Author Archives: Craig Stevens

Great Relationships Start with Communication

Most nonprofits and associations of a certain size undergo an annual audit of their financial statements. While not necessarily a pleasant experience, it is an important discipline to maintain fiscal health and accountability. Having performed audits for 34 years here are some thoughts on what makes for a mutually beneficial relationship between auditors and clients.

What should an organization expect from their auditors?

  • A team of knowledgeable and intelligent professionals throughout the organization.
    • Junior staff members should inspire confidence regardless of their experience level.
  • Attentive client service – prompt and responsive communications, a logistical schedule well in-advance of an audits start date, and deadlines should be met ahead of due dates.
  • Technical advice – regular updates on standard changes, regulations etc. that affect your business; and answers to your questions or a referral source when necessary.
  • Pleasant to work with!
  • Fees – reasonable charges for services rendered and regular billing updates to avoid surprises.
  • Presentation skills – auditors should be able to competently present to your Board and/or other advisors such as lawyers, actuaries, and investment managers.
  • Deliverables that exceed your expectations.

What should auditors expect from their clients?

  • Adequate and advanced preparation for the audit and tax return. If a client is still reconciling accounts and making adjustments to the books after the audit commences, it’s almost a guarantee the auditor will incur overruns. Auditors need to be able to do the audit when they have staff in the field for efficiency, not by managers back in their office over weeks as clients process adjustments and make changes.
  • Consistent client engagement during the audit and tax process, and prompt responses to open item requests.
  • Advance notice of transactions and major events before the audit commences such as lease transactions, property sales, loss events, new programs or activities, personnel turnover, and fraud or malfeasance.
  • Prompt payment for agreed upon services.
  • A collegial working relationship.

What do you think makes for a great auditor/client relationship? Tell us.

Endowment Updates


Nonprofits dream of substantial endowments to allay rising operating costs and for greater flexibility to pursue new programs and ideas. Nonprofits such as prestigious universities, have often achieved this goal. Endowments generally involve donations to nonprofits whereby the corpus or principal of the gift are to remain intact and the “earnings” on the corpus can be used to fund programs.

In practice, arrangements can be diverse based on the donor’s specific wishes regarding the endowment. For example, a donor could stipulate the principal of the endowment be spent over a certain time or conversely that the “corpus” of the gift be increased by some percentage anually to account for the loss of purchasing power. Endowments are different from a nonprofit’s reserve funds that have accumulated over time to cover unforeseen pressing financial needs. Some organizations designate their reserve funds to function as a quasi-endowment to manage long-term finances.

However, many nonprofits never achieve a true or quasi-endowment accumulation because current need surpasses long-term dreams and operating reserves can be difficult to come by. Similarly, the average donor lacks the financial wherewithal to make a significant endowment gift and may prefer to see their gift assist with current needs, and/or receive the benefits of an annual donation. Donors of significant means may have different motivations to make an endowment gift. They may be concerned about the operational impact of a large one-time gift and the use of the funds. A sense of permanence may also motivate larger donors to make a named gift so that future generations are aware of their philanthropy. This sense of permanence guides many to establish a named private foundation for the same reasons.

Furthermore, organizations with endowments are required to record transactions a certain way and to provide disclosures about their endowments by financial reporting standards. The accounting standards are influenced by “endowment law” and known as the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which has been adopted by all states except Pennsylvania. UPMIFA replaced the prior standard that was in place since 1972, the Uniform Management of Institutional Funds Act (UMIFA). In addition to a law change, accounting standards are evolving with the issuance of ASU 2016-14, Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities.  Early adoption is permitted; these amendments are effective for years beginning after December 15, 2017.

Under both present and future GAAP, contributions are restricted only upon a donor’s designation. If the donor creates a true endowment fund, the contributions are permanently restricted net assets under current GAAP or net assets with donor restrictions under the latest changes. A board-designated endowment fund is created when a governing board designates or earmarks a portion of its net assets without donor restriction to be invested, generally for a long but possibly unspecified period. When classifying a donor restricted endowment fund, consideration is given to both the donor’s explicit instructions and the applicable laws (usually UPMIFA) that extend donor restrictions. Investment returns are recorded in accordance with any donor stipulation such as for use in a particular program, and in this case would be considered restricted until the amounts are spent on the specific program or otherwise considered restricted until appropriated for expenditure by the nonprofit’s governing board.

