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Agenda
9:0010:15 am Exempt Organizations in the News A Retrospective of What Made Headlines in 2012 Doug Boedeker, CPA, CMA, Audit Partner; Katrina Henderson, CPA, Audit Manager 10:1510:25 am: Break 10:2511:15 am Accounting & Audit Update Looking Back at 2012 Jeffrey Stefan, CPA, Audit Partner; Rich Banner, CPA, Senior Audit Manager 11:1512:30 pm Revisiting Executive Compensation Reporting on the Form 990 Subrina Wood, CPA, Tax Manager; Sara Smith, Senior EO Tax Specialist 12:30 pm1:15 pm: Lunch
Agenda
1:152:30 pm How to Effectively Facilitate the Investment Manager Selection Process Lisa Swatkoski, Vanguard Institutional Advisory Services; Camille Alexander, Graystone Consulting; Moderator: Charles Tate, CPA, Managing Partner 2:303:20 pm Trending Towards CRM Christopher McCarthy, MCP, Principal, T3 Information Systems 3:203:30 pm: Break 3:304:45 pm How to Prevent and Detect Common Frauds at Nonprofit Organizations Christian Spencer, CPA, Audit Partner, and John Kubichek, CPA, CFE, Audit Manager
Course Outline
Introduction Charity Fundraising Issues Super-PACs & Campaign Activities Governance Issues Disaster Relief Issues General Scrutiny of Exempt Organizations
Charities Deceive Donors Unaware Money Goes to a Telemarketer and Telemarketers Lying for Charities Prompts Call for U.S. Probe
David Evans; Bloomberg Markets Magazine; September 12, 2012 and December 4, 2012, respectively.
InfoCision Management Group handles telemarketing for the American Cancer Society (ACS) and other major nonprofits Questioning scripts used by telemarketers deceptive tactics used to say one percentage went to charities but actually another
Ex. the agreement with them states 44% will go to ACS but the script says 70%
Another mistake telemarketers saying they were volunteers when actual employees of InfoCision InfoCision has provided a response to this article and it is posted on their website http://www.infocision.com
Copyright 2013 Tate & Tryon CPAs and Consultants
Be aware when making donations Veterans Support Organization hired paid solicitors to serve as volunteers to solicit contributions Several complaints of similar tactics
Baucus, Burr Investigate Nonprofit For Exploiting Veterans, Taxpayers, Abusing Tax-exempt Status
Senator Richard Burr; Committee On Finance News Release; May 23, 2012.
Press release discussing whether tax-exempt organizations are being used for financial/political gain Letter issued to the Disabled Veterans National Foundation requesting revenue information, the fundraising expense and other information
Copyright 2013 Tate & Tryon CPAs and Consultants
Grant writing is susceptible to fraud Policies and procedures should be set in place to protect the organizations Examples include:
Having a grant development project leader Verify all data presented Perform an accuracy ethics review prior to signing Monitor consultants timely
Copyright 2013 Tate & Tryon CPAs and Consultants
Cap on deductions will reduce the amount of donations received by nonprofits as the additional tax will be taken from their overall donation
Nonprofits uniting for the tax deduction on donations Normally, every nonprofit is focused on its own particular mission, whether saving the environment, or helping children, or imbuing a greater appreciation for art. For the first time, Ive seen the sector coming together. Were like Rip Van Winkle waking up and saying, This is not O.K. said Diana Aviv, Chief Executive of Independent Sector
National Day of Giving Beyond the consumer focus of Cyber Monday and Black Friday, I think people are a little anxious to do something more this holiday said Allyson Burs, Vice President of Communication for the foundation of AOL founder Steve Case and his wife, Jean Everybody talks about the giving seasonWe thought it would be great to give the giving season an opening day said Henry Timms, Deputy Executive Director of 92nd Street Y
Pink Ribbon campaign may be deceptive as the money raised may not actually go to the cause Are nonprofits really benefiting more from the cause related marketing?
Super-PAC Spending
Rove Biggest Super-PAC Loser, Trump Says Waste of Money
Super-PAC Governance
Post-Campaign Super-PAC Cash Still Flowing to Consultants
Administration vs. Program Expense Ratios for some Super-PACs are shockingly high. An amazing lack of governance and oversight.
Campaign Disclosures
States Crack Down on Campaigning Nonprofits
Matea Gold & Chris Megerian; Los Angeles Times; November 26, 2012.
Political activities of 501(c)(4) entities are drawing scrutiny at the state level. (Amid frustration of the Federal reporting rules.) Fears of nonprofits participating in campaign money laundering.
Governance Issues
BoardSource Nonprofit Governance Index 2012 can be obtained via www.Boardsource.org Fundraising is singled out as the area where Board members perform most poorly.
Copyright 2013 Tate & Tryon CPAs and Consultants
Governance Factors
The Role of the Nonprofit Board: Four Essential Factors for Effective Governance
Editorial in the wake of the Penn State scandal. Questions effectiveness of Boards Advocates a Private Attorney General statute a charitys stakeholders could sue for mismanagement.
Concern over state sunshine laws in conjunction with decision to leave the ACC. Does process kill the offer? University issued a statement on December 7, 2012 expressing regret about not following the sunshine laws.
Copyright 2013 Tate & Tryon CPAs and Consultants
Tension over strategic direction of UVA was there even a strategy? Did the Board listen too much to mid-level management (professors)? Board composition came under scrutiny. Avoidance of sunshine laws? Back-end involvement by former Board members?
Copyright 2013 Tate & Tryon CPAs and Consultants
Dartmouth College
Leon Black Investing Dartmouth Money Stirs Ethics Debate
Basic conflict of interest issue. Can safeguards overcome perception? But, what if the conflict is profitable?
Capped a six-month period of public exploration about the Corcorans future. Public discussion appears to have been fruitful. A fascinating story to follow as it unfolded.
