Archive for June 26, 2014

Internal Control Checklist for Small Non-Profits: 5 Critical Steps

Frauds in NonprofitsEstablish a strong control environment:  Setting a tone at the top of the organization can go a long way in deterring fraud.  Having an effective control environment will naturally foster strong controls and facilitate employees following protocol.  Ideas:  create written procedures and assign responsibilities/authorization power, use budgets and deadlines and hold employees accountable and, most importantly, involve the Board or other governing body by providing financial reports and expect them to stay engaged and ask questions.

Create and maintain segregation of duties:  This is essential.  History shows that most instances of fraud occur because the person had an opportunity, usually meaning there was no one else involved in certain functions and thus no one would notice, especially in small incremental amounts.  In a small office, this can certainly be a challenge; however there are several things you can do between two or three people that will create those checks and balances.  Ideas:  a) when dealing with cash receipts, have two people count, double check and record cash; b) for purchases, separate individuals should be approving purchases, generating checks, recording expenses in the general ledger and reviewing and signing checks (and avoid using a signature stamp); c) also be sure to consider authorization rights with your online banking and discuss available controls with your bank, such as email notifications or authorization codes for payments made online.

Physical Controls:  Simple things such as keeping offices locked, check stock locked in a file cabinet (one or two people keep the key) and passwords on computers and for software will help keep your assets safe.

Review and reconcile the bank statement:  Ideally, someone other than the person writing checks should receive the unopened bank statement and prepare a reconciliation of bank activity to general ledger activity, in which case discrepancies can be detected timely.  The bank statement should be reviewed by someone outside the cash function.  In a very small office, it may be necessary to have the treasurer or other board member perform this review.  Pay particular attention to cancelled checks and withdrawals, noting payee, amount and frequency for reasonableness.  A person committing fraud may record a payment to a known vendor in the system or on a check stub, while the actual check is made payable to someone else.

Payroll:  Look at weekly payroll reports from the payroll company to make sure employees and pay rates are within your expectations.  It is also important to review year-to-date figures by employee (summarized on one report), which will include all payments, including bonuses, corrections, direct deposits, etc.  Payroll fraud often occurs in separately processed payroll, which can be excluded from your weekly payroll reports, but would be reflected in year-to-date totals.  Try to discuss available controls with the payroll company. Many will offer emails to be sent directly to a designated individual for notification of all processed payroll, pay rate changes, added and terminated employees.  If this were the case, it would be difficult for any erroneous information to go undetected, especially in a small office environment.

 

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

IRS Releases Draft Form 1023-EZ

The IRS recently released a draft of the new Form 1023-EZ “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code”. This new “EZ” form is, as one would expect, much shorter and simpler than the regular Form 1023. The new short form is only three pages long, compared to the 26-page regular Form. The IRS estimates that completion of the short form will take only 14 hours, compared to the 101 hours it estimates as the time needed to complete the full form.

Use of the short form is limited to small organizations with actual and projected annual gross receipts not-to-exceed $200,000 and total assets of $500,000 or less. In addition, foreign organizations, LLCs, churches, schools, hospitals, health maintenance organizations and various other types of organizations are not eligible to use the short form. There is a 22-question eligibility worksheet in the instructions that must be completed before the Form can be submitted to the IRS.

The Form 1023-EZ is designed to reduce the burden on smaller organizations seeking exempt status, while at the same time allowing the IRS to focus more of its efforts on the compliance of organizations which have already been granted exempt status. The Form 1023-EZ has eliminated the need for applicants to include certain information, including copies of governing documents, financial data/projections, narrative descriptions of the applicant’s current and planned activities, and compensation arrangements with officers, directors, key employees, etc. It instead requires some basic information about the organization and a series of “yes or no” questions about its planned activities, including whether the organization will attempt to influence legislation, pay compensation to its officers, directors and trustees, engage in any activities with foreign organizations/individuals or related party transactions, have any unrelated business income, etc.

Thus far, the Form 1023-EZ has not garnered much support from tax and other professionals who specialize in not-for-profit tax issues. Criticism generally stems from the Form’s simplistic nature, and the general fear is that organizations will be formed by people who don’t fully understand what’s involved in running a charitable organization and that organizations are going to be granted exempt status that shouldn’t.

After the date of this blog post the IRS issued a final release of the Form 1023-EZ and its instructions. You can find updated details here >>

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Kevin Fontant Boston Tax AccountantKevin Fontana is a manager in our tax department, Kevin has over ten years of accounting experience and oversees and coordinates tax compliance services for many of the firm’s corporate, partnership and individual clients. His privately owned clients span industries such as multi-location retail, distribution, manufacturing and real estate. In addition, Kevin oversees the tax compliance services for several non-profit clients, including independent schools, social clubs, historical societies and private foundations.

How to Record Non-Cash Donations

Recording Noncash DonationsOne of the most frequent questions I receive from clients surrounds recording and tracking of in-kind and non-cash donations. Non-cash donations fall under two main categories: goods/property and services.  The treatment is different for each, both from a financial reporting and tax perspective.  While the generally accepted accounting principle (GAAP) treatment for these items can get tricky, there are a few things to keep in mind that can help to simplify the process.

Goods

Donated goods, long-lived property, use of property, securities (or promises to give any of those items in the future) are recorded at the fair value on the date of donation. The organization should record the fair value of the donated assets as increases in unrestricted net assets, with a few exceptions.  If a donor places a restriction on how long a long-lived asset (i.e. property and equipment) is to be used,  then it should be recorded as temporarily restricted net assets, and released to unrestricted net asset over time, as the restriction expires.  Also, an organization may adopt a policy to imply a time restriction for the use of long-lived assets. If so adopted, the organization would record donations of long-lived assets to temporarily restricted net assets, and release to unrestricted over the useful life (along with depreciation).

If an organization received a donation of the use of a long-lived asset (i.e. donated rent), the donation should be recorded at fair value as unrestricted revenue in the period in which it was received, along with the corresponding related expense (i.e. rent expense).  If the donation is a promise to give the use in future periods for a specified period of time, the promise should be recorded as a temporarily restricted contribution receivable, and released over time as the benefit is used.

Services

The nature of many non-profit organizations is to utilize the manpower and skills of many volunteers.  GAAP sets forth specific criteria that must be met in order to recognize a contribution.  The requirements are: 1) services that create or enhance a non-financial asset (i.e. property and equipment) or 2) meet all of the following:

  • The service requires specialized skill (typically accountants, attorneys, architects, teachers, electricians, doctors, other professionals, etc.)
  • The service is provided by someone who possesses those specialized skills
  • The service would typically need to be purchased if not contributed

If the donated service meets the definition set forth above, the donation should be recognized at fair value on the date of the donation as an increase to unrestricted net assets, with an offsetting recognition of an asset or the related expense.

Note on Auctions

Organizations often receive gifts from donors to be used in auctions at fundraising events.  These items should be recognized as an asset at fair value on the date of donation.  Any difference between the fair value and the amount received from the “sale” of these items at auction should be an adjustment to contribution revenue.

Acknowledgments
The IRS sets the specific compliance rules for charities regarding acknowledgments to donors.  See previous blog post on Written Acknowledgements for Donors.

The IRS has many complex rules relating to various types of donations, such as artwork, antiques, collection items, cars, boats, aircraft, intellectual property and many more.  See Publication 561 for more detailed information.

 

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.