One of the major changes to both governing law (UPMIFA vs UMIFA) and in the recent accounting update is the treatment of “underwater endowments”. Under UMIFA, there was a concept of the historical dollar value of an endowment consisting of the original gift plus any additions to the fund made by the donor, which constituted a floor that the value of the fund should not fall below. Regardless of interpretation, in practice the accounting guidance followed the prescription that the historic dollar value and recorded permanently restricted net asset was fixed. Therefore, any decrease in fair market value below this had to be covered by otherwise unrestricted net assets creating a loss in that column, assuming there was no temporarily restricted net assets on net appreciation of the fund that was unspent. UPMIFA eliminated the concept of historic dollar value and applied prudent man standards to how an endowment fund may be spent over time. As a result, the new accounting standards are a significant change that would treat a drop in fair market value of a restricted donor endowment as a loss in the donor restrictions column.

There are specific financial statement disclosures related to endowment funds as stated in the new standards ASU 2016-14, Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities. A nonprofit will disclose information to enable users of financial statements to understand all of the following about its endowment funds both donor-restricted and board-designated:

  • Net asset classification such as net assets with donor restrictions or net assets without donor restrictions.
  • Net asset composition such as board-designated endowment funds or donor-restricted endowment funds.
  • Changes in net asset composition
  • Spending policies
  • Related investment policies

At a minimum, a nonprofit shall disclose all of the following information for each period that it presents financial statements:

  • A description of the governing board’s interpretation of the laws that underlie the nonprofit’s net asset classification of donor-restricted endowment funds, including its interpretation of the ability to spend from underwater endowment funds.
    • A description of the nonprofit’s policy or policies for the appropriation of endowment assets for expenditure (its endowment spending policy or policies) including its policy and any actions taken during the period concerning appropriation from underwater endowment funds.
    • A description of the nonprofit’s endowment investment policies including their return objectives and risk parameters, how return objectives relate to the nonprofit’s endowment policy or policies and the strategy for achieving return objectives.
  • The composition of the nonprofit’s endowment by net asset class at the end of the period, in total and by type of endowment fund, showing donor-restricted endowment funds separately from board-designated endowment funds.
  • A reconciliation of the beginning and ending balance of the nonprofit’s endowment in total and by net asset class including, if applicable 1) investment return 2) contributions 3) amounts appropriated for expenditure that contain no purpose restrictions and other changes.

If a nonprofit is subject to a donor restriction or applicable law that its governing board interprets as requiring the maintenance of purchasing power for donor-restricted endowment funds, they should periodically adjust the disclosed amount that is required to be maintained either by the donor or by law.

Furthermore, for each period that a statement of financial position is presented, a nonprofit shall disclose each of the following, in the aggregate, for all underwater endowment funds:

  • The fair value of the underwater endowment funds.
  • The original endowment gift amount or level required to be maintained by donor stipulations or by law, which extends donor restrictions.
  • The amount of the deficiencies of the underwater endowment funds.

Endowments are complicated. Please call Aronson’s Craig Stevens at 301.231.6200, if you have specific questions, or would like to discuss how the new accounting standards apply to your specific situation.


The Future of Finance Leaders


A recent study was issued as a collaboration between Oracle, the American Institute of CPAs (AICPA), and the Chartered Institute of Management Accountants (CIMA) to conduct research on how finance can navigate successfully through today’s economic uncertainty and create value in the digital age. The study “Agile Finance Revealed” looked to identify the traits of such leaders and how they created or are creating a dynamic new operating model. To create the report, a survey of senior finance professionals in major businesses across a range of sectors in the US and Canada was conducted. Larger businesses were surveyed with total revenues of over $200 million to $20 billion plus in five key industries, which included financial services, healthcare and life sciences, manufacturing, retail, and higher education. Although the entities surveyed were much larger than a typical association or nonprofit, the findings are a good road map for the future of finance functions and organizations looking to stay on the cutting edge.