Disaster Relief
Use of a state agency to oversee fund distribution and a board of political fundraisers
Contrary to what other states have done as other states have used large nonprofits with disaster relief experience such as United Way
Approach is problematic because of state regulations that must be followed RESULT, delays in aid Daniel Borochoff, president of CharityWatch says It is interesting that they are raising money in direct competition with the charities Their defense every dollar raised will go to N.Y. citizens rather than cover overhead expenses
Copyright 2013 Tate & Tryon CPAs and Consultants
Raised over a $100M for aid within 1 week of the storm Contingency plans initiated for relief agencies impacted
The needs of organization may be larger than those currently served Principles to help maintain balance
Stick to the mission Use all means of communication Take care of service providers Maintain strong systems for accountability
Bloombergs Expose
Tax-Exempt Firm Gets $600 Million Profit Flying First Class
A must-read article for association executives! Questions the U.S. practice of allowing associations to self-declare exempt status. Should royalties be tax-exempt? Executive compensation always draws scrutiny!
Copyright 2013 Tate & Tryon CPAs and Consultants
Bloombergs Editorial
Making Sure Nonprofits Arent All About Profit
Dovetails off of the Bloombergs various articles examining exempt organizations. Calls for increased Federal and state enforcement of exempt organizations. Interesting discussion of the Tax Reform Act of 1969s excise tax on the investment income of private foundations.
Copyright 2013 Tate & Tryon CPAs and Consultants
College Athletics
Football-Ticket Tax Break Helps Colleges Get Millions
Curtis Eichelberger & Charles Babcock, Bloomberg L.P.; October 25, 2012.
Part of the debate over what constitutes a charitable deduction. History of the authorizing legislation is a fun read. Should a colleges television, sponsorship, and royalty revenue be tax exempt?
Copyright 2013 Tate & Tryon CPAs and Consultants
Tim Craig & Mike DeBonis; The Washington Post; May 3, 2012
Both stories involve local officials stealing government money through charities.
Copyright 2013 Tate & Tryon CPAs and Consultants
Speaker Biography
Douglas Boedeker , is a partner within Tate & Tryons Audit and Assurance Services unit and is also actively involved in the Firm's exempt organization tax services group. He has more than 20 years of experience providing an array of audit, tax, and consulting services to a variety of nonprofit organizations and employee benefit plans. He takes particular pride that his family has contained at least one CPA every year since 1923. Doug graduated summa cum laude from Susquehanna University in Selinsgrove, Pennsylvania with a Bachelor of Science degree in accounting while simultaneously completing the coursework for a second major in arts administration. Known for an enthusiastic and entertaining style, he is a frequent speaker on a variety of exempt organization audit, accounting, and tax issues. Doug is also a coauthor to Guide to the Newest IRS Form 990: Interpreting and Complying with the New Tax Reporting Requirements for Transparency and Accountability, (published by ASAE).
Doug Boedeker, CPA, CMA Audit Partner Tate & Tryon 202-419-5106 dboedkeer@tatetryon.com
Speaker Biography
Katrina Henderson, CPA, is a manager within Tate & Tryons Audit and Assurance Services unit. She has more than 12 years of experience providing an array of audit services to a variety of nonprofit organizations and employee benefit plans. Katrina graduated cum laude from the University of Maryland in College Park, Maryland with a Bachelor of Science degree in accounting and marketing.
Katrina Henderson, CPA Audit Manager Tate & Tryon 202-419-5121 khenderson@tatetryon.com
Agenda
Voting members and independence Definitions and time periods Common paymaster treatment Reporting on the Statement of Functional Expenses
Agenda
Special Topics Accountable plans and Cash Advances Severance, non-qualified plans, and equity based payments Miscellaneous topics
Overview
Board of Directors/Trustees
Voting members
Officers - By-laws
Independence
Conflict of interest
Officers
Overview
Key Employee
Authority broad based or quantified by control over at least 10% of the total assets, expenses, revenue or program. Salary threshold - $150,000 reportable (W-2 Box 1or 5 whichever is higher or 1099 Box 7) compensation Must be one of the top 20 employees who satisfy the responsibility and $150,000 test
Overview
Amount includes salary, pension, and non taxable benefits Fiscal year organizations must provide an additional calculations for Line 5. Allocation differences of key and officer salaries Amounts are based on the fiscal year of organization Amounts will not tie to the totals found in Part VII due to the $10,000 exception rules.
Overview
Method of allocation between organization is time based and is only for the reportable compensation. Reportable Compensation allocated to related organizations and reported as if paid by that organization
Columns (D) and (E) of Part VII equal the total amount of reportable compensation. Column E Other compensation is not allocated and does not change.
Amounts reported in Part V for the number of W-2s filed is based on the EIN of the organization that actually filed the W-2s.
Special Topics
Special Topics
Personal services
Babysitter, bodyguard, chauffeur, chef, tax preparer, pet sitter, financial planner, lawyer, personal assistant.
Expense reimbursements
Directors and trustee are considered employees for purposes fringe benefits and can be reimbursed substantially identically as employees under the plan. Outstanding salary advances that are not under an accountable plan are considered loans and reported on Schedule L, Part II.
Severance payments
Report if amount paid by reporting or related organization Includes payments for wrongful termination or demotion Payments resulting in termination or change of employment made under a change-of-control Report name, amount and any terms in Supplemental Information section of Schedule J
Does not include 457(b) plans or split-dollar life insurance plans, but does include 457(f) plans. All plans that are not generally available to all employees, but only to highly paid ones Disclose name, amount, and description of plan in the Supplemental Information section of Schedule J
Paid by organization or related organization Includes stock, stock options, stock appreciation rights, restricted stock or shadow stock. Includes payments determined by reference to equity in a partnership, limited liability company, or corporation
Special compensation considerations for public charities 501(c)(3) and social welfare 501(c)(4) organizations
Compensation contingent of net earnings or revenue Bonuses and non-fixed payments rules Contracts and employment agreements Initial contract exception and the rebuttable presumption procedure
Miscellaneous Topics
Insurance policies
Miscellaneous Topics
Form W-9 indicates if the payment is to the corporation of the individual Payments made to the corporation appear on Schedule L, Part IV if over the reporting threshold.
