Financial Statements of Nonprofits are Different!

Many seasoned accountants get confused when they start working with nonprofits, also known as not-for-profit or tax-exempt organizations. On the surface, both nonprofits and for-profits look the same, but there are significant differences between these two to require different reports.

Nonprofit Basics

A common misconception is that nonprofits are simple and not that important overall in our economy. But let’s look at the facts – as of June 2016 we have 1,571,056 tax-exempt organizations in the US. As of 2010, nonprofits were responsible for 9.2% of all wages and salaries. “Nonprofit share of GDP was 5.3% in 2014” (National Center of Charitable Statistics). So, this sector cannot be ignored and sooner or later you may find yourself involved with a nonprofit and its idiosyncrasies.

“A nonprofit is a corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive” (Legal Dictionary online). Based on the principle that profits are not relevant, nonprofit organizations operate to provide goods and services to a community. Examples are the Red Cross, food banks and welfare organizations. They can be big and small with many nonprofits having operations in foreign countries. Regardless of its size, most nonprofits are organized in three general areas, reflected on financial statements:

  • Program
  • Administration
  • Fundraising

Program is the most important area of a nonprofit. Without program, there’s no reason for the nonprofit to exist. The program area is closely connected to the nonprofit mission statement. It’s where most of the revenue received should be spent. The other areas exist to provide support for programs.

Administration area, also known as “Management” or “G&A,” is the backbone of the organization, including accounting and human resources departments. It’s often also considered overhead. This is the area where most money is usually spent after programs.

Fundraising is the marketing department of the nonprofit. Fundraisers are in charge of getting money in and could be involved in grant writing, special events and other activities designed to attract donors. This area typically spends the least amount of money.

Learn more!

 

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Top Three Accounting & Auditing Issues: Peeling the Onion

Recent surveys have shown that the top three issues for professional CPAs are:

1. Keeping Up with the Effects of new Federal and State Regulations

  • Keeping up with new accounting and auditing pronouncements
  • Information technologies
  • Health Care and Related Issues
  • Consumer Issues

2. Keeping Up with the Complexities of Tax Laws

3. Finding Qualified Staff/Employees

These issues all have sub issues that are important. When we drill down into the issues we come across the top three accounting and auditing issues just below the surface. This is similar to “peeling an onion” to get to the heart of the issues. Other issues also arise such as:

  • Succession Planning
  • Seasonal workload compression

Nevertheless, the top three A & A issues always come back to changes in generally accepted accounting standards (GAAP), changes to generally accepted auditing standards (GAAS), and changes to compilation and review standards (SSARS). Some have said the overarching theme to all this is “standards overload.” Whether one is employed in public practice, industry, government, or education, the same “standards overload” concerns always seem to surface. “Standards overload” is said to be one of the primary reasons for the rise of the concept of “other comprehensive basis of accounting” (OCBOA).

There is growing appeal in the accounting profession to find an alternative for small businesses to some of the measurement and disclosure requirements of GAAP. We see this in the Private Company Council (PCC) with the FASB. Mr. Russell G. Golden’s, Chairman of the FASB, goals include simplicity and clarification of GAAP.

One solution often mentioned is the use of OCBOA financial statements. In 1981, the AICPA’s Special Committee on Accounting Standards Overload was formed to consider alternative means of providing relief from accounting standards that are not cost-effective, particularly for small, closely held businesses.

So the nature of the problem in finding the top three issues seems to be in finding which of the exact standards of GAAP, GAAS, or SSARS are the top three issues.

Read the full article at www.cpelink.com/top-three-accounting

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Fundamentals of Construction Accounting

While most believe the construction process begins on the left at the Estimating stage, the process truly begins at the Accounting stage. Accountants must provide estimators with the right internal information before the estimator can begin. The estimator is then able to draft blueprints and enter information for job costs. Once construction begins, information is delivered to Accounting and completes the circle as the job finishes.

Since the construction process begins with the Accounting stage, common issues will naturally occur. One main issue is the accumulation of contract costs. This error is a result of the cash method used to accumulate costs resulting in unrecorded liabilities that affect cost records for contracts in progress. The correct accounting fix to this issue is to use accrual accounting as costs should be allocated to the appropriate individual contract records.

Why is being aware of your costs the most important aspect of construction accounting? It helps you:

  • In the bidding process
  • To determine problem jobs and people
  • In the claims process
  • To make better business decisions
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Lost Revenue from Corporate Fraud

ACFE 2014 Report to the Nations states that organizations typically lose 5% of their revenue to fraud each year.

Most of the time, fraud takes place below the radar, and upon discovering it, companies tend to want to move forward as quickly as possible without notifying the public of the fraudulent activity.

The smallest organizations tend to suffer the largest median loss as these organizations typically employ fewer anti-fraud controls than their larger counterparts. It is not unusual for small business to lose a significant amount to fraud and end up closing their doors for good.

