 1. Educating
donors about endowments
Many organizations
are aware of the benefits of endowments, but they may not be aware
of the fundraising tool they have by informing potential donors of
their benefits from endowments. In her book, Endowment Building,
Diana S. Newman offers several suggestions on how endowment contributions
provide numerous benefits to donors.
From the donor's
perspective, an endowment contribution:
- Perpetuates the
donor's values and priorities. By creating or adding to a permanent
endowment for a designated purpose, the donor seeks to enable and
obligate the organization to implement his expressed wishes.
- Creates a sense
of immortality. It will be invested permanently and can serve as
a permanent tribute to the donor.
- Makes significant
investment in the future. Many donors make larger endowment gifts,
often through planned giving vehicles, than they dreamed were possible.
Endowment gifts are sometimes the donor's last and largest gift
to the organization.
- Endows annual
gifts. An endowment gives donors the option to perpetuate their
annual gifts.
- Allows incremental
funding. Some donors do not want to give away their assets during
their lifetimes, yet they want to see the benefits of the gift
immediately.
- Provides lifetime
income. Some kinds of endowment gifts — split interest gifts,
for example — pay income to the donor for life, with the
remainder going to the charity's endowment after the donor's death.
- Alleviates management
burden. Some donors, particularly as they become older, are uneasy
with managing their assets and making investment decisions.
- Permits additions
at later times. An endowment fund can be added to later.
2. Purchase
accounting made simple
Organizations find themselves having
to make purchases, the number and type of which can vary according
to the organization's size and mission. In their book Bookkeeping
for Nonprofits, Murray Dropkin and James Halpin offer a look
at some of the elements that come into play for purchasing.
- Vendors. The entry and maintenance
of a vendor record is the starting point.
- Purchase order system. A purchase order
process places better controls on spending, provides a framework
for measuring purchases against budgets, and provides accounting
with information about a transaction.
- Unprocessed vendor invoice file. As
other documents arrive, they are filed with the purchase order.
- Invoice posting. The completed invoice
packet is posted to the accounts payable system. The paperwork
is filed under the processed vendor invoice file until payment
is issued to the vendor.
- No invoice number. If a vendor issues
an invoice with no number, the proper procedure is to create a
unique invoice number.
- Vendor credits. Goods returned to a
vendor and price adjustments are two reasons for credits to be
issued.
- Vendor statements. Some vendors invoice
customers for every transaction, and some mail periodic statements
that act as invoices. The bookkeeper must be aware of every type.
- IRS Form 1099. The IRS requires organizations
to issue a Form 1099 for the total of payments made throughout
the calendar year to any individual, partnership or estate for
rent, services or other fees.
3. The
cash receipt process
No matter what is the source of funds
or what part of the organization generates the revenue, there are
basic internal control principles that apply to the handling of money.
In their book Bookkeeping for Nonprofits,
Murray Dropkin and James Halpin offer a system by which organizations
should operate regarding the cash receipt process.
- Opening the mail. Someone other than
the person responsible for recording and depositing funds should
open the mail.
- Setting up the cashier. In locations
where cash is regularly collected, each transaction is immediately
recorded by a receipt.
- Accounting for cash as it is received.
The transaction is recorded immediately in some preliminary document.
- Separating cash handling duties. The
collection, depositing, posting and reconciling of cash receipts
should each be the responsibility of different people, if possible.
- Safeguarding the asset. Until deposited
in a bank account, the funds should be held in a protected environment,
such as a safe.
- Promptly depositing the funds. At
least once a day, funds should be deposited in the organization's
bank account.
- Daily reconciliation. Once each day,
the cash receipt process should be reconciled.
- Monthly bank reconciliation. An employee
who is not involved in either the cash receipt or cash disbursement
process should complete a monthly reconciliation of each bank account.
- Monitoring the process. Management
should periodically spot-check the process and, at random times,
select the recording and depositing of funds in a single day for
a complete review.
4. Fraud
signals for which you need to beware
Fraud is a serious concern for any organization,
and the officers of several nonprofits can attest to the devastating
consequences of high-profile revelations of dishonesty.
According to the Association of Certified
Fraud Examiners (ACFE), there are certain poor internal controls
that can leave an organization susceptible to internal fraud. These
are:
- Lack of segregation of duties. The person
who authorizes an action, such as paying a bill, should not be
the same person who performs the action, such as signing the check.
Further, a different person should be responsible for maintaining
custody of the cash account.
- Weak physical safeguards. Keeping an organization's
assets secure means more than sticking an identification tag on
all assets or locking the computers to a heavy object.
- Inadequate documents. Not only can records
be used to track fraud after the fact, but strict records can also
discourage fraud.
In addition, there are certain accounting
anomalies that can signal a problem. These are:
- Cash flow abnormalities. Significant and
ongoing differences between expected cash and actual cash must
be investigated.
- Unusual source documents. These include
purchase orders, checks, expense reports, requisitions, receiving
reports and time cards.
- Unreasonable costs. Costs that increase
faster than inflation, the use of more items than usual or the
increase in purchasing items from one company might indicate fraud.
Similarly, unreasonable costs for travel or other reasons may indicate
a problem. If something doesn't look right, it probably isn't.
5. Know
your accounting lingo
Many nonprofit managers have a basic
understanding of accounting practices and principles. As generalists,
however, managers may not have a strong understanding of the terminology
and procedures used by accountants today.
