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Nonprofit Finances: Its Mysteries Revealed
         A Primer for Board Members
                 Alfonso Perillo




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                                          Partner,
                                 Edelstein & Company LLP                           Hosting:
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Nonprofit Finances: Its
 Mysteries Revealed
       A primer for Board Members




     Alfonso Perillo, CPA, CFE
     Partner, Nonprofit Division
     Edelstein & Company LLP
Board Oversight is Critical

 The nonprofit is responsible for its internal
  controls
 The outside accountant’s responsibility is
  limited to ensuring that the financial
  statements are fairly stated
 There is no substitute for good governance



                 © Edelstein & Company LLP,
                   Boston, Massachusetts
Typical Financial Documents
    Received by Board Member
 Audited financial statements
 Budgets

 Budget–to-actual reports

 Form 990




                © Edelstein & Company LLP,
                  Boston, Massachusetts
Numbers Are Important and They Tell a
               Story
 Numbers can be manipulated
 Watch for discrepancies
     Budget to actual – accrual and cash
     Compare reports (audited financial statements
      to internally prepared statements)
     Are answers to questions asked plausible?

     Have the auditors present to the board or a
      subgroup of the board (audit or finance
      committee)
                   © Edelstein & Company LLP,
                     Boston, Massachusetts
The Balance Sheet (Statement
     of Financial Position)
Assets =                       Asset = provides a
                                 future benefit


Liabilities +                  Liability = represents
                                 a future obligation


Net Assets (Equity)            Net assets =
                                cumulative
                                earnings

                © Edelstein & Company LLP,
                  Boston, Massachusetts
The Financial Statements

   Statement of financial position: Represents the organization’s
    assets and liabilities at a point in time.
        Usually at the end of the nonprofit’s year end, but can be quarterly or monthly

   Statement of Activities: Represents financial activity for a period.
        Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this
         can be presented on a quarterly or monthly basis.
        Inflows are revenues, outflows are expenses
        Changes in net assets (net income) represent the difference between revenues
         and expenses.
   Statement of Cash Flows: Represents cash inflows and outflows for
    a period.
        Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this
         can be presented on a quarterly or monthly basis.



                                    © Edelstein & Company LLP,
                                      Boston, Massachusetts
Accrual v. Cash Basis of
              Accounting
             Cash                                Accrual
   Revenue recorded when              Revenue recorded when
    received                            earned and is realized or
                                        realizable
   Expense recorded when              Expense recorded when
    paid                                the obligation is incurred
                                        and in the same period in
                                        which related revenue is
                                        recognized (matching
                                        principle)

   Not GAAP                           GAAP

                     © Edelstein & Company LLP,
                       Boston, Massachusetts
Strange Timing Differences



   Accrued revenue: before cash is received [Accounts receivable;
    pledges receivable; grants receivable]

   Accrued expenses: before cash is paid

   Deferred revenue: cash is received before earnings process is
    complete [Deferred tuition, advances]

   Deferred expense: cash is paid before the obligation is incurred
    [Prepaid expenses,]

                            © Edelstein & Company LLP,
                              Boston, Massachusetts
Funky Things You Need to Know
     About Nonprofit Accounting
                              2010                      2011            Revenue or
                                                                     Expense Recorded
                                                                            in:
Accounts receivable;   Service provided or     Cash received         2010
pledges receivable;    commitment from
grants payable         donor
Accrued expenses;      Service provided by     Cash paid             2010
accounts payable       vendor; obligation
                       incurred
Deferred revenue;      Cash received           Service provided by   2011
deferred tuition       before the earnings     the nonprofit
                       process is complete;
                       before the term
                       starts
Prepaid expenses       Payment made for        Service received by   2011
(deferred expenses)    future year expense     the vendor



                                 © Edelstein & Company LLP,
                                   Boston, Massachusetts
Funky Things You Need to Know
      About Nonprofit Accounting
   Contributions are recorded when a promise to
    make a donation is made by a donor
   In-kind gifts of specialized services are recorded
    in the period the service is received
   Gifts can be for restricted purposes
   Natural versus functional classification




                     © Edelstein & Company LLP,
                       Boston, Massachusetts
Statement of Financial Position:
          Example
      GOOD WORKS, Inc.

      Statement of Financial Position
      December 31, 2010

      Assets

      Cash                                              $ 120,775
      Unconditional promises to give                       25,000
      Prepaid expenses                                      3,600
      Furniture and equipment                               3,225
      Security deposit                                      1,500

      Total assets                                        154,100

      Liabilities and net assets

      Liabilities
      Accounts payable                                      7,500
      Accrued expenses and other liabilities                5,800
                                                           13,300

      Net assets:
       Unrestricted                                        40,800
       Temporarily restricted                              95,000
       Permanently restricted                               5,000
         Total net assets                                 140,800

      Total liabilities and net assets                  $ 154,100




                           © Edelstein & Company LLP,
                             Boston, Massachusetts
Statement of Activities: An Example
 GOOD WORKS, Inc.

