By Jeff Holt, CPA, MBA
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Nonprofit Services Group

Having a good match with a CPA firm which understands the issues facing not-for-profit businesses can make all the difference between a good audit experience and a traumatic one.

Generally at the end of field work, an audit exit conference is held to satisfy required communications under auditing standards. The audit committee and the auditor breathe a collective and satisfied sigh of relief that this year’s audit is now behind them and everyone can move on to fulfilling the organization’s charitable mission.

However, after the “formal” part of the meeting is over, I will, as a Partner in the nonprofit practice of SLGG, inevitably get the question, “So, can you tell us about what’s going on in the nonprofit industry that will affect us in the future?”

Here is my top “5” list of accounting topics which have had or will have an impact on the nonprofit world:

·         Principles of Effective Practice for Nonprofit Organizations – to be issued by the Panel on the Nonprofit Sector

·         FASB 158

·         Statement on Auditing Standards #112

·         Statement on Auditing Standards #114

·         Proposed New Financial Accounting Standards on Nonprofit Mergers and Acquisitions, and Treatment of Goodwill under a Nonprofit Merger

Principles of Effective Practice for Nonprofit Organizations

Did you ever wonder what “best practices” are for effective governance of a nonprofit organization? How best to staff my Board or audit committee?  How do I ensure proper financial oversight of charitable resources? What policies and procedures should I follow when I solicit funds from the public to build donor support and confidence?

Well, there is no need to wonder any more!

The Panel on the Nonprofit Sector (the “Panel”) assigned an advisory committee to examine standards and principles established by over 50 self-regulation and accreditation systems that monitor different types of charitable organizations. The Panel was formed by the U.S. Senate Finance Committee in order to develop a standard set of principles for all charitable organizations to follow. The advisory committee has recently issued a second draft of its report for public comment entitled, “Draft Principles of Self Regulation (of the Nonprofit Sector).” This report is divided into 5 key areas that detail the best practices and principles for nonprofit organizations, as follows:

·         Facilitating Legal Compliance and Public Disclosure

·         Effective Governance

·         Strong Financial Oversight

·         Responsible Fundraising

·         Drafts of Additional Principles

The advisory committee is still receiving comments on these principles through March 30^th, 2007, but it is expected to recommend the final draft to the full Panel after this period. The Panel is expected to issue its final recommendations to the nonprofit community in late Spring 2007.

SLGG has suggested and helped implement many of the principles listed in the report draft to our nonprofit clientele. Implementation of these regulatory principles will served to strengthen a nonprofit business’s overall regulatory environment, including financial oversight regulations which can streamline the audit process enormously.

I highly recommend that you review the report draft principles. They can be accessed at the Panel on the Nonprofit Sector’s website at: www.nonprofitpanel.org/selfreg/index_html.

Financial Accounting Statement #158 – Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans

Statement #158 improves financial reporting by requiring an employer (including a nonprofit organization) to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through changes in comprehensive income (for a business entity) or unrestricted net assets of a not-for-profit organization.

Nonprofit organizations are required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007.

Statement on Auditing Standards #112 – Communicating Internal Control Related Matters Identified in an Audit

This standard provides guidance to auditors on communicating matters related to an agency’s internal control identified in an audit and on evaluating the severity of control deficiencies identified in an audit.

SAS #112 includes the following definitions:

A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

A significant deficiency is a control deficiency or a combination of control deficiencies that adversely affects the entity’s ability to initiate, authorize, record, process or report financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected.

A material weakness is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

So, what does this mean to you? It means:

1. Internal control awareness – while controls have always been a critical management function, a nonprofit’s management should place even greater importance on designing and implementing an effective internal control system

2. Likelihood of more reportable audit findings – this statement has “lowered the bar” so that findings that may not have been previously reportable may now be reportable because there is the potential for misstatement, not whether an actual misstatement occurred.

3. Correcting and following up on findings – an increase in the number of reportable findings will mean more work for management of a nonprofit to correct and follow up on those findings.

How can you prepare? Nonprofit management members should inform their respective Boards now about SAS #112 because of the potential of more audit findings than they may have seen in the past. You don’t want a surprise at a future board meeting when the audit is presented.

SAS #112 is effective for audits of periods ending on or after December 15, 2006. For most nonprofits, this will mean SAS #112 will be effective for June 30, 2007 audits.

