Tag Archives: nonprofit

Bishop Estate Trust Case Study: Avoiding Conflicts of Interest

conflicts of interest

Most people involved with nonprofit organizations are familiar with the concept of “conflicts of interest.” Generally, nonprofit board members should have a high standard of care and undivided loyalty to the nonprofits they serve. There should be no instances of self-dealing for themselves, people, or businesses related to them. For example, if a nonprofit is interested in purchasing a board members’ piece of property to expand their organization, they should be made aware of any costly problems beforehand. If the board member does not disclose this information, they will have violated their fiduciary duty by transferring their problems to the nonprofit.

Most board members generously donate their time, talent, and money with no expectation of return other than the satisfaction of being involved with a significant cause. However, nonprofits should be proactive by enforcing a conflict of interest policy, in the event a conflict of interest arises. Potential conflicts of interest could end up destroying both the public and donors’ trust in the organization. A sample conflict of interest policy can be found on the IRS website.

One of the greatest case studies on conflicts of interest is the Bishop Estate Trust controversy.

At the time of her death in 1884, Princess Pauahi Bishop was considered to be the most affluent landowner in Hawaii. In total, she owned approximately 10 % of the land in the state. Detailed in her will, Princess Bishop established a trust where all income from the land would be used to erect and maintain two schools on the Hawaiian Islands. The citizens were extremely enthusiastic for the Kamehameha Schools that would educate their children in the years to come. Since 1884, the Hawaii Supreme Court justices have appointed numerous groups of trustees to oversee the trust. The new board of trustees in combination with the increase in land and development values, which have driven up the trust’s worth to be billions, have created a high probability for conflicts and self-dealing to occur.

In August 1997, a Honolulu Star-Bulletin article outlined some of the conflicts of interests regarding the trust. These types of conflicts went beyond the board members’ relationship with the organization:

  • Many cases regarding the Bishop estate went before the Hawaii Supreme Court justices who selected the trustees. Allegations arose that the appointments by the Supreme Court justices were based on a tangled web of politics and favors.
  • The stakes were very high. By 1997, the trustees received approximately $900,000 in compensation for their services. This was extremely unusual, as most nonprofit trustees serve without compensation.
  • Some trustees invested personal money in some of the active investments they selected for the trust, including oil and gas deals. This created conflicts to whether their decisions reflected what was best for the trust or for the individual trustees.
  • The organization spent millions of dollars lobbying against intermediate sanctions regulations. Generally, an individual trustee or insider could be held personally liable if they unfairly benefited from transactions with the organization, with repayment obligations to the nonprofit.
  • Trustees allegedly used school employees to work on their own properties during work hours with no repayment.

These conflicts were considered so corrupt that the IRS threatened to revoke the trusts’ tax exempt status. Ultimately, the allegations were resolved through private settlements and jail time. A full account of the case is detailed in the nonprofit management book, “Broken Trust: Greed, Mismanagement & Political Manipulation at America’s Largest Charitable Trust.”

Conflicts of interest are an important topic for many organizations. If you have any questions or would like to discuss any issues specific to your organization, please contact Aronson’s Nonprofit & Association Services Group at 301.231.6200.

Association Membership Trends to Watch

conflicts of interest

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.

Private Schools Balance between Tuition and Contribution Revenue

tuition

Two of the most common revenue streams for private schools are tuition and contribution revenue.  Unfortunately, tuition alone does not cover the cost for private schools to run their programs and maintain their campuses. Contributions are a great addition to tuition for private schools. However, do you know how to account for both revenue sources?

Tuition revenue is accounted for as an exchange transaction that is recognized ratably over the term of the school year net of financial aid. Any money received in advance of revenue recognition treatment being met, should be recorded as deferred revenue liability. See how to account for delinquent tuition payments here.

Contributions are recorded when received or pledged as unrestricted, temporarily restricted, or permanently restricted depending on donor restrictions. Some private schools have capital campaigns that raise funds to improve facilities, initiate new programs, or to build an endowment. Capital campaigns usually have explicit or implied restrictions; the stated objective of the capital campaign usually makes the donor’s restriction clear. Pledges must be carefully reviewed to determine if they are conditional or unconditional. Unconditional pledges should be recognized at fair value as revenue in the year the pledge is made. Conditional pledges are to be recognized as revenue when the conditions are substantially met.

The federal tax code allows taxpayers to deduct contributions or donations made to qualified private nonprofit schools that operate to educate students in the community or serve some other approved purpose. However, a donation made to a nonprofit private school may not qualify for the deduction if the school significantly engages in additional activities that do not relate to charitable, scientific, humanitarian, or religious causes.

A private school may offer a gift or other benefit, such as tuition discounts, in appreciation of a donor’s generosity. Schools that choose to offer discounts should advise donors that they must reduce the deductible value of their donation by the value of all gifts and benefits from the private nonprofit school. For example, providing a $500 gift certificate in appreciation of a $20,000 donation may seem minimal, but it still requires the donor to report a charitable deduction of $19,500 rather than $20,000.

For more information about accounting for private schools or questions, please contact Melissa Musser at Mmusser@aronsonllc.com.

