September 29, 2020

Internal Controls for Not-for-Profits in the New Normal

As stay-at-home orders and social distancing have shifted the workforce in many ways, not-for-profits are left with many changes to their accounting and financial reporting environments. Many of these changes were expected, but some changes may have unintended consequences. Pre-pandemic policies were designed to set up effective and efficient controls. However, the controls that were designed may not be effective, or even applicable in the current environment. These changes present the perfect opportunity for management to reevaluate their control environment, begin assessing and updating the risks that lie within that environment, and redesign their policies and procedures.

How to Assess Your Internal Controls

The first and most important step in the process will be assessing where risk lies within the accounting and financial reporting systems. Management should consider where and how fraud or misstatements could occur. Once management knows where the potential risks are, management can insert the needed controls to deter and reduce those risks.

Segregation of Duties

One of the strongest ways to reduce risk is to achieve segregation of duties. This separates the physical custody of assets, record-keeping of the transactions, and authorization of transactions. Under the new normal, segregation of duties may have some barriers that need to be overcome. There are many resources that are available to help achieve better segregation of duties. One example would be using a lock-box to accept deposits. Once the receipt is entered into the lock-box, the accounting department can record the deposit, without having physical custody of any cash or checks. On the cash disbursement side, there are tools such as Bill.com or positive pay to ensure the vendors you want to pay are actually paid.

Strengthen Review Process

Another key control in the internal control environment is review. This can range from the review of KPIs, review of check support, review of bank reconciliations, or financial statement review. However, the review process is only as good as the reviewer. Too often, someone is going through the motions of the review, mainly as they are not exactly sure what they should be looking for. It is key that the reviewer has proper expertise or training. For example, while reviewing the bank reconciliation, they should review the list of payments, outstanding checks and other reconciling items and any other transactions that hit the cash account and reconciliation. The person tasked with the review should be familiar with the organization’s vendors so they would recognize any irregular payments.

As not-for-profits typically have a robust board and other oversight committees, such as a finance committee, the reviewer should have a great deal of organizational knowledge and some accounting knowledge. Typically, the chair of the finance committee, or treasurer of the board would handle the review process. It’s also key to get that person involved in developing the processes so they are aware of the level of detail and review required.

Electronic Approval

For many organizations, some degree of remote work may be permanent. The amount of physical paperwork that circulates through the office may be significantly reduced, thus the approval process will look differently. Where old procedures would require formal written sign offs, such as initials on the bank reconciliation or signature on the support for cash disbursements, there may not be hard copies of these items to sign with a formal sign off. This is where electronic approval may replace old, hard copy approvals. It is important to note in the electronic approval what was reviewed and what is approved. This can take the form of an email approval to the appropriate personnel, or utilization within various software, such as DocuSign.

The workforce will continue to evolve over the next year, and each evolution should bring new considerations to the control environment. As mentioned above, the first important step is to assess the risk environment. This will be a continual process that management can implement into their daily processes. As each day brings about new changes, it is important to document and apply changes to the environment as they occur.

The Anders Not-for-Profit Group can help you implement stronger internal controls in your organization. Contact an Anders advisor below to learn more or visit our COVID-19 Resource Center for more insights.

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September 19, 2020

Uniform Guidance Updates for Organizations with Federal Grants

Organizations that receive greater than $750,000 of federal grants are usually subject to additional audit requirements, commonly referred to as a single audit, or Uniform Guidance audit. The federal government’s response to the COVID-19 pandemic has created some new programs and relief packages for non-governmental agencies, and some may now be subject to the single audit requirement. Here are some guidelines and updates for Organizations that receive federal grants:

  • Paycheck Protection Program (PPP) Forgivable Loans administered by the US Small Business Administration do NOT count toward the $750,000 threshold and are NOT subject to the single audit rules.
  • Provider Relief Funds (CFDA 93.498) administered by the US Department of Health and Senior Services are subject to the single audit rules.
  • Economic Injury Disaster Loans (EIDL) administered by the US Small Business Administration are subject to the single audit rules.

The US Office of Management and Budget (“OMB”) which oversees these audits, released the 2020 Compliance Supplement on August 18, 2020. When organizations prepare the schedule of expenditures of federal awards (SEFA), they should separately present “COVID-19 Emergency Act funding”.  The OMB has indicated there will be no new clusters of programs added for Coronavirus Aid, Relief, and Economic Security (CARES) Act programs, however, the final guidance (to be issued in an Addendum) specifically addressing all federal program under the CARES Act is expected to be issued soon.

Finally, the OMB has issued two formal memos addressing single audit due dates and other administrative matters:

The first memo M-20-11, “Administrative Relief for Recipients and Applicants of Federal Financial Assistance Directly impacted by the Novel Coronavirus (COVID-19),” provided extensions specifically to  organizations who are receiving funds under H.R. 6074 for coronavirus preparation and response.

On March 19, 2020, the OMB issued memorandum M-20-17. This memo provides extensions more broadly , and applies to organizations with year-ends through June 30, 2020 that have experienced a loss of operational capacity due to the COVID-19 crisis, and have not yet filed Single Audit reports with the Federal Audit Clearinghouse (“FAC”) as of March 19, 2020. The extension allows for delayed submission of the Single Audit reporting package up to six months beyond the original due date (normally the earlier of thirty days after receipt of the auditor’s report, or nine months after the end of the fiscal year).

The Anders Not-for-Profit Group can help you navigate the evolving regulations so you can always stay in compliance. Contact an Anders advisor below to learn more.