Read more

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The Long Winding Road of Professional A & A Standards

Are you current on the fast developing standards and issues from new FASB Pronouncements for 2014 and 2015?  According to CPE Link instructor Pat Patterson more changes will come from from the FASB and the Private Companies Council as well. Revenue Recognition (ASU 2014-9) is currently being considered for a delayed effective date; however, early implementation may be allowed. Are you ready? Leases and Financial Instruments are on the verge of being issued which will have an instant impact. Revenue Recognition, Leases, and Financial Instruments will change the way every professional has to handle the related issues.

The AICPA’s Clarity Project is essentially complete and has totally revised all AICPA Auditing Standards. Some have very little change, but there are many new requirements that include:

  • A new audit report
  • Issues with legal and regulatory agencies
  • Communicating Internal Control Related Matters Identified in an Audit
  • Forming an Opinion and Reporting on Financial Statements
  • Modifications to the Opinion in the Independent Auditor’s Report
  • Emphasis of Matter Paragraphs and Other matter Paragraphs in the Independent Auditor’s Report
  • Special Considerations-Audits of Group Financial Statements
  • Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
  • Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards
  • Terms of Engagement
  • Quality Control for an Engagement Conducted
  • Opening Balances-Initial Audit Engagements, Including Re-audit Engagements
  • Written Representations
  • Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement

But whether there is some, little, or even no change, you still need to go through all of the new clarified AU-C sections because with clarity . . .You may find that you need to change or tweak how you do things!

For Compilation and Review Engagements, professionals are entering into new territory with Section 70 of SSARS 21, Preparation of Financial Statements. This new standard will change the way many professionals look at a set of financials. There are new standards for the engagement letters and signatures, the reporting (or no reporting), legends on financial statements, and the new Compilation report. Additionally, there are some changes to the documentation issues with Compilation and Review engagements.

Are you familiar with the “RED Zone” for Comp and Review? In this case, RED stands for Reporting, Engagement Letters, and Documentation. While standards in SSARS 19 are still in play until periods ending after December 15, 2015, the provisions of SSARS 21 may be early implemented; and even both standards may be used until December 15, 2015.

Other matters that involve professional standards also are affected by the new FASB, Clarified Auditing Standards, and revisions to Preparation, Compilation, and Review engagements. These include:

  • Personal Financial Statements
  • Special Purpose Formats
  • Disclosures like “going concern”
  • Quality Control
  • International Standards from the IASB

Want to know more? Check out a live webcast or on-demand self-study course from award-winning, nationally recognized author and discussion leader, Pat Patterson.

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Simplifying the Reporting Process

For many small business owners, the issuance of financial statements is nothing more than a necessity to satisfy the bank or other third party user. Although the small business client may be willing to pay higher fees to accountants for effective tax planning or management consulting, most owners are unwilling to pay for a high-priced compilation or review engagement that is perceived as a commodity rather than a value-added service.

An accountant may wish to consider existing reporting options that offer practitioners a means to reduce the time spent on completing an engagement. Here is a list that may be useful depending on the client’s needs and circumstances:

1. Compile OCBOA financial statements (e.g., cash or income tax basis)
2. Compile GAAP financial statements with no footnotes and statement of cash flows
3. Issue management-use financial statements in accordance with SSARS No. 19:

  • Compiled financial statements without a compilation report
  • Financial statements are not distributed to parties other than management (e.g., not issued to the bank)

4. Issue a compilation report with only selected footnotes:
SSARS No. 19 permits an accountant to report on financial statements under which a select few disclosures are included provided the notes are labeled:

“Selected Information-Substantially All Disclosures Required by Accounting
Principles Generally Accepted In the United States Are Not Included.”

5. Use a compilation report at interim periods that list the departures from GAAP.
Example: Assume that an accountant prepares monthly financial statements for a client, and these statements consistently have certain GAAP departures such as missing accruals, allowance for bad debts, etc. The accountant may prepare a standard compilation that makes reference to the GAAP departures and can use this report, without modification, from month to month.

At year-end, the accountant may adjust the departures to GAAP and issue a standard compilation or review report.

6. Compile only one financial statement (e.g., balance sheet), and not the full set of financial statements

7. Apply options that are excluded from SSARS No. 19 for which a compilation or review report is not required:

  • Provide selected monthly information requested by the client such as account balances (e.g., cash or accounts receivable) or operating information (e.g., number of meals served for the month)
  • Provide a client or other third party users with a copy of the client;s tax return.An accountant is not required to report on a tax return.

8. Issue financial statements with one or more GAAP departures.

This list was an excerpt pulled from Steven Fustolo’s course 2013 Practice Issues: Compilation & Review Update.

