Are You Audit Ready?
Are You Audit Ready?
In this era of heightened public scrutiny, plenty of people have an interest in your organization’s finances — from your contributors and directors to lenders and federal and state regulators. This is one reason why many nonprofits are turning to accounting professionals for a review or audit of their financial statements.
It is critical for nonprofit management to understand not only the basic audit services available, but also how to work with accounting professionals and staff to become “audit ready.”
Levels of Service
In general, four levels of financial statement services are offered by CPAs:
1. Audit: An audit provides the highest level of assurance that an organization’s financial statements are free of material misstatement and have utilized Generally Accepted Accounting Principles (GAAP). The auditor performs a risk assessment, which includes evaluating the internal controls of the organization to determine the appropriate audit procedures. These procedures may include:
• Confirmation of financial assertions with outside parties
• Testing selected transactions by examining supporting documents
• Completing physical inspections and observations (e.g., examining cash, equipment, inventory and other tangible assets)
2. Review: If a full audit proves cost prohibitive, a review of a nonprofit’s financial statements may be an alternative that provides a level of accountability and transparency. A CPA outside of the organization provides a limited level of assurance that there are no material modifications that should be made to the financial statements. A re-view is substantially less in scope than an audit and generally only includes inquiries of management and application of analytical procedures to management’s financial data.
3. Compilation: A compilation of financial statements is less costly than an audit or review; however, it provides the most basic service CPAs offer in preparing financial statements. The CPA is required to have a general know-ledge of nonprofits and applicable ac–counting principles, but is only required to read the compiled financial statements and consider whether they are in an appropriate form and free from obvious material errors. Because of the limited procedures performed, the CPA in the standard compilation report cannot express any degree of assurance on the financial statements or an opinion on them.
4. Agreed Upon Procedures Report (AUP): An AUP is an alternative to a financial statement audit. With it, your organization can direct your accountant to review and test only specific areas of your finances, such as internal controls or bookkeeping procedures. An AUP might also be appropriate if, for example, a foundation wants evidence that its grant funds were used appropriately, in which case the AUP would look only at the use of those grant funds. Procedures are conducted only on the agreed-upon areas, and the accountant does not express an opinion on the findings.
Finding a Fit
Accounting firms provide fairly standardized professional services. Yet, they vary in the depth of their expertise and industry experience. Due diligence in selecting an appropriate firm is key, and cost should not be the only factor considered.
When interviewing accounting firms, describe your organization thoroughly, including your mission and services. Make the firm aware of any special circumstances (e.g., this is the first audit under a new Executive Director).
Likewise, state explicitly what you need the accounting firm to do. Do you only require audited financials, or are you seeking a provider who will handle everything from an audit to completing tax returns and filing financial reports?
Preparing for an Audit
The key to improving the efficiency and quality of your audit process lies in preparation. The auditor may provide your organization with a Prepared by Client (PBC) list — a list of items he or she will examine and that you will need to prepare and complete. This list can include everything from bank statements and accounts receivable to details of grants received and salary/wage expenses.
Designate a staff member to be the point person and coordinate information requests. This person can then assign deadlines and delegate responsibility for requested information. The goal is to have the requested items ready at the beginning of fieldwork (and available in electronic format whenever possible).
After the audit is complete, the auditor will issue an audit report, which is addressed to the board of directors. The report includes:
• The auditor’s report expressing an opinion as to whether the financial statements, taken as a whole, give a fair representation in all material respects of the organization’s financial picture.
• The financial statements, including the statement of financial position (balance sheet), statement of activities (income statement), statement of cash flows and statement of functional expenses (mandatory for health and social service organizations). It also includes any accompanying footnotes that provide additional information concerning the entity and its financial position.
• A management letter outlining any deficiencies in the nonprofit organization’s system of internal controls, including suggestions for improving weak spots.
• Auditor’s communication with the board (those charged with governance) concerning the auditor’s responsibility, the audit process and the results of the audit.
A Caveat
Remember that having your organization’s books independently audited does not relieve the board of responsibility for financial misstatement or wrongdoing. A sound system of financial reporting, oversight and controls — including a separate audit committee — are all best practices. n
The Importance of an Audit Committee
An independent audit committee is certainly a best practice in nonprofit governance, signaling your organization’s commitment to transparency and accountability. Yet, there remains confusion in many circles as to what the exact function and makeup of this important committee should be.
