November, 2016
Segregation of Duties
Introduction
The concept of Segregation of Duties is to separate the major responsibilities of authorizing transactions, custody of assets, recording of transactions and reconciliation/verification of transactions for each business process. From a separation of duties perspective, the completion of more than one of these functions would be considered performing "incompatible duties". In other words, no one employee should have responsibility to complete two or more of these major responsibilities. However, staff limitations may make this impractical and that is when Compensating controls must be considered.
Matrices are available upon request to assist you in structuring proper separation of duties and identifying areas where separation of duties is lacking. They will cover the most common processes that everyone should have (Cash, Petty Cash, Investments, Purchasing, Payroll, Inventory, Fixed Assets and General Ledger).
If you identify employees who perform two or more tasks for each business process area, you will need to determine if those tasks would be considered a performance of "incompatible duties". If so, you will need to consider compensating controls or revise duties.
We should always strive for the optimum degree of segregation of duties. However, due to limited staff sizes at some organizations, optimum separation of duties cannot be achieved. In those circumstances you should at least strive for an acceptable(minimal) level of segregation of duties which when combined with compensating controls will minimize the impact of control deficiencies and exposure to errors or irregularities. A minimal level of segregation of duties could possibly be achieved by verifying that no one employee performs more than two of the "incompatible duties". For example, an employee might perform the authorization and verification/reconciliation functions but they should not record the transaction or maintain custody of assets. A compensating control would be managerial review.
Some Basic Suggestions for Best Practices
Generally, the Chief Financial Officer, Controller and accounting department personnel should not have access to modify general ledger accounts or change mappings for these accounts. Normally these changes should be made by IT personnel after approval by CFO or Controller.
Employees responsible for preparing/initiating a journal entry should not be able to approve or record the journal entries.
Financial statements should be approved by supervisory personnel at a higher authority level than person preparing the financial statements.
If the general ledger system is configured so that journals cannot be approved prior to posting a compensating control would be to print a report of all journal entries at the end of each period and have a supervisory level employee who does not have access to record transactions review and approve the transactions that have been recorded.
September, 2016
Board of Directors/Trustee Responsibilities
Do your Board members understand what truly are their responsibilities?
If you are a trustee or a member of the board of directors of a charitable organization, you and your fellow board members are responsible for governing the organization.
The law imposes upon you two primary duties: the duty of care, and the duty of loyalty. The duty of care means that you must act with such care as an ordinarily prudent person would employ in your position. The duty of loyalty means that you must act in good faith and in a manner that you reasonably believe is in the best interest of the organization.
THIS MEANS:
• You should attend board meetings and meetings of committees on which you serve. You should make sure that you receive detailed information beforehand about matters which are going to be voted on at a meeting.
• You should carefully read all of the material which you receive and prepare yourself to ask questions.
• You should use your own judgment and not simply take the word of your CEO or fellow board members.
In order to carry out your legal responsibilities as a board member or trustee, you must be able to make informed judgments about important matters affecting the organization. The law permits you to reasonably rely on information from the organization’s staff, lawyer, auditor, outside advisors, and board committees in making those judgments. If you do not have adequate information, you have the right to get it.
THIS MEANS:
• You have the right to have reasonable access to management.
• You have the right to have reasonable access to internal information of the
organization.
• You have the right to have reasonable access to the organization’s principal
advisors, such as its auditors or attorneys, for example.
• Senior management must be willing to facilitate board access to the books and
records of the organization.
• Senior management must be willing to facilitate communications between the
board and the principal advisors of the organization.
• The board has the right, if necessary, to engage the services of outside advisors at
the organization’s expense to assist it with a particular matter.
A charity’s board should be vigorous and responsive to the mission of the charity. You should make sure that your board’s process of selecting new members assures diversity of viewpoints and rotation of board members and officers. As a board member, you have responsibility for ensuring that the public and charitable role of the organization will be carried out in a way that is effective in furthering the mission of the charity. A nominating process which invites openness, variety, and change is important to achieving this goal.
THIS MEANS:
• Your nominating process should reach out for candidates, and actively recruit individuals whose commitment, skills, life experience, background, perspective, or other characteristics will serve the organization and its needs.
• A larger candidate pool may result if you include non-board members as well as
board members on your nominating committee.
• Term limits for board members are an effective way to ensure board vitality.
If your board does not have term limits, board members should be reviewed periodically to confirm that they remain interested in and suitable for the board. Rotation off the board, assignments to off-board committees, and designation as emeritus members are other ways to achieve a vigorous board.
