising 82,364 - - 82,364 79,212

Total expense 1,780,720 - - 1,780,720 1,466,579

Change in net assets from operations (10,027) 54,818 2,704 47,495 55,748

Investment income, net 16,718 1,375 - 18,093 15,314

Change in net assets 6,691 56,193 2,704 65,588 71,062

Net assets, beginning of year 356,166 435,932 4,165 796,263 725,201

Net assets, end of year $ 362,857 $ 492,125 $ 6,869 $ 861,851 $ 796,263

Federal Form 990

• Informational form for Tax Exempt Entities• Has been significantly revamped in recent years• Reports on financial results and compliance

with the organization’s mission• Contains a section that covers the organization

policies• Is subject to public inspection

State Level Reporting

• Varies by state• Often supervised by State Attorney General,

Secretary of State, or Consumer affairs• May require additional filings specific to that

state• May require a copy of Form 990• Filings also may be publicly available

Fiduciary Responsibilities

• Cash – that it gets spent toward the mission of the organization on items that are approved, legal, appropriate and for reasonable amounts

• Investments – that invested funds are properly managed to provide a return for the organization and that the types of investments are appropriate

• Liabilities – that liabilities are incurred for approved expenditures or long term financing

Fiduciary Responsibilities

• Net assets – organized and presented by type of restriction

• Unrestricted (including Board designated)• Temporarily Restricted – restriction based on time

period or specific purpose• Permanently Restricted – restriction established

by donor, corpus not available for general use, often may be invested

Supporting Policies and Procedures

• Employee manuals that outline approved policy• Multi – level approval process for expenditures

– department heads or senior staff• Regular monthly financial reporting and

comparison to budgets with explanation of variances

Typical Organization Structure

• Board of Directors with Committee Structure– Finance committee/Audit Committee/Investment

Committee• Executive Director• Finance Director (or Controller/Bookkeeper)• Accounting staff• Program Directors

Board Structure and Governance

• Structure based on size of organization• Look for specific expertise – legal, accounting, human

resources• Form 990 requirement for Board review and approval• Finance Committee – most common, reviews financial results, may function as

audit and investment committee if not practical to have separate committee

Board Structure and Governance

• Audit committee – will oversee relationship with outside auditors and

may include members who are not on the Board itself

– Will review and approve outside auditors’ report on financial statements

– Many larger organizations are establishing audit committees

Board Structure and Governance

• Investment Committee– Oversees investment portfolio– Hires and oversees work of professional money

managers– Monitors investment results– Makes decision on types of investments– Monitors compliance with asset restrictions– Fair value – Level 1, 2 and 3 type assets

Management’s Responsibilities

• Executive Director – “the buck stops here”, establish a “tone” of compliance for the organization

• Finance Director – regular financial reporting process and day to day oversight

• Program Directors – budget monitoring, use of staff resources

Preventing Fraud

• Determine what creates opportunities• Identify common types of fraud • Outline best practices for prevention• Set a tone of the organization• Regular monitoring of policies• Monitor related parties• Segregation of duties• Question variances

Howard Cheney, CPAhcheney@mbkcpa.com(413) 322-3491

Melyssa Brown, CPAmbrown@mbkcpa.com(413) 322-3484

Thank You!