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September 17, 2020

How the New Revenue Recognition Treatment Will Affect Not-for-Profits

The way most organizations recognize revenue under U.S. Generally Accepted Accounting Principles (GAAP) was set to change this year due to a Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09. Below we dive into what this means for not-for-profits going forward.

What does this mean for my organization?

For traditional, charitable type not-for-profits, the good news is that pure donations and contributions are considered voluntary and nonreciprocal, or “non-exchange”, and these types of revenues do not fall under the new standard. The standard also provides for some exemptions beyond typical donations. For example, lease and insurance contracts as well as investment income are excluded from the scope of the standard.

What is subject to the new standard?

In contract to the “non-exchange” revenues described above, An exchange transaction occurs when there is a reciprocal transfer between two entities; one of the entities acquires assets or satisfies liabilities by surrendering other assets or services or incurring other obligations. These types of revenues must be evaluated to determine if they are considered “contracts with customers” and are subject to the new standard. Some examples may include, but are not limited to:

  • Memberships
  • Subscriptions
  • Sales of Products and Services
  • Royalties
  • Conferences and Seminars
  • Tuition
  • Advertising
  • Licensing

How should these revenues be recognized?

Once an exchange transaction has been identified to be a contract with a customer, the Organization should follow a 5-step model set forth in the standard for recognizing these revenues:

Step 1 – Identify the contract with the following criteria:

  1. approval and commitment of the parties
  2. identification of the rights of parties
  3. identification of payment terms
  4. contact has commercial substance, and
  5. it is probable the entity will collect consideration to which it will be entitled in exchange for goods/services

Step 2Identify the performance obligation and determine if there are multiple performance obligations. Performance obligations are distinct if it is capable of being distinct, customer can benefit from the good or service on its own or together with other resources, and it is distinct within the context of the contract, or the promise is separately stated.

Step 3 – Determine the transaction price

Step 4 – Allocate the transaction price to the performance obligation in the contract

Step 5 – Recognize revenue when (or as) the entity satisfies a performance obligation

What about grants?

We love grants, but truth be told, the accounting for grants often presents a challenge. For years there has been a large divergence in practice among organizations and their accountants on the treatment of grants. In 2018, FASB issued ASU No. 2018-08 to help organizations determine the proper treatment of grants. This standard provides clarifying guidance to evaluate whether a resource provider receives value in return for the resources transferred. Organizations should understand the impact of this ASU when evaluating its grants for applicability of ASC 606.

The world of revenue recognition is complicated. The Anders Not-for-Profit Group can help you navigate the evolving regulations so you can always stay in compliance. Contact an Anders advisor below to learn more.

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September 8, 2020

GAAP Financial Reporting Considerations Related to COVID-19

There’s no doubt that not-for-profits have been thrown into a “new normal”. For the past few months, board members and executive directors have worked to understand the aspects of the CARES Act and PPP loan forgiveness while trying to rework budgets, cash flow projections and other important forecasts to help weather this crisis. In conjunction with the financial work being done, there are several important accounting and reporting rules under Generally Accepted Accounting Principles (GAAP) that should be considered.

Subsequent Events

GAAP often requires disclosure of events or circumstances occurring after the balance sheet date, but before the financial statements are issued. Events that provide evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date are called “Type 2” events. For many organizations in the US with a December 31 year end, the COVID-19 crisis was considered a Type 2 event. Generally, Type 2 events are not recognized in the financial statements but are disclosed in the footnotes to keep the financial statements from being misleading.

On the other hand, subsequent events caused by conditions that existed prior to year-end are considered “Type 1” events, and the impact of the subsequent event is recognized in the fiscal year. For example, a not-for-profit association has an April 30, 2020 year end. The annual trade show is scheduled for November 2020. In May 2020, the Association is forced to cancel due to travel and attendance restrictions caused by COVID-19. Even though the cancellation did not take place until after year end, it was caused by conditions that existed at April 30, and therefore this is a Type 1 event, recognized in the April 30 financial statements.

Risks and Uncertainties

GAAP financial statements normally include disclosures related to the nature of an entity’s operations or activities, significant estimates, and current vulnerability due to certain concentrations to provide users with information on risks and uncertainties impacting financial performance. The COVID-19 crisis has created new risks and uncertainties for many organizations. Those experiencing operational shutdowns, work stoppages, supply chain constraints, etc. should considered the relevant disclosures required under GAAP.

Decline in Market Values of Investments

The COVID-19 crisis has had a tremendous impact on the capital markets, and entities holding investment assets, including businesses, not-for-profits and employee benefit plans, should consider disclosure in the financial statements regarding declines in fair values of these assets.

Going Concern

GAAP requires that management evaluate whether conditions and events, in the aggregate, exist that raise substantial doubt about an entity’s ability to continue as a going concern for a period of one year from the date the financial statements are available to be issued. Existing literature cites external factors, such as catastrophic events, as issues that may raise substantial doubt. For some not-for-profits, the COVID-19 crisis may have raised new threats and doubts that severely impact operations. Going concern evaluations must consider both quantitative and qualitative factors, and the analysis can be very complicated. Nevertheless, if substantial doubt is raised, the entity must consider the need for additional disclosures in the financial statements.

There are many other areas of financial reporting that could be impacted by the COVID-19 crisis. Management should consider the effect, if any, on the collectability of receivables, inventory valuation, and when deferred revenue may be earned – just to name a few. Each situation is different, and significant judgment will be needed in determining the appropriateness of the above considerations on specific organizations.

The Anders Not-for-Profit Group is here to help you navigate GAAP considerations. Contact an Anders advisor below to discuss your specific situation.

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