Keeping the board informed of the performance of a nonprofit organization is necessary to assist the board members in exercising their responsibilities in governing the organization. This may be easier said than done, given the amount of data and information that is available. Often an effective tool is the use of a document that highlights the goals of the organization and its progress in meeting those goals – a dashboard.
Creating a dashboard begins with an assessment of the operational, programmatic, and financial goals of the nonprofit. These goals are those that will enable the organization to grow and/or maintain its ability to meet its mission. Once these goals are set, the next step is an assessment of the metrics to be used to measure progress in attaining those goals.
An effective dashboard to present to the board will include a listing of the overall goals of the organization, current objectives to achieve those goals, and the units of measurement. Next, a summary of the progress in meeting those objectives, using the metrics, will give the users of the dashboard an understanding of the financial and operational health of the organization.
The dashboard can be tailored in many ways to meet the needs of the organization and board. Some have red, yellow and green “status lights” to quickly identify areas where adjustments in operations may be necessary. Some include narratives to more fully describe important highlights. And some include graphic information to demonstrate trends and other information.
Presenting information the board needs to govern the organization in a way that is easy to understand and act upon will enhance the overall effectiveness of the organization in meeting its mission.
Auditor rotation is again receiving a lot of attention. Many board members from publicly-traded companies encourage the nonprofit boards they serve to explore audit firm rotation as a best practice. While there is not a standard for mandatory audit firm rotation, some believe it is necessary for audit objectivity. Many others believe the costs would significantly outweigh any benefits.
Generally, the main reason organizations look at audit firm rotation is to provide a “fresh look” at their organization and operations. This is a valid issue, and one that audit firms regularly address in their procedures. Independence and objectivity are the basis of the audit process. Auditors are required to perform and document their work in accordance with auditing standards and firms are subject to a peer review process every three years to ensure the processes are followed.
Audit committees can help ensure the audit they are receiving brings value. They should meet with their auditors regularly to understand the processes and procedures used in the audit, how the auditors maintain their objectivity, and to discuss matters that come to the auditor’s attention. When there is a continuing interest in gaining a different perspective, many audit firms are able to rotate the engagement team – partner and/or staff. This allows the organization to retain the expertise, industry knowledge, and service they receive from the incumbent firm.
The drawbacks of frequent audit firm rotation include the costs incurred by the organization and its staff in the procurement process and initiation of a new firm, an increase in audit costs due to additional time spent in the first years of an audit relationship, and a potential decrease in service level as the end of the audit tenure approaches. The GAO surveyed hundreds of companies and auditors about audit firm rotation. The general conclusion from those responding was that rotation increases costs and has very little, if any, effect on the quality of audits.
When is rotation of auditors appropriate? Organizations that are not receiving the level and quality of service they expect should discuss the issues with their auditors. When the current auditors are no longer able to meet the high standards of the organization, a change may be in order.
Yesterday, the Emerging Issues Task Force (EITF) reached a final consensus on EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate for Which the Affiliate Does Not Charge the Recipient NFP. Industry practices around this issue have been diverse, with NFPs recording some, all, or none of the services received from an affiliate. One sticking point giving NFPs pause in their determination of which, if any, services to record has been the language in the Accounting Standards Codification itself.
Paragraph 958-605-25-17 states that contributed services (and the related expenses and/or assets created by those services) should be recognized if employees of separately governed affiliated entities regularly perform services (in other than an advisory capacity) for and under the direction of the donee and the recognition criteria for contributed services as defined by 958-605-25-16 are met. That paragraph states that contributions of services are recognized if they either: (a) create or enhance nonfinancial assets; or (b) require specialized skills, are provided by individuals possessing the skills, and would typically need to be purchased if not provided by donation. Oft-quoted services requiring specialized skills are those provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen. Services not requiring specialized skills should not be recognized. Paragraph 958-605-30-2 states that contributed services recorded should be measured at fair value.
In order to resolve the diversity in practice in the interpretation and application of the above, a final consensus was reached yesterday, as follows:
• The issue applies to services received from personnel of any affiliate that directly benefit the recipient NFP
• The recipient NFP should recognize all services received from personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge the recipient NFP
• The services should be measured at cost; however, fair value can be elected if cost significantly overstates or understates fair value (election may be made on a service-by-service basis
• A recipient that is a Health Care (as defined under Topic 954, Health Care Entities) that provides a performance indicator analogous to income from continuing operations of a for-profit entity should report the increase in net assets associated with the services received as an equity transfer
• No additional recurring disclosures are required
This final consensus will be considered for ratification by FASB at its March 29 meeting. If ratified, the guidance will be released in a future Accounting Standards Update and will be effective for fiscal years beginning after June 15, 2014, with early adoption permitted. The guidance is to be applied prospectively, with an option to apply it using a modified retrospective approach wherein all prior periods presented would be restated, but not the beginning net asset balances of the earliest period presented.
Nonprofit organizations are generally very aware of their percentage of program expenditures to total expenditures. This program efficiency ratio is often used as an indicator of the organization’s effectiveness in its delivery of services, resulting in an assumption that the greater the allocation to program, the better.
This logic doesn’t really work. An organization devoting an extremely high percentage of its resources to program is likely not spending an appropriate amount of time and resources on the activities necessary to keep the nonprofit sustainable. Without fundraising, how will the community and new donors learn about the organization and the work it is doing?
Administrative expenditures provide significant benefit to a nonprofit organization. A minimum level of administrative activity is necessary to keep the nonprofit running, but a healthy sustainable organization invests in its internal controls, its employees, and its future.
Nonprofits can assist donors when making contribution decisions. Describe the mission, relationships, and organizational strength of the enity and how the program efficiency ratio supports operations, growth and sustainability.
The IRS has a free newsletter that helps nonprofit organizations stay abreast of developments in the tax-exempt world. Readers of “EO Update: e-News for Charities and Nonprofits” receive updates from the IRS about issues of tax policy, services and available information that impact tax-exempt organizations, such as:
news releases from the IRS related to exempt organizations;
new forms, guidance and other publications;
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The updates are brief summaries with links to more extended discussions of content available on the irs.gov website.
The link to subscribe is http://www.irs.gov/Charities-&-Non-Profits/Subscribe-to-Exempt-Organization-Update.