Consider additional disclosure on Schedule O
Payments made to the individual are reported on a 1099-MISC. The amount in Box 7 should be reported in Part VII
Miscellaneous Topics
Management companies
Report payments as Independent Contractors in Part VII, Section B Check question about delegating control over management duties in Governance and Management section YES. Report top management or financial person from the management company in Part VII with full disclosure
Leased employees
Interpreting and Complying with the New Tax Reporting Requirements for Transparency and Accountability
By:
Charles F. Tate, CPA Deborah G. Kosnett, CPA Douglas A. Boedeker, CPA Subrina L. Wood, CPA Frederick U. Longwood, CPA
ASAEcenter.org/bookstore
Speaker Biography
Subrina Wood, CPA, is a Tax Manager in the Firms Exempt Organization Tax department with more than 25 years of exemptorganization tax experience. Previously, Ms. Wood worked in the tax departments of the Boston offices of KPMG, Mellon Bank, and Thompson Reuters. Ms. Wood has extensive experience establishing and maintaining private foundations and charitable gift strategies, and has worked with organizations such as Carnegie Mellon University, Virginia Military Institute, and Smith College. In addition, she has considerable experience with the following exempt organization tax specialty areas: Form 990 reporting; tax reporting for nonprofits holding alternative investments; preparing entities for electronic filing and payment options; accounting and reporting for special events and fundraisers; and handling nonresident alien tax issues. Ms. Wood has presented on a variety of exempt organization tax issues at nonprofit industry conferences such as the AICPA National Not-For-Profit Industry Conference and ASAEs Annual Association Law Symposium.
Subrina Wood, CPA Tax Manager Tate & Tryon 202-419-5129 swood@tatetryon.com
Speaker Biography
Sara Smith, is a senior exempt organization tax specialist with the Firm. She has extensive experience in dealing with a variety of exempt organization tax areas such as governance policies, nexus issues, functional allocation of expenses, non-cash contributions, and foreign reporting requirements on the Form 990. Ms. Smith also recently published an article in the Firms newsletter titled, The Value of Good Governance Policies, in which she discusses the importance of establishing good governance policies and how this information should be disclosed on the Form 990. Ms. Smith is involved in the oversight of the tax engagements such as American Society of Association Executives (ASAE); American Society of Cataract and Refractive Surgery; American Association of Justice, American Association of Universities; Common Cause; Council of Better Business Bureaus; Pharmaceutical Research & Manufacturers of America; United States Capitol Historical Society; and Washington DC Economic Partnership.
Sara Smith Senior Exempt Organization Tax Specialist Tate & Tryon 202-419-5195 ssmith@tatetryon.com
Page 5
Part V
Statements Regarding Other IRS Filings and Tax Compliance Check if Schedule O contains a response to any question in this Part V . . . . . . . . . . . . . .
Yes No
1a Enter the number reported in Box 3 of Form 1096. Enter -0- if not applicable . . . . 1a b Enter the number of Forms W-2G included in line 1a. Enter -0- if not applicable . . . . 1b c Did the organization comply with backup withholding rules for reportable payments to vendors and reportable gaming (gambling) winnings to prize winners? . . . . . . . . . . . . . . . . . 2a Enter the number of employees reported on Form W-3, Transmittal of Wage and Tax Statements, filed for the calendar year ending with or within the year covered by this return 2a b If at least one is reported on line 2a, did the organization file all required federal employment tax returns? . Note. If the sum of lines 1a and 2a is greater than 250, you may be required to e-file (see instructions) . . 3a Did the organization have unrelated business gross income of $1,000 or more during the year? . . . . b If Yes, has it filed a Form 990-T for this year? If No, provide an explanation in Schedule O . . . . . 4a At any time during the calendar year, did the organization have an interest in, or a signature or other authority over, a financial account in a foreign country (such as a bank account, securities account, or other financial account)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b If Yes, enter the name of the foreign country: See instructions for filing requirements for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. 5a Was the organization a party to a prohibited tax shelter transaction at any time during the tax year? . . . b Did any taxable party notify the organization that it was or is a party to a prohibited tax shelter transaction? c If Yes to line 5a or 5b, did the organization file Form 8886-T? . . . . . . . . . . . . . . . 6a Does the organization have annual gross receipts that are normally greater than $100,000, and did the organization solicit any contributions that were not tax deductible as charitable contributions? . . . . . b If Yes, did the organization include with every solicitation an express statement that such contributions or gifts were not tax deductible? . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Organizations that may receive deductible contributions under section 170(c). a Did the organization receive a payment in excess of $75 made partly as a contribution and partly for goods and services provided to the payor? . . . . . . . . . . . . . . . . . . . . . . . . b If Yes, did the organization notify the donor of the value of the goods or services provided? . . . . . c Did the organization sell, exchange, or otherwise dispose of tangible personal property for which it was required to file Form 8282? . . . . . . . . . . . . . . . . . . . . . . . . . . . d e f g h 8 If Yes, indicate the number of Forms 8282 filed during the year . . . . . . . . 7d Did the organization receive any funds, directly or indirectly, to pay premiums on a personal benefit contract? Did the organization, during the year, pay premiums, directly or indirectly, on a personal benefit contract? . If the organization received a contribution of qualified intellectual property, did the organization file Form 8899 as required? If the organization received a contribution of cars, boats, airplanes, or other vehicles, did the organization file a Form 1098-C? Sponsoring organizations maintaining donor advised funds and section 509(a)(3) supporting organizations. Did the supporting organization, or a donor advised fund maintained by a sponsoring organization, have excess business holdings at any time during the year? . . . . . . . . . . . Sponsoring organizations maintaining donor advised funds. Did the organization make any taxable distributions under section 4966? . . . . . . . . . . . . Did the organization make a distribution to a donor, donor advisor, or related person? . . . . . . . Section 501(c)(7) organizations. Enter: Initiation fees and capital contributions included on Part VIII, line 12 . . . . . . . 10a Gross receipts, included on Form 990, Part VIII, line 12, for public use of club facilities . 10b Section 501(c)(12) organizations. Enter: 11a Gross income from members or shareholders . . . . . . . . . . . . . . . Gross income from other sources (Do not net amounts due or paid to other sources against amounts due or received from them.) . . . . . . . . . . . . . . . 11b Section 4947(a)(1) non-exempt charitable trusts. Is the organization filing Form 990 in lieu of Form 1041? If Yes, enter the amount of tax-exempt interest received or accrued during the year . . 12b Section 501(c)(29) qualified nonprofit health insurance issuers. Is the organization licensed to issue qualified health plans in more than one state? . . . . . . . . Note. See the instructions for additional information the organization must report on Schedule O. Enter the amount of reserves the organization is required to maintain by the states in which the organization is licensed to issue qualified health plans . . . . . . . . . . 13b . .