Statement on Auditing Standards #114 – The Auditor’s Communication with those Charged with Governance

This SAS replaces SAS # 61, which established communication requirements applicable to entities that either had an audit committee or had an equivalent group designated with financial oversight responsibility (like an audit committee). SAS #114 broadens the communications requirement to audit of financial statements of all nonissuers and establishes a requirement for the auditor to communicate with those charged with governance certain significant matters related to the audit.

While SAS #114 is consistent with its predecessor, it does include additional matters to be communicated and provides additional guidance on the communication process. A few of these are:

·         Adds requirements to communicate:

o        An overview of the planned scope and timing of the audit

o        Representations the auditor is requesting from management

·         Requires the auditor to determine the appropriate person in the entity’s governance structure with whom to communicate particular matters

·         Recommends that significant findings be in writing, and other communication be oral or in writing

·         Establishes a requirement to document required communications with those charged with governance.

Having the right CPA firm which will embrace the communications requirements as listed here can be of vital importance to effective financial oversight of your nonprofit organization.

SAS #114 is effective for audits of financial statements for periods beginning on or after December 15, 2006.

Proposed New Financial Accounting Standards on Nonprofit Mergers & Acquisitions, and Treatment of Goodwill under a Nonprofit merger

Some may be aware that the good folks of FASB have been working for years on standardizing the methodology for nonprofit mergers and acquisitions so that it is consistent with for-profit businesses. Up until FAS 141-Business Combinations was issued, organizations had 2 potential accounting methodologies for mergers and acquisitions: a) The purchase, or acquisition method, and b) pooling of interests. Typically, nonprofits used the pooling of interests method because it reflected more the economics of the overall merger.

Alas, FAS 141 basically disallowed the use of pooling of interests for for-profit businesses, but left the nonprofit organizations on hold until further guidance was issued. Nonprofit organizations won’t be hanging on much longer.

The Financial Accounting Standards Board has recently issued two proposed Statements (concurrently), the first dealing with Nonprofit Mergers and Acquisitions, and the second on what to do with Goodwill and other Intangible Assets acquired by a nonprofit in a merger or acquisition.

The first statement:

·         Eliminates the use of the pooling of interest method and requires the use of the purchase (or acquisition) method for any merger or acquisition. This means that assets and liabilities acquired are measured at fair value (not book value as is with pooling), and either goodwill is recognized (if the consideration paid is greater than the fair value of the net assets acquired), or a contribution is recognized (if the fair value of the net assets acquired exceeds consideration paid). This statement also discloses information to enable users of the statements to evaluate the nature and financial effects of the merger or acquisition.

 The second statement:

·         This statement deals with the accounting for goodwill acquired by a non-profit in a merger or acquisition, and incorporates guidance from other Standards – primarily FAS 142 - Goodwill and Other Intangible Assets.

Both of these statements (both will be issued together) are required to be applied by a non-profit in its fiscal year that begins approximately six months after the issuance of these statements as final (which is unknown as of the date of this writing). For example, if the final statements are issued on June 30, 2007, its application would be required in fiscal years beginning after December 15, 2007. Earlier application would be encouraged for organizations with annual periods that begin on or after the date the Statements are issued.

What can you do about these new rules and standards?

Implementation of new standards and procedures can be a headache to any organization, but nonprofit organizations face unique challenges. Often times, because of budgetary and other concerns, nonprofit accounting departments run lean and focus more on the day to day general ledger, A/R, A/P, payroll, and budget functions and are may not be as concerned with financial reporting and the year end audit until their audit firm contacts them.

SLGG currently serves over 80 nonprofit organizations in assurance and taxation work. We do so not only by being there to conduct year end audit fieldwork and prepare tax returns but also offer our year round involvement, whether it is assisting on new standards or pronouncements, communicating best practices, or simply available when a question comes up. Having the right CPA firm to handle audits and financial reporting can make all the difference in your ability to focus on your mission as a nonprofit leader.

What Else is Going on in the Nonprofit World?

There is more!  Other items of note that are applicable to nonprofits are:

·         The Pension Protection Act of 2006

·         Not-for-Profit Organizations Industry Developments – 2006 (issued annually by the AICPA, 2007 is not yet available)

Stay Tuned for The 5 Hottest Topics in Nonprofit Accounting, Part II. Until then!

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