 Statement of Activities
 For the Year Ended December 31, 2010


                                                                 Temporarily       Permanently
                                             Unrestricted         Restricted        Restricted       Total

 Support and revenue:
 Contributions                           $ 200,000           $    150,000      $       5,000     $ 355,000
 Program service                            50,000                      -                  -        50,000
 In-kind contributions                      12,000                                         -        12,000
 Membership dues                            13,500                      -                  -        13,500
 Interest income                             1,300                      -                  -         1,300
 Net assets released from restrictions         95,000              (95,000)               -              -

 Total support and revenue                    371,800              55,000             5,000        431,800

 Expenses:
 Program services:
 Education services                           240,000                   -                 -        240,000
 Support services                              79,000                   -                 -         79,000
 Advocacy                                      66,000                   -                 -         66,000

 Total program services                       385,000                   -                 -        385,000

 Management and general                        39,000                   -                 -         39,000
 Fundraising                                   50,000                   -                 -         50,000
 Total expenses                               474,000                   -                 -        474,000

 Change in net assets                        (102,200)             55,000             5,000        (42,200)


 Net assets - beginning of year               143,000              40,000                 -        183,000

 Net assets - end of year                $     40,800        $     95,000      $       5,000     $ 140,800


                                                            © Edelstein & Company LLP,
                                                              Boston, Massachusetts
Quick Ratio
Cash + Unconditional promises (accounts receivable) /
 Current liabilities
              Cash                                       120,775
              Unconditional promises to give              25,000
                                                         145,775


              Accounts payable                             7,500
              Accrued expenses and other liabilities       5,800
                                                          13,300


                                                         145,775
                                                       Divided by
                                                          13,300
                                                       Equals
                                                                11 :1




                       © Edelstein & Company LLP,
                         Boston, Massachusetts
Months of Cash Reserves
Cash / Average Monthly Expenses


             Total expenses                                474,000
             Less: in-kind                                 (12,000)
                                                           462,000
                                                        Divide by 12
             Average monthly expenses                       38,500
             Cash                                          120,775




             Cash divided by average monthly expenses            3:1




                       © Edelstein & Company LLP,
                         Boston, Massachusetts
Efficiency Ratio
Program expenses / Total expenses



               Program services           385,000
                                        Divided by
               Total expenses             474,000


                                                 81%




                   © Edelstein & Company LLP,
                     Boston, Massachusetts
Being Properly Registered To
                 Fundraise
 Certificate of Solicitation
 Gaming Activities
     Raffles
     Gaming and Bingo

     Poker Tournaments




                  © Edelstein & Company LLP,
                    Boston, Massachusetts
Watch the Language You Use to
             Solicit Funds
 Don’t inadvertently create a restriction by
  the language used
 It is hard enough getting unrestricted
  support
 Language like “Funds raised will be used
  to support Good Works Inc.’s programs”
  can create a restriction


                 © Edelstein & Company LLP,
                   Boston, Massachusetts
Internal Controls
The process by which information and authority flows across an organization so that it can
accomplish its goals


                                  Tone at the
                                     Top



                           Internal Control Policies
                               and Procedures


                           Policies and Procedures
                                 are Followed


                              Nonprofit Achieves
                                 Its Mission


                                © Edelstein & Company LLP,
                                  Boston, Massachusetts
Segregation of Duties
Those having responsibility for handling assets are not responsible for
   recording the assets in the accounting system




      There is a wall between the receiving of asset function and the task of
                recording the transaction in the accounting system


                             © Edelstein & Company LLP,
                               Boston, Massachusetts
Fraud is Concealed
   Most common fraud schemes
       Fictitious vendor: a billing scheme
       Check tampering: process of altering checks

       Skimming: taking money before it is recorded

   The myth of the trusted employee

Source: Association of Certified Fraud Examiners, 2010 Report to the Nations on Occupational Fraud and Abuse




                                           © Edelstein & Company LLP,
                                             Boston, Massachusetts
The Fraud Triangle
                         OPPORTUNITY




RATIONALIZATION                                PRESSURE




                  © Edelstein & Company LLP,
                    Boston, Massachusetts
Simple Fraud Prevention
                Techniques
The appearance of oversight is a deterrent
Other simple techniques
   Someone independent of the accounting process (like
    the treasurer) receives duplicate copies of the bank
    statements
   Limit access to the accounting software by providing
    read only rights
   Have two check signers for checks deposited over a
    certain amount