1c
2b 3a 3b
4a
5a 5b 5c 6a 6b
7a 7b 7c 7e 7f 7g 7h
8 9a 9b
9 a b 10 a b 11 a b 12a b 13 a b
12a
13a
c Enter the amount of reserves on hand . . . . . . . . . . . . . . . . . 13c 14a Did the organization receive any payments for indoor tanning services during the tax year? . . . . . b If "Yes," has it filed a Form 720 to report these payments? If "No," provide an explanation in Schedule O
14a 14b
Form 990 (2012)
Page 6 Governance, Management, and Disclosure For each Yes response to lines 2 through 7b below, and for a No response to line 8a, 8b, or 10b below, describe the circumstances, processes, or changes in Schedule O. See instructions. Check if Schedule O contains a response to any question in this Part VI . . . . . . . . . . . . . . Section A. Governing Body and Management Form 990 (2012)
Part VI
Yes
No
1a
Enter the number of voting members of the governing body at the end of the tax year . . If there are material differences in voting rights among members of the governing body, or if the governing body delegated broad authority to an executive committee or similar committee, explain in Schedule O.
1a
b Enter the number of voting members included in line 1a, above, who are independent . 1b 2 Did any officer, director, trustee, or key employee have a family relationship or a business relationship with any other officer, director, trustee, or key employee? . . . . . . . . . . . . . . . . . . 3 Did the organization delegate control over management duties customarily performed by or under the direct supervision of officers, directors, or trustees, or key employees to a management company or other person? . 4 5 6 7a Did the organization make any significant changes to its governing documents since the prior Form 990 was filed? Did the organization become aware during the year of a significant diversion of the organizations assets? . Did the organization have members or stockholders? . . . . . . . . . . . . . . . . . . Did the organization have members, stockholders, or other persons who had the power to elect or appoint one or more members of the governing body? . . . . . . . . . . . . . . . . . . . . b Are any governance decisions of the organization reserved to (or subject to approval by) members, stockholders, or persons other than the governing body? . . . . . . . . . . . . . . . . . 8 Did the organization contemporaneously document the meetings held or written actions undertaken during the year by the following: a The governing body? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b Each committee with authority to act on behalf of the governing body? . . . . . . . . . . . . 9 Is there any officer, director, trustee, or key employee listed in Part VII, Section A, who cannot be reached at the organizations mailing address? If Yes, provide the names and addresses in Schedule O . . . . .
2 3 4 5 6 7a 7b
8a 8b 9
Yes No
Section B. Policies (This Section B requests information about policies not required by the Internal Revenue Code.)
10a Did the organization have local chapters, branches, or affiliates? . . . . . . . . . . . . . . b If Yes, did the organization have written policies and procedures governing the activities of such chapters, affiliates, and branches to ensure their operations are consistent with the organization's exempt purposes? 11a Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the form? b Describe in Schedule O the process, if any, used by the organization to review this Form 990. 12a Did the organization have a written conflict of interest policy? If No, go to line 13 . . . . . . . . b Were officers, directors, or trustees, and key employees required to disclose annually interests that could give rise to conflicts? c Did the organization regularly and consistently monitor and enforce compliance with the policy? If Yes, describe in Schedule O how this was done . . . . . . . . . . . . . . . . . . . . . . 13 Did the organization have a written whistleblower policy? . . . . . . . . . . . . . . . . . 14 Did the organization have a written document retention and destruction policy? . . . . . . . . . 15 Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision? a The organizations CEO, Executive Director, or top management official . . . . . . . . b Other officers or key employees of the organization . . . . . . . . . . . . . . . If Yes to line 15a or 15b, describe the process in Schedule O (see instructions). 16a Did the organization invest in, contribute assets to, or participate in a joint venture or similar with a taxable entity during the year? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10a 10b 11a 12a 12b 12c 13 14
15a 15b
arrangement . . . .
16a
b If Yes, did the organization follow a written policy or procedure requiring the organization to evaluate its participation in joint venture arrangements under applicable federal tax law, and take steps to safeguard the organizations exempt status with respect to such arrangements? . . . . . . . . . . . . . .
16b
Section C. Disclosure
17 18 List the states with which a copy of this Form 990 is required to be filed Section 6104 requires an organization to make its Forms 1023 (or 1024 if applicable), 990, and 990-T (Section 501(c)(3)s only) available for public inspection. Indicate how you made these available. Check all that apply. Own website Anothers website Upon request Other (explain in Schedule O) Describe in Schedule O whether (and if so, how), the organization made its governing documents, conflict of interest policy, and financial statements available to the public during the tax year. State the name, physical address, and telephone number of the person who possesses the books and records of the organization:
Form 990 (2012)
19 20
Part VII
Page 7 Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors Check if Schedule O contains a response to any question in this Part VII . . . . . . . . . . . . . .
Section A. Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees 1a Complete this table for all persons required to be listed. Report compensation for the calendar year ending with or within the organizations tax year. List all of the organizations current officers, directors, trustees (whether individuals or organizations), regardless of amount of compensation. Enter -0- in columns (D), (E), and (F) if no compensation was paid. List all of the organizations current key employees, if any. See instructions for definition of key employee. List the organizations five current highest compensated employees (other than an officer, director, trustee, or key employee) who received reportable compensation (Box 5 of Form W-2 and/or Box 7 of Form 1099-MISC) of more than $100,000 from the organization and any related organizations. List all of the organizations former officers, key employees, and highest compensated employees who received more than $100,000 of reportable compensation from the organization and any related organizations. List all of the organizations former directors or trustees that received, in the capacity as a former director or trustee of the organization, more than $10,000 of reportable compensation from the organization and any related organizations. List persons in the following order: individual trustees or directors; institutional trustees; officers; key employees; highest compensated employees; and former such persons. Check this box if neither the organization nor any related organization compensated any current officer, director, or trustee.
