FINANCIAL LITERACY FOR BOARD MEMBERSPresented by:James Halleran, CPA, PartnerJames Moore & Co.

Fiduciary Responsibilities of Board Members

One of the main responsibilities of board members is to maintain financial accountability of their organization. Board members act as trustees of the organization’s assets and must exercise due diligence to oversee that the organization is well-managed and that it’s financial situation remains sound. Here is an outline on how board members can fulfill their role as fiduciaries.

What does fiduciary mean?

Fiduciary duty requires board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient. Board members, as stewards of public trust, must always act for the food of the organization, rather than for the benefit of themselves. They need to exercise reasonable care in all decision making, without placing the organization under unnecessary risk.

Setting up and monitoring key financial indicators

Ensuring adequate control mechanisms

Approving the budget

Overseeing the organization’s legal obligations.

• Understand the organization’s internal control structure

• Understand the financial statements

• Know the components of nonprofit financial statements

• Understand the adequacy of resources and analysis of financial statements

Objectives

What are Internal Controls?

Why are they Important?

Who is Responsible?

Internal controls are the measures that an organization develops and implements to:

• Conduct business in an orderly and efficient manner

• Safeguard its assets and resources

• Deter and detect errors, fraud and theft

• Ensure accuracy and completeness of its accounting data

• Produce reliable and timely financial and management information

• Ensure adherence to its policies and plans

Internal Controls – What and Why?

• Management is primarily responsible

• The governing board is ULTIMATELY responsible

Internal Controls – Who’s Responsible?

Elements ofInternal Control Framework

Internal Control Process

Characteristics of a Favorable Control Environment

An effective control environment is defined as follows:

• An environment in which competent people understand their responsibilities, the limits of their authority, and are knowledgeable, mindful and committed to doing what is right and doing it the right way.

• Employees in this environment are committed to following the organization’s policies and procedures and its ethical behavioral standards.

• The control environment encompasses technical competence and ethical commitment. It is an intangible factor that is essential to an effective internal control.

What is the governing board’s role?

To enhance an organization’s control environment, the governing board and management should:

• Establish and effectively communicate written policies and procedures, a code of ethics and standards of conduct.

• Behave in an ethical manner, creating a positive tone “at the top.”

• Require the same standard of conduct from everyone in the organization.

Items That Can Enhance an Organization’s Control Environment

• Effective human resource policies and procedures that address hiring, orientation, training, evaluation, counseling, promotions, compensation and disciplinary actions.

• Make sure that employees are well acquainted with policies and procedures that pertain to their job responsibilities.

• Make sure that employees and board members comply with the conflict of interest policies and disclose any potential conflicts of interest.

• Make sure that employees are adequately trained.

Items That Can Enhance an Organization’s Control Environment

• Make sure that employee performance evaluations are conducted periodically. Good performance should be valued and get positive recognition.

• Make sure that appropriate disciplinary action is taken when an employee does not comply with policies and procedures or standards.

What is needed for the effective ongoing risk assessment?

• The board and management should perform systematic and period reviews of the risks and threats to the organization.

• This review allows the organization to identify control points and where to implement prevention controls (rather than detection controls).

• It also allows the organization to perform a cost/benefit analysis of whether a control is really work implementing based on the risk identified.

• Examples of potential risks include:o Internally – new program riskso Externally – funding restrictions

What are Control Activities?

Policies and procedures that help ensure management’s directives are carried out. Examples include:

• Accounting policies and procedures

• Cost allocation plans

• Procedures that are in place to implement changes in laws, regulations, guidance and funding agreements.

• Adequate segregation of duties provided between performance, review and recordkeeping of a task.

• Computer program controls including access controls, security controls, reviews of input and output data.

What is needed for adequate information and communication?

Communication must be in all directions:

• Top down, bottom up and lateral

• Both external and internal

What is needed for adequate information and communication?

Examples:

• Reports are provided timely to managers and board members for review.

• There are adequate internal and external communication channels, such as staff meetings, bulletin boards, surveys, suggestion boxes.

• Accurate information is accessible to those who need it.

• Actions are taken as a result of communications.

What type of monitoring and follow up are needed?

You may select from a wide variety of monitoring procedures including, but not limited to:

• Supervisory reviews of controls, such as reconciliation reviews as a normal part of processing.

• Self assessments by boards and management regarding the tone they set in the organization and the effectiveness of oversight functions.

• Analysis of and appropriate follow-up on operating reports or metrics that might identify anomalies indicative of a control failure.

Based on the results of monitoring, changes should be made to controls accordingly because internal controls are not a “one time” effort. Things change.

What are the limitations of internal controls?

• Cost benefit considerations – sometimes a control is just too costly to justify

• Potential for management override – most always present

• Risk of collusion

Segregation of Duties – Two PeopleAccountant or otherprofessional staff*

*Non-accounting personnel such as a receptionist, administrative personnel, etc. can be trained to perform some of the less technical duties.

• Mail checks• Write checks• Reconcile bank statement• Record credit/debits• Approve payroll• Disburse petty cash• Authorize purchase orders• Authorize check requests• Authorize invoices for payment

• Receive and open bank statements

• Sign checks• Make deposits• Perform interbank transfers• Distribute pay checks• Review petty cash• Review bank reconciliations• Approve vendor invoices• Perform analytical procedures• Sign important contracts• Make compensation adjustments• Discuss matters with board or

audit committee• Review wire/ACH transactions• Review account activity

Executive Director

Segregation of Duties – Three People

*Non-accounting personnel such as a receptionist, administrative personnel, etc. can be trained to perform some of the less technical duties.

Accounting Staff

• Write Checks• Reconcile bank statement• Record credit/debits• Reconcile petty cash• Distribute payroll

• Sign important contracts• Make compensation adjustments• Sign checks• Complete deposit slips• Perform interbank transfers• Perform analytical procedures• Review bank reconciliations• Review wire/ACH transactions• Review account activity

Executive Director

Accountant / other*

• Approve payroll• Process vendor invoices• Mail checks• Perform analytical procedures• Approve invoices for payment• Disburse petty cash• Open mail and log cash• Receive bank statements

Segregation of Duties – Four People

*Non-accounting personnel such as a receptionist, administrative personnel, etc. can be trained to perform some of the less technical duties.

Accounting Staff

• Write Checks• Reconcile bank statement• Record credit/debits• Reconcile petty cash

• Sign important contracts• Make compensation adjustments• Sign checks• Perform analytical procedures• Review wire/ACH transactions• Review account activity

Executive Director

Accountant / other*• Distribute payroll• Open mail and log cash• Disburse petty cash• Mail checks• Review bank reconciliation

Accountant / other*

• Approve vendor invoices• Perform interbank transfers• Approve payroll• Complete deposit slips

Why do you need to understandthe financial statements?

Components of NonprofitFinancial Statements

The Statement of Financial Position

The Statement of Activities

The Statement of Functional Expenses (if applicable)

The Statement of Cash Flows

Reporting of Organization Activity

Statement of Financial Position

Financial position at a point in time

Statement of Financial Position

Financial condition at a point in time

Beginning of Year

October 1, 20XX

End of Year

September 30, 20XX

Statement of Activities

Summary of activity for a period of time

Statement of Functional ExpensesSummary of how expenses are distributed for a period of time

Statement of Cash Flows

Summary of activity for a period of time

Statement of Financial Position

Assets(Items the nonprofit organization owns)

Liabilities(Amounts owed to outside vendors,

creditors, grantors and lenders)

Net Assets(Portion of assets

funded by nonprofits own resources)

Assets on the Statement of Financial Position

The most common types of assets included on the Statement of Financial Position include:

• Cash and cash equivalents

• Certificates of deposit

• Pledges, grants or accounts receivable

• Prepaid expenses

• Investments

• Inventory

• Fixed assets/property and equipment/capital assets

• Collections

Liabilities on the Statement of Financial Position

The most common types of liabilities included on the Statement of Financial Position include:

• Accounts payable

• Accrued expenses

• Deferred revenue

• Long-term debt

Net Assets on the Statement of Financial Position

Net assets included on the Statement of Financial Position include:

• Without Donor Restrictions

• With Donor Restrictions

Statement of Activities

• The Statement of Activities provides information on the operating activities of the non-profit between one date and another (e.g., for the year ended September 30, 2011).

• The Statement provides information on the mix of revenues and expenses and may be a useful predictor of future activities.

• The Statement measures activities as resources are received and spent.

Revenues Reported in the Statement of Activities

The most common revenues for nonprofits are:

• Contributions – donations, gifts or transfer of assets (these include unrestricted, restricted and temporarily restricted contributions)

• Program service revenues

• Governmental grants

• Special events revenue

• Investment income

Expenses Reported in the Statement of Activities

Expenses are divided into two functional categories:

• Program expenses

• Supporting expenses

Statement of Functional Expenses

Statement of Cash Flows

This statement proves information on the cash inflows and outflows of the organization between one date and another. Cash flows are separated into three different business activities.

• Operating

• Investing

• Financing

Financial Statements & Supplementary Schedules

• Sometimes called footnotes. These notes describe the accounting principles used by management, descriptions of the entity, and other required disclosures that make your financial statements conform with Generally Accepted Accounting Principles.

• Notes should help the user better understand the financial statements and the reporting entity’s financial and operating prospects.

• Supplementary Schedules = Additional Detail

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Questions?

Contact Information:

James Halleran, CPA386.257.4100James.Halleran@jmco.com