Functional Allocation of Expenses – How Difficult Could This Be?

By: Peggy Jennings, CPAPeggy Jennings

The allocation of expenses among program, management & general (M&G), and fundraising functions is sometimes a mysterious process, often left to chance or defaulted to SALY (same as last year), or, in certain unfortunate cases, is determined based on desired ratio outcomes. If done properly, the allocation methodologies can be as diverse as the nature of the expenses incurred.

For those wanting to “do things right,” why the confusion?

One reason is the sometimes over-generalization of the requirements, which themselves are rather sparse in the FASB Accounting Standards Codification (ASC). For example, the definition of program services found in the ASC is “The activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the not-for-profit entity (NFP) exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs.” Little wonder that a question often heard is, “Aren’t all of our expenses incurred in fulfilling our mission?”

A more useful reference can be found in the AICPA Audit and Accounting Guide, Not-For-Profit Entities (Guide), which provides helpful guidance in Chapter 13, Expenses, Gains and Losses.

To learn more, read the full article here.

Evaluating the Auditor Relationship

By: Peggy JenningsPeggy Jennings

Nonprofit organizations, much like public companies, rely on their external audit firm to perform a quality engagement. The audit committee plays a critical role in the governance of nonprofit organizations and one of the tasks assigned to this group is the evaluation of the audit firm.

The AICPA’s Audit Committee Toolkit for Not-for-Profit Entities (3rd Edition) contains a chapter devoted to the evaluation of the audit firm, including the following excerpts of considerations:

Quality of Resources and Services: Does the audit team identify and discuss appropriate risks in planning the audit?

Quality of Communications: Is the auditor comfortable raising issues that would reflect negatively on management?

Independence and Objectivity: Are you confident that the audit team maintains appropriate objectivity and professional skepticism?

Questions for Management: Are you satisfied with the knowledge, skills and abilities of the staff assigned to the audit engagement?

These queries, and many more, can be found in the Toolkit referenced above. If you don’t have access to this valuable document, consider joining the AICPA’s Not-for-Profit Section where you can find resources devoted to assurance, financial accounting & reporting, governance & management and tax compliance.

As always, feel free to contact Eide Bailly with any questions regarding this topic!

How Audits Should Work

By: Tim McCutcheonTimMccutcheon

Audit time doesn’t have to be all that stressful. Honestly. What follows is a solution to ensure the most zen-like audit you’ve ever experienced.

Start by adopting the right mind-set so that your thoughts, which rule your actions, match the underlying reality of the audit cycle and the way audits actually get done. Stephen Covey, best-selling author of The 7 Habits of Highly Effective People, suggested we all should ask ourselves the question, “Is real life more like school, or the farm?” At school, it’s sometimes possible to slack off for a while, then cram the night before the exam, and still get by with a passing grade. Does that work on the farmto slack offthen at the last minute till the soil, plant the seeds, water the plants, pull the weeds, and grow the crops the night before the harvest?

Well, duh. Of course not. So why this comparison? Because the audit engagement is like the farm. The lesson is that you can reduce, if not eliminate, audit stress by being the farmer, tending your crops throughout the year so that when harvest time arrives, you are ready to enjoy the bountiful fruits of your labor.

For the ABC steps you can take to get the most from your audit with the least stress read the full article here

Considering a Change in Auditors?

TimMccutcheonBy: Tim McCutcheon

Many not-for-profit organizations (NFPs) have audit firm rotation polices requiring a change in audit firms—not just audit partners—every few years, most typically every five years. Some call for rotation in as little as every three years. Policies such as these have become the norm only in the past dozen years or so. Why is this, and does it make sense?

The rise of audit partner or audit firm rotation policies, in large part, is attributable to the Sarbanes-Oxley Act of 2002 (SOX, or the Act). Curiously, with the exception of two very narrow provisions of the Act dealing with document destruction and whistleblower policies, the Act does not apply to NFPs unless an NFP is also an issuer of publicly traded securities or has filed as a registrant to issue such securities under the Securities Exchange Act of 1934 or the Securities Act of 1933, respectively. So, if SOX doesn’t apply to NFPs, why have so many adopted its audit partner rotation policy, or going even further, turned the policy into one of audit firm rotation?

The article looks back at the Act, the effects it has had—intended or otherwise—on the relationships between NFPs and their auditors since its passage, and offers considerations for NFPs when evaluating their own policies. Clink here to read the full article.