CEOs increasingly expect CFOs to have a seat at the strategy table. Still only 30% of survey respondents agreed that their finance function provides the support that businesses need to become agile. Put simply successful finance functions will evolve from being an expense control, spreadsheet driven accounting and reporting center into a predictive analytics powerhouse that creates business value. The most advanced finance departments are using cloud-based applications and digital accelerators such as machine learning, artificial intelligence, and robotic process automation to ruthlessly automate transactional processes, accelerate finance modernization, and provide a high degree of scalability and agility. For example, robotic process automation lets employees configure computer software “bots” to interact with applications and perform a high volume of repetitive tasks, such as account reconciliation and other processes performed in shared service centers. Machine learning gives computers the ability to learn without being explicitly programmed and is already being used in the financial services industry to optimize business processes such as internal audit and fraud detection, based on patterns and historical trends.

With less time being spent on transactional processing, finance teams are free to spend more time on understanding how the business model generates value. For example, analyzing performance by dimensions, by product, by channel, or by segment can identify opportunities to innovate, reduce cost, or generate additional revenues. If implemented correctly, resources can be deployed to focus on areas where returns or prospects are better. The report goes on in much further detail and is instructive as to where finance departments should be headed.


Potential Changes Ahead for the Johnson Amendment


The new administration has made mention of repealing the so-called Johnson Amendment. What would a repeal mean? In 1954, Lyndon Johnson (later the 36th President of the United States) was the Democratic Senate Minority Leader running for reelection. On the road to reelection, Johnson faced a conservative nonprofit group calling for the election of his opponent.

Johnson, known as a Senate legislator without equal, responded to his opposition by introducing an amendment to Section 501(c)(3) of the Internal Revenue Code, which applies to organizations organized and operated exclusively for religious, charitable, and scientific purposes. In the amendment, tax-exempt status organizations cannot participate or intervene in, which includes the publishing or distributing of statements, any political campaign on behalf of or in opposition to any candidate for public office. In effect, to be exempt from paying taxes one cannot participate in partisan elective politics.

Today, religious groups and charities alike believe the amendment restricts free speech from the pulpit and that the amendment should be repealed. The Alliance Defending Freedom is a major force behind repealing the amendment. The group argues that from the founding of the Country until 1954, Pastors were free to speak boldly from the pulpit about the most crucial social and political issues of the day. Without fear of the IRS restricting or revoking their tax exemption. A commission to study the topic convened by the Evangelical Council of Financial Accountability (ECFA) recommended amending the Johnson Amendment to allow the following.

  • Speech that would be no added cost or a very minimal cost to the organization (such as a sermon, not an expensive advertising campaign).
  • If the speech of the organization would cost more than the minimal amount, then the Johnson Amendment would only prohibit speech that clearly identifies candidates and directly calls for those candidates’ election or defeat.

Defenders of the current law believe partisan politics should not be part of their mission – that they should exist to feed the homeless, provide education, do scientific research, or carryout their mission without political influence or thought. Currently, churches and charities can receive tax-deductible contributions whereas contributions to candidates or political parties are not tax deductible. If tax-deductible contributions were made to churches who promoted or opposed specific candidates, how would such contributions be treated? Furthermore, the equivalent of a Federal Election Commission (FEC) does not exist, which could create pockets of dark money. Are Political Action Committees (PACs) subject to FEC reporting the answer to oversight?

As with healthcare reform, travel restrictions, and Supreme Court nominations, if the Johnson Amendment comes up for legislative change it will no doubt be hotly contested from all sides. Additional information can be found here.

Association Membership Trends to Watch

association membership

recent member survey conducted by Member Zone, revealed some interesting statistics. Of the 1,070 associations surveyed, 58% reported membership levels remained flat or declined. Here are the top five reasons members gave for not renewing a membership:

  • Budget cuts
  • Lack of value — little or no return on investment
  • Lack of engagement/interest
  • Lack of time to participate
  • Cost

The most common renewal method was email, which 68% of Associations used. The top tactics for new member recruitment were word of mouth, events & meetings, email, trade shows & conferences, and social media. Perhaps individual phone calls to non-renewing members would have been better for retention efforts.

The top three enticing factors for new members were networking, education, and advocacy. For Associations, their main challenges revolved around recruiting and retaining members, attracting younger members, and effectively communicating their value proposition.

With the availability of information, prospective members may not believe they need an Association to serve as their industry information filter. Most successful organizations have excellent educational programs for their members that are industry-specific and not available elsewhere, they foster member-to-member relationships that are reinforced at meetings & events, and their legislative or advocacy programs are seen as effective.

Membership attraction and retention will remain important as businesses become more cost conscious of where they receive value.

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