(C) (A) Name and Title (B) Average hours per week (list any hours for related organizations below dotted line) Position (do not check more than one box, unless person is both an officer and a director/trustee) Individual trustee or director Institutional trustee Officer Key employee Highest compensated employee Former (D) (E) (F) Estimated amount of other compensation from the organization and related organizations
Reportable Reportable compensation compensation from from related the organizations organization (W-2/1099-MISC) (W-2/1099-MISC)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
Form 990 (2012)
Page 8 (C) (A) Name and title (B) Average hours per week (list any hours for related organizations below dotted line) Position (do not check more than one box, unless person is both an officer and a director/trustee) Individual trustee or director Institutional trustee Officer Key employee Highest compensated employee Former (D) (E) (F) Estimated amount of other compensation from the organization and related organizations
Part VII
Section A. Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees (continued)
Reportable Reportable compensation compensation from from related the organizations organization (W-2/1099-MISC) (W-2/1099-MISC)
(15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) 1b c d 2 Sub-total . . . . . . . . . . . . . . . . . . . . . Total from continuation sheets to Part VII, Section A . . . . . Total (add lines 1b and 1c) . . . . . . . . . . . . . . . Total number of individuals (including but not limited to those listed above) who received more than $100,000 of reportable compensation from the organization Yes No 3 4 Did the organization list any former officer, director, or trustee, key employee, or highest compensated employee on line 1a? If Yes, complete Schedule J for such individual . . . . . . . . . . . . For any individual listed on line 1a, is the sum of reportable compensation and other compensation from the organization and related organizations greater than $150,000? If Yes, complete Schedule J for such individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Did any person listed on line 1a receive or accrue compensation from any unrelated organization or individual for services rendered to the organization? If Yes, complete Schedule J for such person . . . . . . 3
5 Section B. Independent Contractors 1 Complete this table for your five highest compensated independent contractors that received more than $100,000 of compensation from the organization. Report compensation for the calendar year ending with or within the organization's tax year.
(A) Name and business address (B) Description of services (C) Compensation
Total number of independent contractors (including but not limited to those listed above) who received more than $100,000 of compensation from the organization
Form 990 (2012)
Page 9
. . . . . . . . . . . . . .
(C) Unrelated business revenue (D) Revenue excluded from tax under sections 512, 513, or 514
1a b c d e f
Federated campaigns . . . Membership dues . . . . Fundraising events . . . . Related organizations . . . Government grants (contributions) All other contributions, gifts, grants, and similar amounts not included above
1a 1b 1c 1d 1e
Business Code
2a b c d e f All other program service revenue . g Total. Add lines 2a2f . . . . . . . . . 3 Investment income (including dividends, interest, and other similar amounts) . . . . . . . 4 5 6a b c d 7a Income from investment of tax-exempt bond proceeds Royalties . . . . . . . . . . . . .
(i) Real (ii) Personal
Gross rents . . Less: rental expenses Rental income or (loss) Net rental income or (loss) . . . (i) Securities Gross amount from sales of assets other than inventory b Less: cost or other basis and sales expenses . c Gain or (loss) . . d Net gain or (loss) . . . . . .
(ii) Other
Other Revenue
8a Gross income from fundraising events (not including $ of contributions reported on line 1c). See Part IV, line 18 . . . . . a b Less: direct expenses . . . . b c Net income or (loss) from fundraising events 9a Gross income from gaming activities. See Part IV, line 19 . . . . . a b Less: direct expenses . . . . b c Net income or (loss) from gaming activities . 10a Gross sales of inventory, less returns and allowances . . . a b Less: cost of goods sold . . . b c Net income or (loss) from sales of inventory .
Miscellaneous Revenue
Business Code
11a b c d All other revenue . . . . . e Total. Add lines 11a11d . . . 12 Total revenue. See instructions.
. .
. .
. .
. .
. .
Form 990 (2012)
Page 10
Part IX
Section 501(c)(3) and 501(c)(4) organizations must complete all columns. All other organizations must complete column (A). Do not include amounts reported on lines 6b, 7b, 8b, 9b, and 10b of Part VIII. 1 2 3 Grants and other assistance to governments and organizations in the United States. See Part IV, line 21 Grants and other assistance to individuals in the United States. See Part IV, line 22 . . . Grants and other assistance to governments, organizations, and individuals outside the United States. See Part IV, lines 15 and 16 . . Benefits paid to or for members . . . . Compensation of current officers, directors, trustees, and key employees . . . . . Compensation not included above, to disqualified persons (as defined under section 4958(f)(1)) and persons described in section 4958(c)(3)(B) . . Other salaries and wages . . . . . . Pension plan accruals and contributions (include section 401(k) and 403(b) employer contributions) Other employee benefits . . . . . . . Payroll taxes . . . . . . . . . . . Fees for services (non-employees): Management . . . . . . . . . . Legal . . . . . . . . . . . . . Accounting . . . . . . . . . . . Lobbying . . . . . . . . . . . . Professional fundraising services. See Part IV, line 17 Investment management fees . . . . . Other. (If line 11g amount exceeds 10% of line 25, column (A) amount, list line 11g expenses on Schedule O.) . . Advertising and promotion . . . . . . Office expenses . . . . . . . . . Information technology . . . . . . . Royalties . . . . . . . . . . . . Occupancy . . . . . . . . . . . Travel . . . . . . . . . . . . . Payments of travel or entertainment expenses for any federal, state, or local public officials Conferences, conventions, and meetings . Interest . . . . . . . . . . . . Payments to affiliates . . . . . . . . Depreciation, depletion, and amortization . Insurance . . . . . . . . . . . . Other expenses. Itemize expenses not covered above (List miscellaneous expenses in line 24e. If line 24e amount exceeds 10% of line 25, column (A) amount, list line 24e expenses on Schedule O.)
(A) Total expenses (B) Program service expenses (C) Management and general expenses (D) Fundraising expenses
4 5 6
7 8 9 10 11 a b c d e f g 12 13 14 15 16 17 18 19 20 21 22 23 24
a b c d e All other expenses Total functional expenses. Add lines 1 through 24e 25 Joint costs. Complete this line only if the 26 organization reported in column (B) joint costs from a combined educational campaign and fundraising solicitation. Check here if following SOP 98-2 (ASC 958-720) . . . .
Form 990 (2012)
SCHEDULE J
(Form 990)
For certain Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees Complete if the organization answered "Yes" to Form 990, Part IV, line 23. Attach to Form 990. See separate instructions.