New IRS Form 990 Audit Selection Methodology

The IRS has recently improved its audit selection process shifting from a subjective selection to a data-driven selection. Previously, subjective audit selection indicated that audits were driven by issue-specific determination. For example, following an IRS study on hospitals, more hospitals were selected to be audited compared to previous years. Similarly, following an IRS study on colleges and universities more audits of colleges and universities were performed.

The IRS has developed a data-driven approach that incorporates nearly 150 analytics based on nonprofit organizations’ Form 990 data in an effort to eliminate subjectivity. In doing so, the IRS intends to expand the number of organizations that could potentially be audited. If an organization “fails” too many analytical evaluations, it is more likely to be audited by the IRS. While no specific analytics have been published, industry experts anticipate the IRS to focus on the following sections of Form 990:

  • Inconsistent information
  • Reporting amounts in column (C) of Part VIII, but not reporting that a Form 990-T was filed on Part V, Line 3.
  • Preparing Schedule L to report an insider transaction, but reporting on Part VI, Line 12 that the organization did not implement a conflict of interest policy.
  • Responding affirmatively to a Part IV inquiry, but not completing the applicable Form 990 schedule.

Although the IRS’s method of audit selection was updated, its budget has not increased for nonprofit organizations. Despite the budget stagnation, the new data-driven audit selection method has increased return change rates to over 90%, which represents a substantial increase in change rates compared to the 70% seen with subjective audit selection. Furthermore, there has been a 20 -day reduction in average audit completion since the implementation of data-driven audit selections – from 233 days in 2015,when subjective audit selections occurred to 213 days in 2016.

For more information on this new approach, click here.

What You May Have Missed: Cost-Saving Initiatives and Best Practices for Exempt Organizations

democrats vs republicans

On November 9, Aronson LLC, Arent Fox, and Morgan Stanley hosted an executive summit for exempt organizations that featured strategies for making and saving money, and tips on top governance issues. Missed the event? Here is a brief recap. The event kicked-off with keynotes delivered by former United Way CEO and Chair of the Alexandria Chamber of Commerce Joe Haggerty, and former US Senator and Congressman from North Dakota and current Senior Policy Advisor at Arent Fox Senator Byron Dorgan.

“Nonprofits should be providing the appropriate level of information to the public, this includes full disclosure, open conversations, innovate use of required reporting, and tying metrics to outcomes,” said Mr. Haggerty. “For example, instead of trying to hide salary info in an appendix, the United Way included its entire compensation plan in the 990 and added information on who they benchmark against and the overall philosophy of compensation.”

With a new administration and Congress set to take control in January, Senator Dorgan flagged several issues exempt organizations should be focused on. Including:

  • Charitable deductions – whatever happens in tax reform, exempt organizations have to be wary that they do not reduce the tax incentives for charitable deductions.
  • Tax exempt status – Congress could hold oversight hearings and evaluate nonprofit tax exempt organizations. A recent example is the NFL revoking its tax exempt status.
  • A potential increase in the excise tax in investment earnings.
  • Increased scrutiny on the heels of the New York Attorney General’s investigation into the Trump Foundation.
  • Antitrust – President-elect Trump’s picks to lead the Federal Trade Commission and the US Department of Justice will determine the administration’s priorities on enforcement.

The first panel discussion featured Arent Fox Nonprofit Leader Richard Newman, Aronson LLC Nonprofit and Association Industry Services Group Partner Rob Eby, and Vice President and Financial Advisor for Morgan Stanley Matthew Teems. The group focused primarily on strategies for making and saving money. Those guidelines include:

  • 5% may no longer be a reasonable earning expectation.
  • In 2017, real estate may be a tool for exempt organizations looking to reduce expenses and in some cases generate tax exempt income.
  • Not all tax exempt organizations will qualify for the real estate tax exemption, pay careful attention to lease/buy comparisons.
  • Some tax exempt organizations qualify for indirect federal tax subsidy through the use of tax exempt bonds to finance real estate acquired for exempt use.

Good governance was the central theme for the second panel, which included Mr. Teems, Aronson LLC Nonprofit and Association Industry Services Group Partner Gregory Plotts, Arent Fox Nonprofit Partner Sean Glynn, and Vice President of Commercial Insurance at Sahouri Insurance Allen Hudson. The group focused on investment committee responsibilities, audit committee responsibilities, and new accounting standards. Major takeaways include:

  • Investment Committees should draft an Investment Policy Statement (IPS) detailing objectives of the Investment Portfolio.
  • Audit Committees must understand critical accounting policies, key judgments and estimates, and how they affect financial results.
  • Relationships with auditors are important. They should be selected carefully, pay attention to their qualifications, independence, and performance. Don’t forget to hold an executive session with auditors.

Additionally, three new Accounting Standards, which will take effect soon include: Financial Presentation for Exempt Organizations (Effective in 2018); Revenue Recognition (Effective in 2019); and Lease Accounting (Effective in 2020).

For more information on the event, the new accounting standards, or Aronson, please contact Greg Plotts at gplotts@aronsonllc.com.

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