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.
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 farm—to slack off—then 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
During the past few weeks we have had the opportunity to meet with several nonprofits who are contemplating a change in their audit firms. One of the questions asked was whether there is any requirement to change audit firms after a number of years. Here are some thoughts and research on the matter.
The concept of mandatory auditor rotation comes from the Sarbanes-Oxley Act of 2002 (the Act) which dictates requirements for public companies. Enforced by the Securities and Exchange Commission (SEC), the Act requires a public company to rotate audit engagement partners every five years but contains no requirement for the rotation of audit firms. In fact, the U.S. House of Representatives, in July 2013, approved a bipartisan bill that would prohibit the SEC from requiring mandatory audit firm rotation for public companies. The bill would amend the Act to prohibit the SEC from requiring public companies to use specific auditors or requiring the use of different audit firms on a rotating basis. The bill would have to be approved by the Senate, which has not taken up the issue, and signed by the President to become law.
Given the stance taken for public companies, which is that mandatory rotation of audit firms is not a good idea, why does this topic continue to be discussed by nonprofit entities? The discussion likely stems from a deep desire of board members and trustees to hold themselves and their organizations to the highest level of fiduciary responsibility. This high level of responsibility suggests a routine evaluation of all significant vendor relationships, and evaluating whether you are receiving value from your audit firm is a reasonable question to raise and answer.
Many nonprofit entities respond to this desire to refresh their audit relationship by rotating audit engagement partners within the same firm every five or seven years. This is a reasonable response and allows the nonprofit to experience a fresh set of eyes on the engagement without the time spent in interviewing audit firms to achieve this goal.
Our advice – if you are not satisfied with the relationship between your Board or Audit Committee and your audit firm, consider your options which might include a change in service providers. On the other hand, if you believe you are with a full-service, qualified firm but would like to refresh the relationship, discuss with the firm your desire to change audit engagement partners. This small change may be all you need.
As always – let us know if there is anything Eide Bailly can do for you!
Management and finance teams in nonprofit organizations often ask for an update as to what is ahead in the world of nonprofit accounting. As of now, we see a couple of things that may be issued or clarified in the coming months.
The long-awaited revised AICPA Audit and Accounting Guide for Not-for-Profit Entities will be issued in the spring. The Financial Reporting Executive Committee (FinREC) of the AICPA issued a working draft of the accounting content of the guide. This proposed guide addresses many new accounting issues that have emerged over the years and includes guidance dedicated specifically to not-for-profit entities. There will be sections that address reporting relationships with other entities, reporting and measuring noncash gifts, programmatic investments and microfinance loans, reporting the expiration of donor-imposed restrictions, and a discussion of the legal and regulatory environment.
The FASB has requested comments on its EITF Issue 12-B “Not-for-Profit Entities: Personnel Services Received from an Affiliate for Which the Affiliate Does Not Seek Compensation”. A final document is expected during the first half of 2013.
The FASB also has a couple of projects in process. Non-for-Profit Financial Reporting: Financial Statements is a standards setting project and Non-for-Profit Financial Reporting: Other Financial Communications is a research project. Currently there are no expected dates of completion for these projects.