Hiring the organization’s CEO is one of the most important tasks you have. It is the job of the board to engage in a selection process which will allow the board to find the right person to carry out the charity’s purpose efficiently and effectively. The organization for which you are responsible can only benefit when the entire board participates in hiring and evaluating its chief executive employee.
THIS MEANS:
• The board should form a search committee at the beginning of the hiring
process. If the board does not create a written job description for the CEO position prior to hiring, it should at least develop a profile of the sort of CEO it believes the organization’s mission and current needs require.
• A majority of the search committee members should be board members, but it
may be beneficial to include staff members and others knowledgeable about the organization and its mission .
The board is responsible for setting the compensation of the organization’s CEO and other senior managers. When setting executive compensation, you should be mindful that the public, which supports the charity and uses its services, is interested in knowing the amount. This information is provided to the public by the Non-Profit Organizations/Public Charities Division of the Attorney General’s Office and by the Internal Revenue Service (IRS), and is available online to anyone who wishes to review an organization’s Form 990 at www.guidestar.org, an independent database of nonprofit organizations.
In addition, both the IRS and the Non-Profit Organizations/Public Charities Division from time to time scrutinize the reasonableness of a charity’s executive compensation and the process used by the board to determine this compensation. Complaints of excessive compensation or private benefit, whether from regulators or from the public, can expose the organization to legal action and damage its good name.
THIS MEANS:
• Every board member should know what the CEO and other senior managers are paid, including the value of any non-salary compensation, such as the use of an automobile, retirement funds, etc.
• If a compensation committee is used, it should not make the final decision. In setting compensation, you should consider the performance of your CEO and senior managers and the compensation provided to other similarly situated
January, 2017
Issues Surrounding Not-for-Profit Organizations
Not-for-profit organizations share some major issues with for-profit companies, such as management, budgeting, and staffing. Yet, they come at these issues from a unique perspective. After all, the term nonprofit is the antithesis of the goal of business. Nonprofits have different business goals, and have to tread carefully to know when to learn from business examples and when to follow their own paths.
Mission, Not Profits
The chief goal of a nonprofit is not to make money, but to serve a public mission. However, to serve that mission, it needs to make money. Balancing a mission and funding is what defines the not-for-profit organization and separates it from for-profit companies. A nonprofit spends much of its time and efforts attracting funds, often without even selling a product. A nonprofit can just ask people to hand funds over, and contributors willingly comply. On the other hand, a nonprofit has to convince contributors of the value of its mission and its ability to spend the contributor’s money wisely to meet that mission.
Administrative Costs
Too much of a positive revenue over expenses can subject a not-for-profit organization to criticism for not spending enough on its mission. Even more public scrutiny occurs if too many of a nonprofit’s expenses are taken up with administrative costs. The American Institute of Philanthropy suggests that a not-for-profit organization’s unrestricted net assets should total less than three years of its current budget, and that at least 60 percent of its total expenses should be spent on program services rather than on administration and fundraising. AIP finds that the most efficient charities dedicate 75 percent of their budgeting spending on program services. Those numbers vary widely by the type of activities in which a nonprofit is involved. GuideStar, an online database of nonprofits in the United States, notes that the median ratio for the percentage of budget spent on programming is 71 percent for art museums, but 94 percent for food banks. This disparity doesn’t mean food banks are more efficient. Art museums have higher administrative costs due to insurance, building maintenance, security and fundraising.
Ethics of Fundraising
Sales staff in a for-profit company often earn a commission for each sale. For nonprofits, commission-based fundraising is considered unethical. The Association of Fundraising Professionals prohibits its members from receiving commissions to dissuade individual and contract team fundraisers from using high-pressure tactics on potential donors for personal gain. AFP asserts that a commission on each donation undermines donor trust by placing self-gain over a nonprofit’s mission. Unfortunately, nonprofits are often in a struggle to find enough money to survive, and the drive to raise funds more effectively is constant.
Management and Leadership
Management of not-for-profit organizations can be a delicate dance of administrative skills to keep operations in budget and in accord with legal requirements, and leadership to persuade volunteers, donors and granting agencies to assist in meeting the group’s mission. Unfortunately, the online Free Management Library writes that many nonprofit managers have a non-management background. Management training is essential, but is not often affordable for a nonprofit’s limited budget.