In their book Bookkeeping for Nonprofits,
Murray Dropkin and James Halpin offer detailed information on the
language you need to understand. These descriptions are in accordance
with the Financial Accounting Standards Board (FASB) and its Statement
of Financial AccountingConcepts No. 6.
- Assets. An asset is something we have
or control or that can provide some future economic benefit. Asset
accounts provide vital information for a part of the snapshot view
that we need. They can include things that we own (cash, automobiles)
and things that can provide a future benefit (a prepaid insurance
premium, for instance).
- Liabilities. A liability is the probable
future sacrifice of an economic benefit arising from a present
obligation. Liability accounts help by telling how much of our
assets are not fully paid for.
- Revenue. Revenues are amounts generated
from activities that constitute the organization's ongoing major
or central operation. Revenues increase net assets, and revenue
accounts provide a part of the historical view that we need.
- Expenses. Expenses are amounts consumed
by activities that constitute the organization's ongoing or major
central operation. Expenses decrease net assets, and expense accounts
provide a part of the historical view that we need.
6. Cash
and the federal government
Cash seems like a fairly easy concept to understand.
We all know something about how much cash we have, or don't have,
as individuals, and that type of knowledge takes on added significance
for the managers of organizations.
In his book Governmental Accounting Made
Easy, Warren Ruppel offers the reminder that government regulations
for nonprofits are intricate and demanding, requiring a great deal
of care with accounting. For example, the presentation of cash
represents the book balances of bank accounts, not the amounts
reported on bank statements.
In addition, Ruppel offers advice on what
should and should not be reported on an organization's statement
of financial position, according to the way the government keeps
accounts.
What should be reported:
- All demand bank accounts that the government
has, including those for general disbursements, payroll imprest
accounts, separate accounts for wire transfers and so forth. One
cash balance is reported on the financial statements representing
the aggregation of all of these accounts.
- All petty cash accounts that are maintained
by the government.
What should not be reported:
- Cash that is restricted by some legally
enforceable instrument. Generally, this would include cash maintained
in debt service reserve accounts required to be maintained by the
related debt instruments.
- Cash that is received and held as a security
deposit that will be returned to the provider at the end of some
agreement.
7. Developments
in governmental accounting
In maintaining
compliance with government regulations, nonprofit managers and financial
officer often find themselves trying to deal with a confusing and
ever-changing array of procedures and requirements. It isn't difficult
enough that government regulations change; government itself will
often change the way it does something, resulting in even more confusion
about what must be done.
In his book Governmental
Accounting Made Easy, Warren Ruppel offers a look at upcoming
developments in governmental accounting, as a need for new or revised
standards becomes necessary. Knowing ahead of time that these developments
are on the horizon may be helpful to nonprofit executives.
- Some accounting
areas are not covered by an existing authoritative statement, often
resulting in a diversity of accounting practices being used. This
makes financial statements among different governments less comparable.
- New types of
transactions, such as derivatives, either come into being or become
more widely used, often resulting in the need for new accounting
guidance.
- Actions by other
standards setters, such as the Financial Accounting Standards Board
(FASB) may rsult I the need t clarify or set requirements for similar
areas in the governmental accounting environment.
- Abuses by entities
of loopholes in accounting principles may point to the need for
a new standard or standards revisions.
8. Developing
good internal controls and audit trails
Although nonprofits are exempt from Sarbanes-Oxley regulation, they
are not exempt from internal or external fraud. And, because of some
high-profile scandals, nonprofits should proactively practice tight
internal controls (i.e., self-governance) to avoid costs associated
with full Sarbanes-Oxley compliance.
According to Liz Marenakos, product line manager, Financial and Business
Solutions at Blackbaud, Inc., in Charleston, S.C., protecting your
organization against fraud before it happens and ongoing monitoring
for fraud are a necessity in today's environment. Don't wait for fraud
to strike before you take action to protect your organization.
Marenakos has seven suggestions for internal controls and audit trails:
- Improve Data Integrity: Use software solutions
that allow for reporting to take place within the system
-- no need to work outside the system for reporting. The more work
and reporting done outside the software system, the more your organization's
audit risk increases.
- Educate Your Staff: Many of your employees aren't
aware of internal controls, their purpose, or their value. Communication
of internal controls will promote buy-in and the support necessary
for success.
- Reduce Duplicate Entry Through Integration: Use
an integrated fundraising and accounting solution to reduce the need
for duplicate data entry. Re-keying data in multiple software systems
increases the likelihood of errors and may create an opportunity
for fraud.
- Ensure Internal Controls Are Embedded in Your Organization's
Culture: Internal controls are not things you do once
and then forget about. You have to continually enhance, tweak,
and re-communicate them in a never-ending cycle.
- Increase Confidence in the Approval Process: Use
a software solution that provides log files so you can audit who
is doing what, see when they are doing it, and retrace the process
from invoice or receipt entry through approval, posting, and payment.
- Ensure Segregation of Duties: Make sure your internal
processes and software system allow for segregation of duties. For
example, ensure that users who enter cash are not the ones creating
the deposit ticket.
- Improve Monitoring Capability: Ensure that operations
stay within certain predefined parameters. For example, if you publish
your cost-of-fundraising ratio to demonstrate stewardship of donated
dollars, use a system that allows you to constantly monitor that
ratio dynamically. If you only calculate that ratio at the end of
a period, you are not in a position to address and correct problems
as they occur.
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