Compensation Information
2012
Part I
1a
Check the appropriate box(es) if the organization provided any of the following to or for a person listed in Form 990, Part VII, Section A, line 1a. Complete Part III to provide any relevant information regarding these items. First-class or charter travel Travel for companions Tax indemnification and gross-up payments Discretionary spending account Housing allowance or residence for personal use Payments for business use of personal residence Health or social club dues or initiation fees Personal services (e.g., maid, chauffeur, chef)
b If any of the boxes on line 1a are checked, did the organization follow a written policy regarding payment or reimbursement or provision of all of the expenses described above? If No, complete Part III to explain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Did the organization require substantiation prior to reimbursing or allowing expenses incurred by all officers, directors, trustees, and the CEO/Executive Director, regarding the items checked in line 1a? . . . . . Indicate which, if any, of the following the filing organization used to establish the compensation of the organizations CEO/Executive Director. Check all that apply. Do not check any boxes for methods used by a related organization to establish compensation of the CEO/Executive Director, but explain in Part III. Compensation committee Independent compensation consultant Form 990 of other organizations 4 Written employment contract Compensation survey or study Approval by the board or compensation committee
1b
During the year, did any person listed in Form 990, Part VII, Section A, line 1a, with respect to the filing organization or a related organization: 4a 4b 4c
a Receive a severance payment or change-of-control payment? . . . . . . . . . . . . . . . b Participate in, or receive payment from, a supplemental nonqualified retirement plan? . . . . . . . c Participate in, or receive payment from, an equity-based compensation arrangement? . . . . . . . If Yes to any of lines 4ac, list the persons and provide the applicable amounts for each item in Part III. Only section 501(c)(3) and 501(c)(4) organizations must complete lines 59. For persons listed in Form 990, Part VII, Section A, line 1a, did the organization pay or accrue any compensation contingent on the revenues of: . . . . . .
a The organization? . . . . . . . . . . . . . . . . . . . . . . . . . . . b Any related organization? . . . . . . . . . . . . . . . . . . . . . . . . If Yes to line 5a or 5b, describe in Part III. For persons listed in Form 990, Part VII, Section A, line 1a, did the organization pay or accrue any 6 compensation contingent on the net earnings of: a The organization? . . . . . . . . . . . . . . . . . . b Any related organization? . . . . . . . . . . . . . . . If Yes to line 6a or 6b, describe in Part III. 7 For persons listed in Form 990, Part VII, Section A, line 1a, did the payments not described in lines 5 and 6? If Yes, describe in Part III . 8 . . . . . . . . . . . . . . . . . .
5a 5b
. .
. .
. .
6a 6b
Were any amounts reported in Form 990, Part VII, paid or accrued pursuant to a contract that was subject to the initial contract exception described in Regulations section 53.4958-4(a)(3)? If Yes, describe in Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . If Yes to line 8, did the organization also follow the rebuttable presumption procedure described in Regulations section 53.4958-6(c)? . . . . . . . . . . . . . . . . . . . . . . . .
Cat. No. 50053T
8 9
For Paperwork Reduction Act Notice, see the Instructions for Form 990.
Page
Part II
Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees. Use duplicate copies if additional space is needed.
For each individual whose compensation must be reported in Schedule J, report compensation from the organization on row (i) and from related organizations, described in the instructions, on row (ii). Do not list any individuals that are not listed on Form 990, Part VII. Note. The sum of columns (B)(i)(iii) for each listed individual must equal the total amount of Form 990, Part VII, Section A, line 1a, applicable column (D) and (E) amounts for that individual.
(B) Breakdown of W-2 and/or 1099-MISC compensation (A) Name and Title
(i) Base compensation (ii) Bonus & incentive compensation (iii) Other reportable compensation (C) Retirement and other deferred compensation (D) Nontaxable benefits (E) Total of columns (B)(i)(D) (F) Compensation reported as deferred in prior Form 990
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
(i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii) (i) (ii)
Schedule J (Form 990) 2012
Page 3 Part III Supplemental Information Complete this part to provide the information, explanation, or descriptions required for Part I, lines 1a, 1b, 3, 4a, 4b, 4c, 5a, 5b, 6a, 6b, 7, and 8, and for Part II. Also complete this part for any additional information.
Agenda
Established in 2009 to be a resource for the FASB in obtaining input from the NFP sector on existing guidance, current and proposed technical agenda projects, and longer-term issues affecting NFPs. In 2011, the NAC began a standard-setting project to reexamine the existing standards for financial statement presentation by NFPs. The project has three goals:
Improve the current net asset classification scheme. Improve statements of activities and cash flows to more clearly communicate financial performance. Review existing NFP-specific disclosure requirements to improve relevance and understandability. In May 2012, the NAC recommendations to FASB.
2.
3.
Revising the net asset classification to have only two general net asset classes:
1. 2.
NAC believes that the distinction between temporarily and permanently restricted net assets has outlived its usefulness.
Prefers the term Other Net Assets rather than Unrestricted. The term Unrestricted can confuse and perhaps mislead stakeholders to believe that those net assets are without any restrictions. They can be subject to limitations that result from laws, regulations, debt covenants, and other contractual restrictions. Focus on liquidity of net assets.
Supports requiring presentation of an operating measure in the statement of activities. Suggested the FASB consider extending the requirement of a statement of functional expenses for all NFPs except those with an insignificant percentage of revenue from contributions. Currently only required for VH&W organizations.
Highlights the need for cross-referencing the fair value disclosures with the endowment disclosures to provide clarity about the extent to which investments represent restricted net assets and restricted asset. Wants to better depict financial risks through disclosure requirement.
Recommends a management commentary that is presented as supplemental information placed before the financial statements and notes. (See handout)
The NAC staff projects that a final statement should be issued in 2014.
TBD
What changed?
Permits assessment of qualitative factors to determine if it is more likely than not that the asset has been impaired Qualitative assessment determines necessity of quantitative assessment
If directed for immediate sale, then operating activity. If donor restricted for long-term purposes, then financing activity. Otherwise, investing activity.
The proposal in the exposure draft would require a recipient NFP to recognize in its standalone financial statements all personnel services received from an affiliate that directly benefit the recipient NFP. Those services would be measured at the cost recognized by the affiliate for the personnel providing those services.
OMB Update
Increase audit threshold to $1,000,000. Creation of a new type of audit for auditees between $1M - $3M. Change criteria for testing compliance requirements. Making federal agencies more responsible for audit follow-up and audit resolution.