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Proposed IFRS Impairments Will Be More Subjective

IFRS proposals for loan-loss provisioning should accelerate impairment costs for banks and drive them to report asset values more prudently than under existing rules, in a statement released by the Fitch Ratings agency. But an expected loss approach could increase management judgment in the provisions taken

The new standard should be more forward-looking and better reflect managements’ own loss expectations, as it removes the barrier to factoring forecast changes in economic conditions into the impairment charge. But this will involve considerable judgment. We expect many banks to calculate their credit losses using estimates of probability of default and loss given default.

The categorization of loans into three “buckets” for the purposes of setting provisions also involves subjectivity. The proposals require banks to provide initially for losses expected over the next 12 months. If the credit quality of the loan then deteriorates, it passes into bucket two…and full lifetime losses are used instead. The third bucket is for loans deteriorated to the point where there is objective evidence of impairment.

It is unclear how the three buckets correspond to the performing and non-performing categories banks already use. Without further explanation of the differences between the various categorizations, and details on the migration of loans between the buckets, analyzing asset quality may be challenging despite improved information available to investors under the new standard.

Nevertheless, we believe increased disclosure from the new IFRS will improve transparency and benefit users, particularly when these are combined with the take-up of recommendations around credit risk reporting by the Enhanced Disclosure Task Force.

Meaningful comparisons between provisions reported by US GAAP and IFRS banks are also likely to be difficult.

The International Accounting Standards Board will now need to agree the exposure draft before it becomes a standard.

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Analytical Procedures in a Review Engagement

Are analytical procedures required for a compilation engagement?

CPAs are fearful that if analytical procedures are performed in a compilation engagement, the engagement will be upgraded to a review. This thinking, of course, is not true. Paragraph 1 of SSARS No. 19 (AR 90) states that an accountant must comply with the provisions for a review engagement if he or she has been engaged to review financial statements. Therefore, an accountant only issues a review report if he or she has been hired to conduct a review engagement. The fact that review-type procedures (such as inquiry and analytical procedures) have been performed during a compilation engagement does not, in itself, upgrade the engagement from a compilation to a review.

In conducting a review engagement, the accountant performs procedures consisting of inquiries of company personnel and analytical procedures applied to financial statement data. Generally, the accountant does not gather evidence as he or she does in an audit.

Analytical procedures include evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. A basic premise underlying the application of analytical procedures is that plausible relationships among data exist. Analytical procedures may help identify potential material misstatements. The results of such procedures should be used as a basis for making additional inquiries and obtaining additional information. Using analytical procedures includes not only calculating ratios and trends, but also analyzing the results and identifying significant fluctuations and their cause.

The rules for applying analytical procedures are found in SSARS No. 19 and include the following:
a) Compare financial statements from year to year, for comparable periods.
b) Compare financial statements with budgeted/forecasted information for comparable           periods.
c) Study relationships of the elements of the financial statements that would be expected to conform to a predictable pattern based on an entity’s experience and the industry.

Note further that Paragraph 17 of SSARS No. 19 emphasizes that the accountant should develop expectations prior to performing analytical procedures.

When analytical procedures identify significant fluctuations and lead the accountant to believe that information may be incorrect, incomplete or otherwise unsatisfactory, SSARS No. 19 requires the accountant to perform the additional procedures he or she deems necessary to achieve limited assurance that no material modifications should be made to the financial statements.

This article is an excerpt from Steven Fustolo’s course 2013 Practice Issues: Compilation & Review Update

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The Failings of Internal Controls

Accounting controls are the means by which we gain a reasonable assurance that a business will operate as planned, that its financial results are fairly reported, and that it complies with laws and regulations. They are usually constructed to be an additional set of activities that overlay or are directly integrated into the basic operations of a business.

A well-constructed system of internal controls can certainly be of considerable assistance to a business, but controls suffer from several conceptual failings. They are:

  • Assured profitability. No control system on the planet can assure a business of earning a profit. Controls may be able to detect or even avoid some losses, but if a business is inherently unprofitable, there is nothing that a control system can do to repair the situation. Profitability is, to a large extent, based on product quality, marketplace positioning, price points, and other factors that are not related to control systems.
  • Fair financial reporting. A good control system can go a long ways toward the production of financial statements that fairly present the financial results and position of a business, but this is by no means guaranteed. There will always be outlier or low probability events that will evade the best control system, or there may be employees who conspire to evade the control system.
  • Judgment basis. Manual controls rely upon the judgment of the people operating them. If a person engages in a control activity and makes the wrong judgment call (such as a bad decision to extend credit to a customer), then the control may have functioned but the outcome was still a failure. Thus, controls can fail if the judgment of the people operating them is poor.
  • Determined fraudulent behavior. Controls are typically designed to catch fraudulent behavior by an individual who is acting alone. They are much less effective when the management team itself overrides controls, or when several employees collude to engage in fraud. In these cases, it is quite possible to skirt completely around the control system.