                       © Edelstein & Company LLP,
                         Boston, Massachusetts
Contact Information

Alfonso Perillo, CPA, CFE

aperillo@edelsteincpa.com




       © Edelstein & Company LLP,
         Boston, Massachusetts
Find listings for our current season
          of webinars and register at:

            NonprofitWebinars.com


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Nonprofit Finances - Its Mysteries Revealed

  • 1. Nonprofit Finances: Its Mysteries Revealed A Primer for Board Members Alfonso Perillo A Service Of: Sponsored by:
  • 2. Affordable collaborative data management in the cloud. A Service Of: Sponsored by:
  • 3. Today’s Speaker Alfonso Perillo Partner, Edelstein & Company LLP Hosting: Assisting with chat questions: April Hunt, Nonprofit Webinars Sam Frank, Synthesis Partnership A Service Of: Sponsored by:
  • 4. Nonprofit Finances: Its Mysteries Revealed A primer for Board Members Alfonso Perillo, CPA, CFE Partner, Nonprofit Division Edelstein & Company LLP
  • 5. Board Oversight is Critical  The nonprofit is responsible for its internal controls  The outside accountant’s responsibility is limited to ensuring that the financial statements are fairly stated  There is no substitute for good governance © Edelstein & Company LLP, Boston, Massachusetts
  • 6. Typical Financial Documents Received by Board Member  Audited financial statements  Budgets  Budget–to-actual reports  Form 990 © Edelstein & Company LLP, Boston, Massachusetts
  • 7. Numbers Are Important and They Tell a Story  Numbers can be manipulated  Watch for discrepancies  Budget to actual – accrual and cash  Compare reports (audited financial statements to internally prepared statements)  Are answers to questions asked plausible?  Have the auditors present to the board or a subgroup of the board (audit or finance committee) © Edelstein & Company LLP, Boston, Massachusetts
  • 8. The Balance Sheet (Statement of Financial Position) Assets = Asset = provides a future benefit Liabilities + Liability = represents a future obligation Net Assets (Equity) Net assets = cumulative earnings © Edelstein & Company LLP, Boston, Massachusetts
  • 9. The Financial Statements  Statement of financial position: Represents the organization’s assets and liabilities at a point in time.  Usually at the end of the nonprofit’s year end, but can be quarterly or monthly  Statement of Activities: Represents financial activity for a period.  Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this can be presented on a quarterly or monthly basis.  Inflows are revenues, outflows are expenses  Changes in net assets (net income) represent the difference between revenues and expenses.  Statement of Cash Flows: Represents cash inflows and outflows for a period.  Usually for a period of time, the nonprofit’s fiscal or calendar year. Again, this can be presented on a quarterly or monthly basis. © Edelstein & Company LLP, Boston, Massachusetts
  • 10. Accrual v. Cash Basis of Accounting Cash Accrual  Revenue recorded when  Revenue recorded when received earned and is realized or realizable  Expense recorded when  Expense recorded when paid the obligation is incurred and in the same period in which related revenue is recognized (matching principle)  Not GAAP  GAAP © Edelstein & Company LLP, Boston, Massachusetts
  • 11. Strange Timing Differences  Accrued revenue: before cash is received [Accounts receivable; pledges receivable; grants receivable]  Accrued expenses: before cash is paid  Deferred revenue: cash is received before earnings process is complete [Deferred tuition, advances]  Deferred expense: cash is paid before the obligation is incurred [Prepaid expenses,] © Edelstein & Company LLP, Boston, Massachusetts
  • 12. Funky Things You Need to Know About Nonprofit Accounting 2010 2011 Revenue or Expense Recorded in: Accounts receivable; Service provided or Cash received 2010 pledges receivable; commitment from grants payable donor Accrued expenses; Service provided by Cash paid 2010 accounts payable vendor; obligation incurred Deferred revenue; Cash received Service provided by 2011 deferred tuition before the earnings the nonprofit process is complete; before the term starts Prepaid expenses Payment made for Service received by 2011 (deferred expenses) future year expense the vendor © Edelstein & Company LLP, Boston, Massachusetts
  • 13. Funky Things You Need to Know About Nonprofit Accounting  Contributions are recorded when a promise to make a donation is made by a donor  In-kind gifts of specialized services are recorded in the period the service is received  Gifts can be for restricted purposes  Natural versus functional classification © Edelstein & Company LLP, Boston, Massachusetts