58 AU sections
3 withdrawn 37 redrafted to corresponding SAS 7 combined into 1 new SAS 11 combined/split into 9 SASs AU section numbers changed to converge with ISA numbering
Speaker Biography
Jeff Stefan, is the partner in charge of Tate & Tryons auditing practice and has more than 25 years of experience serving the nonprofit sector. In addition to his extensive audit and tax experience, he has provided consulting services to organizations such as The World Bank, Public Company Accounting Oversight Board, and ASAE & The Center for Association Leadership in a variety of areas, including grant compliance, merger due diligence, and internal controls. He has also been called upon to consult on a variety of complex issues such as fair value accounting (FAS 157), accounting for alternative investments (FAS 133), split interest agreements, endowment accounting (UPMIFA / FSP 117-1), single member limited liability corporations, uncertain tax positions (FIN 48), and interest rate swap agreements. Mr. Stefan has presented and authored articles on many recent accounting and auditing issues including : FASB Staff Position (FSP) FAS 117-1, Endowments of Not-for-Profit Organizations, Educating Your Board About Audits, Understanding Statement of Auditing Standards (SAS) 103, Audit Documentation, SAS112, Communicating Internal Control Matters Identified in an Audit, and A Summary of the new Audit Risk Standards. Jeff is a member of the American Institute of CPAs (AICPA), the Greater Washington Society of CPAs (GWSCPA), and ASAE.
Jeff Stefan, CPA Audit Partner Tate & Tryon 202-419-5104 jstefan@tatetryon.com
Speaker Biography
Rich Banner, CPA, is a senior audit manager with the Firm and has been working with nonprofits for the past 15 years. Prior to joining Tate & Tryon, Mr. Banner was an internal auditor with a national labor organization based in Washington, DC. Mr. Banner has extensive experience managing and performing audits of various types of nonprofit organizations including trade and membership associations, related for-profit subsidiaries, charitable organizations, and Section 527(f) political action committees. Mr. Banner has experience with a variety of complex auditing issues such as Federal awards and OMB A133 requirements, alternative investments and fair value accounting, and bond financing. He also has extensive experience with restricted contributions, trade shows, exhibits, and sponsorship arrangements.
Rich Banner, CPA Audit Manager Tate & Tryon 202-419-5183 rbanner@tatetryon.com
Membership
For the fth consecutive year, we reached record-breaking membership levels, with more than 358,000 regular voting and nearly 386,000 total members at July 31, 2012. These results reect the AICPAs continuing efforts to provide value to the profession to attract new members and retain our current membership base. In line with our strategic plan, we continued our focus on people. In Fiscal 2012, the student member-focused Legacy Scholars Program was created to engage future CPAs by providing scholarship opportunities and an interactive peer community on ThisWayToCPA (ThisWaytoCPA.com). We registered more than 17,000 new users in this community, added more than 7,000 new student members and now allow international CPA candidates. In addition, with the culmination of two years of study and insights from teams representing diverse viewpoints in practice and academia, the Pathways Commission, a joint effort of the AICPA and the American Accounting Association, released its nal report in July 2012 on the future of higher education in accounting.
As part of our strategy to further enhance our value to our members, the Institute created a joint venture, the Association of International Certied Professional Accountants (Association) with the London-based Chartered Institute of Management Accountants (CIMA). Through the Association, we launched the new Chartered Global Management Accountant (CGMA) designation. The CGMA designation offers a unique value proposition to our members by recognizing their
2011 2012 ANNUAL REPORT 3
6.3% 50.7%
Membership Dues
10.3%
Professional Examinations
4%
Communications & Public Relations
13.9% 10.5%
Other Professional Development & Member Service Conferences
10%
Regulation & Legislation
General Management
6.6% 18.7%
Professional Development & Member Service Conferences
9.8%
Technology
11.6%
Professional Examinations
Technical
8.6% 9.5%
Publications Other Financial Charges
Financials
management accounting skill set of combining nancial expertise and business acumen to achieve sustainable business success. The resources provided for CPA, CGMAs will help them to enhance their competencies in this area, providing them with access to what is envisioned to be the premier designation worldwide for management accountants and others performing management accounting services.
CPA Examination
In Fiscal 2012, we successfully launched the CPA Examination internationally (International Examination) in six countries and administered more than 7,000 sections in Bahrain, Brazil, Japan, Kuwait, Lebanon and the United Arab Emirates. With respect to the CPA Examination in the United States (Domestic Examination), we experienced a small decline in administered sections; 242,000 in Fiscal 2012, down from 264,000 in Fiscal 2011. The decrease is primarily a result of new content and functionality delivered in January 2011 that prompted candidates to take the Domestic Examination prior to January 2011. We continue to invest in the platform to ensure our candidates receive best-in-class content and technology.
This Way to CPAs CPA Exam Aid. The Journal of Accountancy News App for iPad is a benet available exclusively to AICPA members, featuring monthly magazine issues and breaking news from the Journal of Accountancy, CPA Letter Daily, more than 15 AICPA news feeds, videos and more, making it the denitive news source for CPAs. The CPA Exam Aid is a benet available to our student members and CPA candidates to help them plan for the CPA Examination by allowing them to get answers to their questions about the CPA Examination and providing tips to help them study intelligently. In its rst 45 days, the CPA Exam Aid had more than 3,000 downloads. The AICPA also launched The AICPA Reader App, which is available as a free download and can be used to access the AICPAs growing list of e-books, including the AICPAs Codication of Statements of Auditing Standards, audit and accounting guides, audit risk alerts, and management accounting and practice management publications. Fiscal 2012 also saw the launch of two new interactive tools: The Interactive Tax Checklists, which is an online tool that makes tax return preparation planning more efcient, and the Privacy Principles Scoreboard, which is a tool to perform privacy risk and maturity assessments as well as examining and reporting on internal controls over privacy at a service organization.
We continued our mobility efforts working with the National Association of State Boards of Accountancy (NASBA) and the state boards and state CPA societies. With the recent signing of California legislation, 49 states and the District of Columbia have now passed mobility laws and are now in the implementation and navigation phases. These services, programs and initiatives, supported by our membership dues, are for the benet of our members, the accounting profession and the public interest. A detailed account of our operations follows and illustrates managements analysis of our resources, which are carefully managed to fund and support these activities.