Media and Public Relations
Most for-profit businesses have to deal with news media and public relations periodically. Not-for-profit organizations have to deal with media and public relations constantly to remain in the public consciousness in order to meet their mission of public service and attract donors. Nonprofits also have to contend with news reporters and watchdogs who scrutinize their activities and legal filings. The National Council of Nonprofits insists that not-for-profit organizations need to “cultivate a culture of accountability and transparency” to win the public's trust.
March, 2017
Maintaining Tax-exempt Status
For most nonprofit corporations (like 501(3)(c) organizations), maintaining tax-exempt status is paramount. In order to do so, make sure your nonprofit complies with a few special rules. Here's what you need to know.
Organizational Structure: Who Must Play What Role
Like any corporation, a nonprofit has a board of directors to make important policy decisions, officers (president, treasurer, and secretary) who primarily oversee and manage the day-to-day operations of the organization, and possibly employees to do the work.
Unlike regular corporations, however, nonprofit corporations do not have shareholders or owners. (Nonprofits are owned by no one person or group of persons and cannot be sold. In the event the directors of a nonprofit want to dissolve the corporation, they must distribute all of its assets to another nonprofit corporation.)
Although a nonprofit corporation can choose to have members who have voting rights, many nonprofit corporations decide not to adopt a membership structure and, in the interests of efficiency, leave the decision making up to the directors. If a nonprofit does opt for a membership structure, the members participate in major corporate decisions. Specifically, the members have the exclusive right to elect directors, amend articles and bylaws, and vote on a merger or dissolution of the corporation.
Corporate Records Requirements
All nonprofit corporations must keep good corporate records. These records help to preserve directors' limited personal liability and protect your organization's tax-exempt status. Good record keeping means preparing minutes of directors' and members' meetings and documenting important corporate decisions.
You'll want to organize these materials in a corporate records book, which should also contain a copy of your articles of incorporation, bylaws, and tax exemption determination letters from the IRS and your state tax agency.
In addition to keeping records of important decisions, your nonprofit corporation must record any financial transactions in a bookkeeping system and keep other financial records in order to file an annual corporate tax return. In the Commonwealth of Massachusetts if your Organization receives for than $200,000 in revenue in any one year it will also have a requirement to have the accounting records either reviewed or audited by an independent Certified Public Accountant and have formal financial statements prepared. Usually an audit is required if gross revenue exceeds $500,000.
Limits on Nonprofit Activities
In addition to keeping corporate records, nonprofit corporations must follow some additional rules and abide by certain prohibitions in order to retain their tax-exempt status:
Nonprofit corporations cannot contribute money to political campaigns. Nonprofit corporations with a 501(c)(3) tax exemption (the most common) are not allowed to participate in political campaigns or contribute money to them. If they do, the IRS can revoke their nonprofit status, and can assess a special excise tax against the organization and its managers.
Nonprofit corporations can engage in only limited lobbying activities. Tax-exempt 501(c)(3) nonprofits that influence legislation to any "substantial degree" face the loss of their nonprofit status. However, for tax-exempt nonprofits that want to participate in lobbying, the IRS simply sets a limit on the money they can spend on political activities. For more information, see How Much Lobbying Can a Nonprofit Do?
Nonprofit corporations must not distribute profits to members, officers, or directors. A nonprofit corporation cannot be organized to financially benefit its members, officers, or directors. However, reasonable salaries and expense reimbursements are permitted.
Nonprofit corporations must pay taxes on income from "unrelated activities." Sometimes, a nonprofit organization will earn income through activities that aren't directly related to its nonprofit purpose; for example, the directors of an organization dedicated to preserving open space may collect a consulting fee for advising other nonprofits. The IRS requires nonprofits to pay corporate income taxes on such unrelated income over $1,000, whether or not the group uses that money to fund its tax-exempt activities.
Nonprofit corporations cannot make substantial profits from unrelated activities. If a nonprofit spends too much time on unrelated activities, or if the unrelated activities generate "substantial" income, the group's nonprofit status may be jeopardized. Nonprofit corporations that plan to engage in activities that aren't related to their tax-exempt purpose should consult a lawyer or tax expert with experience in nonprofit law.
When a nonprofit corporation dissolves, its assets must be distributed to another tax-exempt group.Since tax-exempt organizations and their assets cannot be owned, they can never be sold. If the directors of a nonprofit decide to disband the organization, they must donate its assets to another nonprofit group. This also means that once property goes into a nonprofit corporation, it cannot later be distributed to a member or director.