An audit committee is typically a small, three-to-five-member group. It can include non-board members, such as former board presidents and treasurers. It should not include nonprofit staff, although they certainly can be invited to provide information and answer questions.
Of course, an audit committee should be completely independent. That means members should have neither conflict of interest nor financial interest in any entity doing business with the nonprofit. Likewise, they should not be compensated for their service.
In the end, an audit committee is charged with two primary tasks:
1. Engaging the auditor – The first job of the audit committee is to engage a firm to conduct the independent audit.
2. Reviewing the audit – The committee should be the first ones to meet with the outside auditor once the audit is completed and all required reports are prepared. Although management of the organization may attend the meeting, it is suggested that an Executive Session occur first with the auditor (i.e., a meeting of the auditor and audit committee without management present). The audit committee then reports audit results to the full board of directors.
Our accounting professionals can provide the guidance you need for an effective, functioning audit committee
Upcoming event! Grant Writing 201: Winning Grants in Southeastern PA (Media)
with Eric Davis, J.D., MBA,
Owner, Procopio Fundraising and Managing Partner, Elliott & Davis, PC
Grant seeking in Southeastern Pennsylvania has never been more competitive than today. With information on grant opportunities so broadly available, most grant making foundations and agencies receive hundreds more worthy grant proposals for each funding cycle than they could ever fund. It is critically important that nonprofit organizations learn how to set themselves apart by preparing winning grant applications.
Give your proposals the competitive edge of a serious grant seeker. If you’re ready to get serious about grant writing, invest a day honing your skills with proven techniques for generating support.
To register and/or learn more click here
Event Details:
Friday, June 8, 2012
9AM – 3PM (Check-in begins at 8:30AM)
Note: Complimentary lunch will be included
Elko & Associates, Ltd
2 W. Baltimore Ave, Suite 210
Media, PA 19063
Metered parking is available on the street or at the municipal parking lot across the street (corner of Baltimore Avenue and Olive Street)
Understand Your Contracts: Right Cost Language Can Mean More Profitable Jobs
Project owners today are more concerned about reducing construction costs than at any time in the recent past. While most contractors would naturally prefer a negotiated, fixed-price contract, more owners are now requiring cost-plus contracts, often with a guaranteed maximum.
At the same time, contractors are sometimes reducing the fees they collect on such contracts to unrealistic levels simply to win the work. This is especially true on larger projects, where fees are often trimmed below 2 percent, even though most contractors typically need at least 6 percent to break even.
With profits under such pressure, achieving a favorable outcome often depends on the terms in the contract, particularly the way job costs are defined. For contractors who are accustomed to dealing with fixed-price or lump-sum contracts, this can require a change in mindset. Many costs that would be absorbed as a regular cost of doing business under a fixed-price contract can legitimately be charged to the specific job on a cost-plus project.
Contract Tips to Consider
Here are some contract pointers that can help you earn a better-than-break-even margin while still offering a competitive fee:
• Be clear on the contingency fund. Often an area of dispute, the contract language should clearly state that the fund is established and managed by the contractor to control the financial risks associated with performing the work. Such risks include variances between the budget and actual bids, labor or material cost increases, minor weather delays, and other non-scope changes. The contract should make it clear that disbursements from the contingency are at the discretion of the contractor.
• Include a labor rate exhibit. Spell out specific labor rates for supervisory, administrative and trade labor along with additional markup to cover overhead. By incorporating specific labor rates into the contract, you safeguard your ability to charge rates greater than actual cost while limiting the owner’s recourse under the contract’s “right to audit” clause.
• Include support staff in the labor rate exhibit. Some classifications that are often overlooked include accounting staff in your principal office, estimators and safety personnel.
• Include additional markup for tools. This labor markup covers the cost of small tools used on the project. Rates up to 4.5 percent of trade labor cost for small tools are not unusual.
• Include markup on trade labor. When performing construction work with your own labor, be sure the contract contains markup on the trade labor to cover your overhead. Overhead rates on self-performed work typically are between 6 percent and 10 percent of trade labor costs.
• Include charges for contractor-owned equipment. This can be a valuable profit center. Establish a list of all equipment your company owns, along with daily, weekly and monthly rates that are equal to published rates such as those in the Associated Equipment Dealer’s Green Book. For equipment not listed, use comparable local rental rates. On fixed price contracts, many contractors routinely fail to charge owners for the cost of equipment needed to execute change orders.