  • 14. Statement of Financial Position: Example GOOD WORKS, Inc. Statement of Financial Position December 31, 2010 Assets Cash $ 120,775 Unconditional promises to give 25,000 Prepaid expenses 3,600 Furniture and equipment 3,225 Security deposit 1,500 Total assets 154,100 Liabilities and net assets Liabilities Accounts payable 7,500 Accrued expenses and other liabilities 5,800 13,300 Net assets: Unrestricted 40,800 Temporarily restricted 95,000 Permanently restricted 5,000 Total net assets 140,800 Total liabilities and net assets $ 154,100 © Edelstein & Company LLP, Boston, Massachusetts
  • 15. Statement of Activities: An Example GOOD WORKS, Inc. Statement of Activities For the Year Ended December 31, 2010 Temporarily Permanently Unrestricted Restricted Restricted Total Support and revenue: Contributions $ 200,000 $ 150,000 $ 5,000 $ 355,000 Program service 50,000 - - 50,000 In-kind contributions 12,000 - 12,000 Membership dues 13,500 - - 13,500 Interest income 1,300 - - 1,300 Net assets released from restrictions 95,000 (95,000) - - Total support and revenue 371,800 55,000 5,000 431,800 Expenses: Program services: Education services 240,000 - - 240,000 Support services 79,000 - - 79,000 Advocacy 66,000 - - 66,000 Total program services 385,000 - - 385,000 Management and general 39,000 - - 39,000 Fundraising 50,000 - - 50,000 Total expenses 474,000 - - 474,000 Change in net assets (102,200) 55,000 5,000 (42,200) Net assets - beginning of year 143,000 40,000 - 183,000 Net assets - end of year $ 40,800 $ 95,000 $ 5,000 $ 140,800 © Edelstein & Company LLP, Boston, Massachusetts
  • 16. Quick Ratio Cash + Unconditional promises (accounts receivable) / Current liabilities Cash 120,775 Unconditional promises to give 25,000 145,775 Accounts payable 7,500 Accrued expenses and other liabilities 5,800 13,300 145,775 Divided by 13,300 Equals 11 :1 © Edelstein & Company LLP, Boston, Massachusetts
  • 17. Months of Cash Reserves Cash / Average Monthly Expenses Total expenses 474,000 Less: in-kind (12,000) 462,000 Divide by 12 Average monthly expenses 38,500 Cash 120,775 Cash divided by average monthly expenses 3:1 © Edelstein & Company LLP, Boston, Massachusetts
  • 18. Efficiency Ratio Program expenses / Total expenses Program services 385,000 Divided by Total expenses 474,000 81% © Edelstein & Company LLP, Boston, Massachusetts
  • 19. Being Properly Registered To Fundraise  Certificate of Solicitation  Gaming Activities  Raffles  Gaming and Bingo  Poker Tournaments © Edelstein & Company LLP, Boston, Massachusetts
  • 20. Watch the Language You Use to Solicit Funds  Don’t inadvertently create a restriction by the language used  It is hard enough getting unrestricted support  Language like “Funds raised will be used to support Good Works Inc.’s programs” can create a restriction © Edelstein & Company LLP, Boston, Massachusetts
  • 21. Internal Controls The process by which information and authority flows across an organization so that it can accomplish its goals Tone at the Top Internal Control Policies and Procedures Policies and Procedures are Followed Nonprofit Achieves Its Mission © Edelstein & Company LLP, Boston, Massachusetts
  • 22. Segregation of Duties Those having responsibility for handling assets are not responsible for recording the assets in the accounting system There is a wall between the receiving of asset function and the task of recording the transaction in the accounting system © Edelstein & Company LLP, Boston, Massachusetts
  • 23. Fraud is Concealed  Most common fraud schemes  Fictitious vendor: a billing scheme  Check tampering: process of altering checks  Skimming: taking money before it is recorded  The myth of the trusted employee Source: Association of Certified Fraud Examiners, 2010 Report to the Nations on Occupational Fraud and Abuse © Edelstein & Company LLP, Boston, Massachusetts
  • 24. The Fraud Triangle OPPORTUNITY RATIONALIZATION PRESSURE © Edelstein & Company LLP, Boston, Massachusetts
  • 25. Simple Fraud Prevention Techniques The appearance of oversight is a deterrent Other simple techniques  Someone independent of the accounting process (like the treasurer) receives duplicate copies of the bank statements  Limit access to the accounting software by providing read only rights  Have two check signers for checks deposited over a certain amount © Edelstein & Company LLP, Boston, Massachusetts
  • 26. Contact Information Alfonso Perillo, CPA, CFE aperillo@edelsteincpa.com © Edelstein & Company LLP, Boston, Massachusetts
  • 27. Find listings for our current season of webinars and register at: NonprofitWebinars.com A Service Of: Sponsored by: