Posts Tagged ‘nonprofit


“Other” Audits

We talk a lot about financial accounting, financial statements audits, and internal audit, but what about those “other” audits and financial reporting?  Occasionally, we organizations go through audits that don’t fit into our normal course of business.

For example, if an organization accepts or offers any Charitable Gift Annuities, they may need to register with the state as a provider of insurance.  With that comes annual reporting requirements and the periodic audit of those annual reports.  Organizations with retirement plans likely have their retirement plans audited.  IT systems may be audited as a part of the financial statement audit, and organizations that accept donations via credit card may have a PCI compliance audit.  Grant accepting organizations require an A-133 audit.  And, though we all pray they don’t happen, there’s also the possibility of the dreaded IRS audit.

At times the amount of regulations and number of audits can seem daunting.  In a given year, World Vision US and World Vision Int’l combined may have 7 to 10 external audits, plus additional voluntary and required reporting to groups such as Accord, InterAction, the ECFA, and the BBB.

How do we handle all this “other?”  First, as with all things, do it right the first time.  Audits are feared when you know you’ve done something wrong or when you’re unsure if you did it right.  Ensuring that we do our accounting and operation right the first time, to the best of our ability, takes a lot of stress out of audit and reporting, especially when the audits are out of the norm or unexpected.  This is where solid internal controls and policies/procedures come into play

Second, stay organized.  Keep lists or calendar reminders of all the audits and reports.  Have assigned point people for each audit.  Due dates occur throughout the year and do not always coincide with fiscal year end.  Keeping track of entrance dates, exit dates, deadlines, auditable year ends, etc. is very important.

Third, stay in scope.  With a new or infrequent audit, you may not understand exactly what they are looking at or why.  Before the audit begins, make sure that you have a good understanding of what the audit is covering.  Give the auditors the information that is within that scope, and keep conversations within the scope of the audit.  This helps keep the audit running smoothly and on time.

Four: be courteous.  Auditors/examiners are employees working a job, and likely have no personal interest in the audit outside of their job role.  Help make the job easy on both of you.

Finally, communicate.  If you don’t understand something, ask questions.  If the auditor brings up an issue, talk about it and investigate.  Your organization is unique and likely has a quirk the auditor has not come across before.  Take time to explain things as they come up, while the audit is in progress.  Don’t wait for the audit report.

See also:  A Good Audit Experience


Results reporting: Momentum for Non-profits to Demonstrate Effectiveness

These last few years, watchdog agencies and donors have increasingly created demand and interest in results reporting for Non-profits.  In January, 2013, Charity Navigator released its final rating approach for results.The focus is on a charity’s design, monitoring, and evaluation with the idea charities who design and evaluate programs transparently will be more accountable and more effective.  CN’s new rating approach is not an A vs. B rating, comparing one charity to another, but rather rating the individual charity to a yard stick and assessing how they measure up to CN’s expectation.  This has the potential to push charities towards more effective methods, and also draw out evidence which, until now, was not provided publically.

Recently World Vision released its own Impact reporting 1.0 – a first version of webpages which publish impact in terms of outputs, outcomes, and its unique approach to programming.  It’s a step in a direction to provide visibility to the public not only on what it recently did, but also how it has evolved over 60+ years of ministry.  These webpages are not perfect, but it’s a large step in a new direction, and one I hope empowers greater effectiveness in the future.


What matters the most to be successful in internal auditing — Brilliance or Consistency?

What matters the most to be successful in internal auditing — Brilliance or Consistency? Before we answer that, here is one more question to answer first.

“What is your 20 mile march?” You may be asking what the 20 mile march is. Let me tell you.

Some days back, I was reading about a real life story that happened in 1911. It was about the adventure Roald Amundsen and Robert Falcon Scott set out upon. The adventure was to be the first person to reach the South Pole. Both Amundsen and Scott set out at the same time. Both were ruthless hardworking never-say-die attitude adventurers. But, only one group of explorers returned. Scott failed while Amundsen succeeded. I was intrigued. I was perplexed. My curiosity was kindled. I wanted to know what made Amundsen accomplish the mission while Scott failed.

Subsequently, I learnt that Scott was said to have let the weather decide when they should move. Some days they would push great distances, others they would not move at all. In the end, it is believed that this is what caused the death of his whole expedition team.

Amundsen, on the other hand, had a focus. He had a game plan. He had a strategy. He planned to go 20 miles every day. No matter the weather or how the team felt, they were to go the 20 miles. Amundsen returned with all men in his expedition team alive.

“I may say that this is the greatest factor—the way in which the expedition is equipped—the way in which every difficulty is foreseen, and precautions taken for meeting or avoiding it. Victory awaits him who has everything in order — luck, people call it. Defeat is certain for him who has neglected to take the necessary precautions in time; this is called bad luck.” – from The South Pole”, by ‘Roald Amundsen’

This is where the principle of the 20 mile march germinates. Staying focused and being consistent every day. It would be interesting to note that the ‘20 mile march’ is a term first coined by Jim Collins in his latest book “Great by Choice”.

For you, the 20 mile march may not be literal. But, it could be symbolic. The 20 mile march will be an objective you have set for yourself.

Your 20 mile march could be:

  • Studying 30/45/60 minutes for C.I.A/C.I.S.A/ C.I.S.S.P examination everyday
  • Reading 20 pages of Fraud Examiners Manual everyday
  • Praying/Meditating 30/60 minutes every day
  • Reading at least one article about ‘Internal audit’ to learn something new everyday
  • And, anything on a daily basis!!!

Regardless of what your march is, it is important that you are consistent.

When your journey looks terrifying, go the 20 miles.

When you are worn-out, go the 20 miles.

When you want to give up, go the 20 miles.

Whether you are happy or sad, go the 20 miles.

Whether you are in cloud nine or in ground zero, go the 20 miles.

Come what may, just ……………… go the 20 miles.

When you break the consistency, you make the subsequent days more taxing. You have to catch-up things. You have to work harder than before. You have to beware of lagging further behind. To take your productivity to the next stage, you could experiment and put into action this principle.

I believe each of us will be having a vision, a goal. We all want to accomplish it. But every time we start our journey, we get hit by a setback. We need to move forward but we do not know how.

The key is we need a 20 mile march in our life.

One example from my personal life. During my schooling, I was a student with average intelligence. When I enrolled myself for Chartered Accountancy course, (touted as one of the toughest examinations in my country with a meager pass percentage) many laughed at me. I was ridiculed for the ‘dumb’ step I had taken in my career. Making their hunch true, I was struggling initially. I was not able to clear my Intermediate examination in my first attempt. At that juncture, I felt that it is essential to change my strategy. I started reading my lessons regularly on a daily basis. I tried to be more consistent in my preparation. In the end, that approach yielded fruits. I succeeded. I realized that consistency pays off. As I was able to apply this principle and succeed, I believe so can you.

If you do not have a 20 mile march, today I encourage you to create one.

Now, I believe everyone will be able to answer the first question. Remember, as Amundsen puts it, “Victory awaits him who has everything in order”.

Question: Do you agree with me? Please share them by leaving a comment to this post. I welcome your thoughts.

(For further reading, you can refer to the following resource from the business journal of McKinsey & Company:

Dan O’Brien. “In the long run, consistency always wins out: An interview with Olympic decathlon champion.” McKinsey Quarterly, August 2012)


The Future of Not-For-Profit Financial Statements

There are several recent developments which are likely going to have a significant impact on how nonprofit financial statements will look in the future: The establishment of the Private Company Council, the future of IFRS, and new projects added to the FASB agenda as a result of the efforts of the Not-for-profit Advisory Council.

I wrote previously about the debate about how FASB and the FAF should accommodate the needs of private companies. After the debate, letter writing campaigns, and press releases, the conversation settled down to what seems like a compromise: There is a new Private Company Council (PCC) which does not have any FASB member on it. This PCC will examine current and new GAAP standards looking for changes, exceptions and practical expedients for private companies. The PCC’s recommendations are subject to a simple majority approval by the FASB. It is important to note that Not-for-profits are not considered private companies and will not directly be affected by the work of the PCC. However there are two ways the PCC could impact NFP financial reporting. First, I suspect that the work of the PCC will highlight the resource constraints of private companies which will also bring attention to NFP resource constraints. Second, I think that the PCC work will result in practical expedients which will be logical for FASB to extend to NFPS as well.

Another area of change has been the broader talk of US entities moving to IFRS. It seems like it has been years that we have been waiting for the SEC to state a clear direction for public companies. We are still waiting, but there has been a shift in the perceived direction of the conversations. (Here is a great article on the latest IFRS developments, if you are interested) While it may still be possible that the US will go to IFRS at some point, if we do I think that we will likely retain a strong “US flavor”. It is likely that the FASB will retain independent standard setting authority. This may mean that some of the areas where US GAAP has more detailed guidance will remain in effect. ASC 958 for nonprofits is a great example of this.

The most industry specific changes are likely to come from the latest work of the FASB’s Not-for-profit Adversary Council (NAC). The NAC just completed a review of the not-for-profit financial reporting model. There has been some thought in the industry that FAS 116 & FAS 117 should be reviewed and perhaps refreshed or updated. The NAC divided their efforts into three areas:

  • Reporting Financial Performance – This group focused on reporting the results of the period paying particular attention to the statement of activities and statement of cash flows. The group agreed that there was room to improve the reporting of finance performance. One topic often raised for discussion is the idea that NFP’s should have some sort of operating measure (like net income) rather than merely reporting changes in net assets. The challenge with this concept is to find an operating measure(s) which is relevant across the diversity of NFPs. What is meaningful for a university is likely not as relevant for a conservation organization or food bank.
  • Liquidity and Financial Health – There is general agreement that liquidity information is both important, and not as clear as it could be under current GAAP. The NAC recommended that the FASB revisit the current net asset classifications and also consider alternate methods of improving liquidity information.
  • “Telling the Story” – Donors are very interested in what an NFP does, and how effective it is. These interests sparked a conversation about whether GAAP should require some form of MD&A for not-for-profits to expand the story of the organization in the financial statements. Of course organizations can voluntarily do this now, and many organizations produce annual reports highlighting programmatic accomplishments. However, the question is if there is value in standardizing and requiring this information under GAAP.

As a result of the NAC’s recommendations the FASB has added three new NFP standard setting projects on its agenda. These are:

  • Reexamine net asset classifications and improve liquidity information
  • Improve reporting of financial performance
  • Streamline and improve NFP-specific disclosures

In addition, the FASB has committed to do further research on the concept of an MD&A for NFPs. This research may or may not result in a future standard setting project.

So, it appears we are in the beginning of a season of change in nonprofit financial reporting. Now is a great time to make yourself heard. Be aware of these projects, and provide feedback and comments as you have them.


Be Creative

It is very easy as an accountant to lose sight of the big picture.  For those of us that work in U.S. or in another country away from the primary ministry as a part of a large organization, we generally work in cubicles, take few if any trips to “the field,” and have little interaction with the ministry of the organization other than anecdotal stories and expense invoices.  For those that do work in ministry countries, you may also be living in the capital city, working in a cube, holding a staring contest with a computer monitor.

In our world of Audit Risk Alerts and GAAP compliance, we can easily begin to think that following accounting guidance and producing sleek financial statements is the end goal.  We lose sight of the forest for the trees.  We push compliance to the detriment of the efficiency of the organization and the sanity of our coworkers.  Compliance is important.  GAAP must be followed.  I agree with both of those statements, and work hard at my organization to ensure that both stay true. But as accountants, and generally back office staff, we must work hard to remember why we are doing this as our visibility is limited.

Our ministry staff are working hard, overwhelmed with the burdens that I’m sure they face on a daily basis.  Our organization works internationally, with the poorest of the poor.  Our staff work in areas like South Sudan, and the DRC.  They are working with child soldiers, starving families, AIDS orphans, and victims of water-born illnesses.  In the midst of that they must also file expense reports, donor reports, grants reports, etc.  The question I ask is, how do we make this easier for them?  What can we do to help them have more time to concentrate on the program work they are doing?

I think accountants have the opportunity to be the most creative people in the organization (and in a good way, not the go-to-jail-for-fraud way) and this is why:  Being creative in an open space is easy.  It’s easy to “think outside the box” when there is no box to begin with.  Therefore, people in marketing and art and design departments of organization often get the credit for creativity.  In accounting and auditing, we are in a very constrained box.  To develop a truly creative, innovative idea that fits within the box we must use, we must be really creative.  We must think creatively inside the box.  This higher level of creativity is what gives accountants the opportunity to be the most creative employees.

By being creative in how we work, we can think about the end goal: the ministry and programs of the organization.  We can redesign processes, cut out unneeded burden, keep our financials in compliance so there are no unintended consequences, and keep our program workers focused on what they really need to be working on.

In conclusion, I challenge myself and the readers in two things:

(1)  Get to know your programs.  Invite members of your programs staff to speak to your accounting department.  Volunteer in local programs.  If possible take trips to field sites.  Ensure that you and your staff know what the organization does and what you are all working for.

(2) Be creative.  This isn’t something that is usually said to accountants, and it comes with a word of caution.  Don’t get so creative that you lose site of the rules and regulations that we must follow.  Getting your organization in trouble with auditors or the IRS can greatly diminish the impact of your organization.  But find ways to innovate inside the box.


Overhead rate is a poor measure of efficiency

There is no financial metric more scrutinized in the not-for-profit world than overhead percentage. As a result I am always hesitant to write on the topic because any article on overhead tends to be perceived as one of two messages: “Overhead rates are too high, and not-for-profits are not to be trusted” or “Overheads don’t really mean anything, so stop trying to compare organizations and just give us money anyway”. The truth is that organizations should welcome comparisons to peers. Such comparisons allow donors to make wise decisions, which results in funds flowing to the best managed not-for-profits. But, is overhead the best measure of quality management?

I like to point out that the effectiveness (not efficiency) is usually a donor’s primary concern when giving. At least this is true for me. Of course I would like the organizations to which I give money to be both effective and efficient. However, if you made me choose, I’d rather an organization make an inefficient but real change, than operate efficiently but fail to make a substantive change with their programs. The problem is that effectiveness is difficult to measure and much harder to compare across organizations. How do you compare teaching a child to read, saving a forest, and preventing a disease through immunization? In which case does a dollar achieve the most good? And even more challenging; how do you compare program quality across these categories? Absent comparable effectiveness measurements, donors and not-for-profits turn to overhead as a measurement of quality management. Overhead doesn’t measure effectiveness, but at least it measures efficiency . . . or does it?

I am participating in a project to measure the efficiency of the finance function across many of our organization’s ministry national offices. To do so, we’ve defined some efficiency metrics which allow us to compare our offices. These metrics include items such as cost per paycheck generated, cost per invoice paid, cost per employee expense report, etc. The common theme in these efficiency ratios is that the cost is divided by the outcome achieved. This allows for meaningful comparisons across offices, and useful evaluations of potential process improvements.

In doing this work I was struck by how different an overhead rate is from the efficiency metrics we are using. Overhead is not the measurement of cost against an outcome (cost per life transformed, cost per tree saved, cost per beneficiary trained), rather it is a ratio between types of costs (percentage of costs which are general and administrative, as compared to costs which are directly related to programs). This ratio among costs fails to capture actual efficiency and can lead to some surprising results. Consider a food shelter that is able to replace hired food servers with volunteers. The food servers are directly related to program activities, thus when they were paid the costs were programmatic. Removing these program costs increases the shelter’s overhead ratio. This works in reverse as well. Imagine a charity finds three vendor bids for a product needed for distribution in its programs. The organization could reduce overhead by intentionally purchasing from the more expensive vendor.

Now, these examples may be a bit of a stretch. However, I think you see my point. The overhead ratio rewards inefficiency in program costs, which are the majority of most not-for-profits’ costs. I certainly do not believe organizations are intentionally choosing inefficient program costs to manipulate overhead. But, I think it is possible that the focus on overhead rates can blind management to potential efficiency gains in program costs. Ironically, if donors and managers have been focused for years on managing to a low overhead rate, many organizations may have already realized the big efficiency wins in management and general expenses. For these organizations improvements in overall efficiency may yield higher overhead rates.

The strongest advantage of overhead as a metric is that it can be used to compare different types of nonprofits. Hospitals, schools, conservation groups, and homeless shelters all can be compared on overhead rate. Unfortunately this strength breaks down on more detailed inspection. One of the more interesting things I have learned since I started working for a nonprofit is that overhead closely corresponds with the type of nonprofit organization (or at least their funding source). Organizations with a large GIK component to their ministry often have very low overhead rates due to the value of the goods they distribute. Child Sponsorship organizations tend to have higher overhead rates due to the additional administrative effort required to connect each sponsor and child. (There are arguably programmatic and stability advantages to this higher cost). Grant funded organizations tend to have overhead rates which fall in the middle. In other words, the type of donations received can have a bigger impact on overhead rate, than the quality of an organization’s management.

So, what should we be measuring? There is clearly need for comparisons among not-for-profits. There are also benefits from these comparisons both for donors and management. But there are clear flaws in overhead as the comparison tool of choice. I think it would be wise to evaluate similar types of not-for-profits based on a grouping by mission (for example Relief & Development, Conservation, Medical Research, etc.). For each grouping an efficiency measure could be determined by dividing total costs by a common outcome metric. For example, animal shelters could report costs per animal served. Then efficiency could be better gauged for similar organizations.

I also think that breadth of analysis can be a solution as well. Part of the problem with overhead is that it is often viewed as the defining, authoritative metric. If other metrics are considered as well (unrestricted undesignated net assets, growth rate adjusted for organizational size, liquidity, etc.) a more complete and useful comparison emerges.


Convergence Projects Update

The FASB and the IASB recently announced their plan to reexpose their proposed new lease accounting standard. This seems to be a theme as several other key projects are slated for reexposure this year. This is probably a good time to review some the FASB & IASB convergence projects, where they stand, and how they impact not-for-profits.

As a reminder convergence projects are areas where there are current differences between IFRS and US GAAP. In these particular areas the two boards have determined that neither existing set of standards is sufficient on the topic and so the two boards will issue a joint new standard to replace the current US GAAP and IFRS standards.

There are four convergence projects which are relevant to not-for-profits: Financial Statement Presentation, Leases, Revenue Recognition, and Financial Instruments.

The Financial Statement Presentation project has been delayed and has not yet been exposed for comment. As a result we won’t spend much time on it. But, it is worth watching going forward as initial discussions include ideas such as requiring the direct method of calculating the cash flow, and redesigning the balance sheet and income statement to include “operating”, “investing”, and “financing” sections just like the statement of cash flows.

The remaining three projects: Leases, Revenue Recognition, and Financial Instruments share a similar timeline:
• All have previous exposure drafts
• Comments were considered and some alterations were made to the proposed statements.
• All three are expected to be reexposed for further comment in the later part of 2011.
• Final statements are expected to be issued in 2012.
• Effective dates are likely 2014 or 2015 (BUT, nonpublic entities will probably have two additional years before these standards are effective).

I posted this previous blog suggesting that FASB was softening its previous stance on leases, perhaps allowing room for something similar to an operating lease. This is no longer the case. The latest momentum on this topic shows FASB has reaffirmed its original position that the present value of the minimum lease term for all leases should be capitalized as a “right-to-use” asset with an offsetting lease liability. The FASB has softened its stance on which lease renewals would be required to be included in the calculation. There are still more details to come on this, so pay attention to the new exposure draft when it is released.

Revenue Recognition
The Revenue Recognition project seeks to replace the various industry-specific revenue recognition standards with a single principle based rights & obligations approach. The good news for not-for-profits is that this standard does not seem to hold any new concepts for us. As a result it is likely going to have very little impact on us.

Financial Instruments
The Financial Instruments project covers all financial instruments not otherwise covered by other guidance (think pension liabilities or leases). It is important to note that pledge receivables are excluded from this project minimizing the impact on not-for-profits. However this will impact nonprofits in other areas such as investment pools, microfinance loan receivables, etc.

The proposed guidance would require most financial instruments to be held on the balance sheet at fair value. There are some limited exceptions for short term trade receivables and payables, and certain debt. There would be two categories, one where Fair Value fluctuations flow through the income statement and another where the fluctuations flow through other comprehensive income. As you can imagine these categories are not particularly meaningful for not-for-profits due to general statement of changes in net assets.

For all of these convergence projects, the process is still open and changes likely will occur. It is wise to monitor the changes. However there is also plenty of time. Due to the big wave of change cause by the convergence projects, the FASB has made it clear that there will be plenty of time to digest the changes prior to adoption dates. This is even truer for non-public entities like not-for-profits.


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