• Include data-processing costs. Evaluate whether it makes sense to charge an hourly rate for supervisory and administrative time billed to the job, or to establish a monthly rental rate for each computer used on the project.
• Include safety-related costs. The contract should state that all costs necessary to implement the contractor’s safety program are to be included in the cost of the project. This includes offsite training, the general safety director and other related costs.
• Consider restructuring how the fee is determined. Rather than basing the fee solely on a percentage of project costs, consider charging a fixed fee based on the guaranteed maximum price. Lock in the fee in the event the project scope is reduced or the owner terminates the project for convenience. Contract language should state that the fee will be increased for change orders adding to the project scope, but not decreased for change orders that reduce scope.
• Clearly state the guaranteed maximum price. Regardless of how the fee is determined, the contract should contain language stating the price, and specify that it does not apply to individual budget line items in the schedule of values.
• Clearly define markups on change orders. Establishing pre-determined fees for each tier of contractor and subcontractor reduces the potential for dispute during construction. For example, you might charge a 10 per-cent markup for overhead, a 5 percent fee for the contractor performing the work, and a fee of 5 percent for the overseeing contractor.
Attorneys often say, “The side that knows the contract best wins.” A well-written contract, properly understood, will allow you to earn a better-than-break-even margin while still offering a competitive fee.
Call us to discuss earning a fair return.
How to Hook Your Key Employees
Despite current unemployment figures, great manufacturing and distribution employees are hard to find. They’re also hard to keep, whether due to aggressive “poaching” by competitors or simply more compelling offers elsewhere.
In times like these, you may want to put your money where your mouth is by implementing a key employee incentive program.
Who’s Key?
The truth is, some employees contribute more than others. This may be because of specific skills or education, important customer relationships, longevity with the company or business knowledge.
The first step in implementing a key employee incentive plan is to identify who should be included. Because these types of plans are typically non-qualified, it’s OK to pick and choose participants. Figure out who is most “key” by answering this question: “If left the company, I’d be disappointed and the business would suffer.” Depending on the size of your business, you may have only one key employee or a handful.
What’s the Competitive Outlook?
Is the current total compensation package for each key employee competitive for your industry in your market? This includes salary, health benefits, auto allowances, bonus arrangements and other perks.
If you can’t answer this question, you need to do some benchmarking (your CPA can help) and figure out what other companies like yours are paying. If you are under-compensating your key employees, be sure to address that immediately.
What’s the Incentive?
Assuming your key employee compensation is on par with that of your competitors, consider an incentive plan to sweeten the deal. The plan design should help keep these employees:
• Working at your company as long as you want them.
• Motivated to contribute to the bottom line.
• Interested in expanding their areas of responsibility.
Your incentive plan should align with your company’s overall strategic plan (e.g., new process development or reduced waste). Define the actions and behaviors you want to see, and build the plan to promote those results.
What Does Success Look Like?
A good incentive plan includes measurable targets for each individual covered by the plan, with specific rewards tied to them. Some of the targets can be corporate goals such as increased customer satisfaction or growth, but others must be specific to the individual. In order for the plan to work, a substantial number of the success factors must be controllable by the individual. The plan must also be simple enough so that the individual can easily see how his or her decisions directly impact the goal.
For example, in a manufacturing environment, the head of operations’ incentive plan may be based 40 percent on the company’s overall target profitability, 30 percent on his or her department reaching certain quality goals, and 30 percent on his or her productivity numbers. Each of these three criteria would then have specific sub-targets attached, along with a defined bonus or other incentive.
What Are the Options?
Incentive plans come in many shapes and sizes. Phantom stock gives select employees the benefits of stock ownership without actually issuing any stock. Shares of phantom stock follow the value of real shares of company stock, and participants can be paid a “dividend” in the form of a cash bonus. When they eventually leave the company (on your terms), they would be paid over a number of years in a “buyout” of their vested phantom shares.
Stock appreciation rights give the employee the right to the cash equivalent of the increase in the company’s stock value over a specific period of time. The rights are typically paid in cash over a number of years, but could also be paid in shares of stock.
In a performance unit plan, select employees are issued a number of performance units at zero value. The units increase in value as performance goals are met. At a certain point in the vesting period, the units can be redeemed for their new, higher value in cash.
Of course, all incentive plans have tax consequences and must be tailored specifically to the company and employees in question. One plan does not fit all, so be sure to discuss the options with your accountant.
Let us help you motivate and retain your key employees. Call us today to discuss incentive plan options for your business.
Using Your Money to Make Money for your Organization
Would you invest two hours of your time to find out from multiple experts how your organization can save money? If the answer is yes, join us for a discussion with a group of experts who understand the challenges nonprofits face and have alternative approaches to common issues that can help preserve your precious resources.
Sponsored by the Nonprofit Center
at La Salle University’s School of Business,
Elko’s Nonproft Leader, John Nihill will be a part of the panel discussion on:
- How to Save on Accounting Costs
- How to Save on Banking Fees
- How to Save on Insurance, Benefits and Investments
Event Details:
March 30, 2012
8:30AM – 10:30PM
The Historical Society of PA
1300 Locust St., Philadelphia
Call 215-951-1701 to register (mention that you were referred by Elko and the registration fee will be waived)
Taxaholics Anonymous-2012 Edition
Delaware County Attorney/CPA Forum will be hosting their annual meeting, “Taxaholics Anonymous” on March 7th at Generations Restaurant in Media, PA.
Elko’s Director of Financial Services, Marc Simmons, along with Jonathan D. Sokoloff (Esquire of Diamond, Polsky & Bauer), will be leading the discussion at the annual therapy session. Participants are invited to offer support to each other by sharing insights and war stories from the current year of tax preparation.
55 is a speed limit not a retirement age
On his birthday he would be 55 years old. A speed limit he joked. He has been working for over 30 years.
When asked how much longer he intended to work he responded 47 more years…without hesitation. I quickly add that up (I am a CPA)… 102. Seems like a ridiculous statement. Living to 102 is one thing…but working to 102?
The new retirement reality is that we are all living longer. During the last century the average life expectancy has risen dramatically. According to the US Census Bureau the number of people entering the Centurion club has risen from 2,300 in 1950 to 80,000 in 2010 and is expected to well exceed 600,000 by 2050 (just 8 years shy of his 102nd birthday). The average 65 year old couple now has a 31% chance of at least one spouse living past the age of 95. Merrill Lynch survey results indicate that 58% of affluent Americans have a positive view of the prospect of living to be 100.
The problem with this great gift of extended mortality is money management in the golden years, which extends far past the current standard retirement age of 65. Consideration of working part time during retirement or investing in an annuity, contributing to a savings vehicle and retiring closer to 85 rather than 65 are all now very real options. If given a choice over half of Americans not yet retired would rather retire later (age 102?) than make trade-offs to their current lifestyles.
Perhaps working to 102 might be a little hopeful….but living to 102 is likely a reality for many. Are you ready? So on this day when the Dow closes just shy of 13,000 and our retirement plans are budding with great rates of return perhaps a visit to your financial advisor may be in order.
New Event: Eight Common Marketing Communication Mistakes and How to Avoid Them
Elko & Associates Ltd, in partnership with the Pennsylvania Association of Nonprofit Organizations (PANO) is hosting the following event:
Eight Common Marketing Communication Mistakes and How to Avoid Them
with Gail S. Bower
President, Bower Consulting, LLC
In an increasingly media saturated world, we are barraged with marketing messages daily. Traditional media have less impact than just 5 years ago. Hundreds of millions of web sites now exist. For nonprofits, the challenge is on to tell compelling stories that engage constituents, funders, and partners.
Nonprofit organizations will improve their visibility and repute by avoiding the top eight marketing communications errors marketing specialist Gail Bower regularly sees. Learn what those mistakes are, why correcting them is important, and how to take steps to change bad communications habits.
To register and/or learn more click here
Event Details:
Tuesday, April 10, 2012
9AM – 12PM (registration begins at 8:30AM)
Note: A light breakfast is included with registration
Elko & Associates, Ltd
2 W. Baltimore Ave, Suite 210
Media, PA 19063
IFRS Certified
Congratulations to Colleen Cooke-Varallo, Elko’s Technology Practice Director, on completing the AICPA’s IFRS Certification!
Contribution vs Exchange Transaction – What’s the Difference?
Click here for the Winter Edition of PANO’s “Keynotes”. Page ten features an article by Elko’s Nonprofit Directors, John Nihill & Sandra Lutz.