Thus, the owners, managers, and employees of a business should view its controls not as an absolute failsafe that will protect the business, but rather as something designed to increase the likelihood that operational goals will be achieved, its financial reports can be relied upon, and that it is complying with the relevant laws and regulations.

This article is an excerpt from Steven Bragg’s Book The Accounting Controls Guidebook.

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Master Vendor File: More Complex than You Might Imagine

By CPE Link instructor Mary S. Schaeffer

Many believe that vendor issues are the sole province of the purchasing department. While procurement has the primary association with the vendor, there is an equally important connection with accounts payable. If the road between accounts payable and the vendor is rocky, everyone suffers. A vendor who doesn’t get paid promptly may decide to put the organization on credit hold. Even if that does not occur, there can be delay in shipments, time wasted unnecessarily as the vendor and accounts payable try and resolve discrepant invoices, and if matters aren’t handled properly, duplicate payments that are not returned.

Therefore it is my contention that the sooner the accounts payable function is alerted to a new relationship with a vendor; the better it will be for both the supplier and the customer. They can begin to collect information, do whatever verification is needed and will be discussed further in this course and be ready to pay when that first invoice shows up.

Unfortunately, what happens most frequently is the first time accounts payable learns about the new vendor is when the invoice shows up. Then one of several scenarios plays out.

Scenario #1: The Worst Case
The processor gets the invoice and looks in the master vendor file to try and find the vendor. Not finding it, he or she sets up the vendor using the information on the invoice and proceeds to process the invoice. They may or may not have been correct in their assumption that the vendor wasn’t in the master vendor file. They may simply have spelled the name incorrectly or someone else had entered the vendor maybe using its DBA or some other similar name. In this scenario, the processor may make a cursory attempt to determine if a 1099 will have to be issued. If they decide one will be needed, they may mail or e-mail the vendor asking for a W-9. Maybe the vendor provides one or equally possible, the vendor simply discards the request. No tracking is done to ensure the W-9 is returned.

It will probably come as no surprise to most reading this to learn that this approach completely negates the requisite segregation of duties required in the accounts payable function. It is also likely duplicate payments will slip through. Finally, there’s a decent chance that the correct information reporting at tax time will not be done.
It should also be noted that this lackadaisical approach to setting up vendors in the master vendor file is likely to allow fraudulent invoices to not only get through, but the crooked vendors could end up in the master vendor file. That way, when the crook emboldened by his or her success with the first invoice sends a second larger invoice, there’s a good chance the invoice will be paid.

Keep in mind, the scenario here is being presented as a worst case. Most organizations, even if they don’t have the controls they should around the master vendor file and a process in place for new vendors do rely on the three-way match and purchaser approvals to avoid the complete disaster described here. However, also keep in mind that many purchasers routinely approve invoices without giving too much attention to the details.

Scenario #2: The Average Case
In this situation, the processor gets the invoice realizes it is not in the master vendor file and stops processing. The invoice is sent over to the person responsible for the master vendor file and he or she sets up the vendor. This is an improvement over the earlier case as at least there is some semblance of segregation of duties used.
Unfortunately, if the best practices regarding data entry discussed later in this course are not used, this situation is only marginally improved over the earlier one. It is still possible to get vendors in the master vendor file more than once and if no attempt is made to solicit taxpayer identification number information, information reporting at tax time is likely to be inaccurate.

Scenario #3: The Best Case
In this situation, the procurement professional notifies accounts payable the moment they are considering doing business with a new vendor, before the first purchase order is written. The person responsible for new vendor setup, immediately contacts the vendor with the organization’s vendor application or profile form. As part of this process, a W-9 is sent to collect the necessary taxpayer number information. And, if the vendor is deemed to be critical, credit information is also gathered to be analyzed, again before the purchase order is submitted.

Once the vendor returns all the information, the person responsible for the master vendor file sets the vendor up using all the best practices discussed later in the course. The taxpayer identification number is run through TIN Matching and assuming everything matches, the vendor is good to go. If there is a mismatch, the vendor is contacted to get the information corrected.

Only after the company has all the information needed is the company permitted to issue the first purchase order. An organization that follows these guidelines is also likely to employ good practices throughout their accounts payable function thus minimizing the number of duplicate payments and almost eliminating fraudulent invoices that make it through the process.

What’s more, a company that explains to the vendor exactly what its processes are and how it operates on the payment side is likely to run into few problems with its vendors. For, let’s be honest, all any vendor really wants is for your organization to place lots of orders with it and to pay them on time.

We’ve just hit the tip of the iceberg when it comes to vendor issues in accounts payable. As you see as you work your way through this course, there are more issues than an outsider might expect.

This article is an excerpt from Mary S. Schaeffer’s Master Vendor File in Accounts Payable. To learn more about Master Vendor File in Accounts Payable, visit her course.

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