REPORT ON OPERATIONS
Investments
In Fiscal 2012, the Institutes investments portfolio remained relatively at as a result of a slight decline in the market offset by the reinvestment of dividends and interest income. The Institutes investments committee actively monitors the performance and allocation of its investment portfolios and responds to changes in market conditions while maintaining a long-term view of the markets. The investments portfolio is diversied across equity and xed income securities.
Member Resources
In support of the continual professional development of CPAs, the AICPA increased the number of virtual conference offerings in Fiscal 2012, making conference programs more readily accessible to participants. The virtual conference programs include post-conference rebroadcasts and an increased number of post-conference highlight webcasts, featuring content from select presentations and commentary from expert panelists covering the main topics from the program. In the coming year, the AICPA will continue to increase the number of virtual conference programs offered. Also in Fiscal 2012, the AICPA successfully relocated its Continuing Professional Education (CPE) operations in its Texas location to the Durham, NC, ofce to streamline operations and gain efciencies. The AICPA launched several new mobile applications, including The Journal of Accountancy News App for iPad and
Public Interest
We continued our efforts with respect to nancial literacy and serving the public interest. In addition to our Total Tax Insights calculator that we launched in May, we continued to enhance our website, 360taxes.org, to help consumers understand their taxes. The site provides tax resources, tips, FAQs, checklists and much more including an Ask-A-CPA section, where CPAs answer individuals questions. The Institute continued its focus on our Feed the Pig campaign and launched new public service announcements in January 2012. During the rst quarter of calendar year 2012, our campaign appeared the most among the more than 50 Ad Council campaigns in the market. This validates the relevance and importance of our efforts.
CPA Examination
In Fiscal 2012, the Domestic Examination recognized approximately $23.3 million in revenue and expensed costs equal to the revenue in accordance with our tri-party agreement with NASBA and Prometric. The agreement provides for the AICPA to break even with respect to revenue and costs over the life of the contract through 2024. Consequently, the previous deferred asset has been fully recovered and we now have a deferred liability of approximately $5.9 million. This recovery was three years earlier than originally anticipated. Not only did the price of the Domestic Examination not increase in Fiscal 2012, but there is an anticipated decrease of $5 per section to $90 effective January 2013.
As mentioned previously, we launched the International Examination in Fiscal 2012 in six countries and recognized revenue of approximately $2.6 million. The International Examination agreement does not provide for the AICPA to break even; accordingly, revenues and costs are recognized as earned or incurred resulting in a prot of approximately $900,000. In Fiscal 2013 and beyond, we will seek opportunities to enter additional countries to continue to ensure the advancement of the U.S. CPA internationally.
increase the target allocation of the Plans assets in xed income investments and decrease the overall target allocation of the Plans assets in equity investments. At July 31, 2012, the Plan was 55% allocated to xed income investments and 45% allocated to equity securities and other types of investments. As noted in prior years, the AICPA implemented a Plan freeze effective April 30, 2017, and no further benet accruals will occur after this date. Furthermore, all AICPA employees hired after November 2005 receive a lower pension benet but a higher employer match under our 401(k) plan. More than 73% of the pension liability is related to former employees who have already vested in the Plan. The low interest rate environment is not advantageous to make further design changes at this time; however, management continues to monitor the interest rate environment in conjunction with its improved funding status to assess opportunities that the market may create.
Long-Term Debt
At July 31, 2012, AICPA had a term loan of $18.8 million for which $8.8 million of principal payments were made during the year. Since Fiscal 2007, the Institute has repaid approximately $69 million in debt. Although the debt is scheduled to be repaid by April 2016, Management continues to evaluate the opportunity to renance its long-term debt given the low interest rate environment.
joint venture, the Association. The AICPA and NorthStar are not responsible for any liabilities or other obligations of CPA2Biz or the Related Organizations included in the combined nancial statements. Highlights from our combined nancial statements as of and for the year ended July 31, 2012, include the following: Total assets on a combined basis were $226.8 million in Fiscal 2012 compared to $241.5 million in Fiscal 2011. The decrease is primarily due to a lower cash balance as a result of the Council-approved investment in the CGMA initiative and amortization of deferred software development costs. Total liabilities on a combined basis were $188.3 million in Fiscal 2012 compared to $176.1 million in Fiscal 2011. This increase is primarily the result of the increased pension liability due to the decline in the interest rate environment, offset by continued principal payments on long-term debt. Operating revenue on a combined basis was $223.4 million in Fiscal 2012 compared to $218.8 million in Fiscal 2011. The increase is primarily related to higher AICPA membership dues revenue associated with achieving a record number of members and an increase in professional development and member service conferences as a result of an increase in virtual conferences and webcast offerings. The increases in revenue were offset by a decrease in publications revenue as a result of fewer standards issued. Operating expenses on a combined basis were $227.9 million in Fiscal 2012 compared to $216.5 million in Fiscal 2011. The increase over Fiscal 2011 is comprised of our investment in the rst year of operations of the CGMA initiative. We continued our investment in the Accounting Doctoral Scholars Program to reverse a shortage of Ph.D. accounting faculty in U.S. colleges and universities. We also invested in technology for continued support of our members including the previously mentioned mobile
CPA2Biz
CPA2Bizs revenue totaled $23.5 million with net income of approximately $200,000 in Fiscal 2012. CPA2Biz continues to serve as a leading voice within the accounting profession supporting the adoption of cloud technology with more than 1,000 rms now leveraging CPA2Bizs cloud solutions. CPA2Biz also reengineered its operations to put a greater focus on mobile application development. With advanced capabilities in this area, CPA2Biz is well-positioned to meet the emerging needs of the profession. CPA2Biz also invested signicant resources to launch the CPA.com email service for AICPA members. Presenting a professional digital brand and online presence is a strategic imperative for CPAs and an opportunity for CPAs to distinguish themselves from other non-professionals practicing nance and accounting.
applications, further enhancements to aicpa.org and development and launch of the CGMA website in conjunction with the new designation. Cash provided by operating activities was $5.5 million in Fiscal 2012 compared to $34.8 million in Fiscal 2011. This change primarily relates to the previously mentioned expenses related to our CGMA initiative, timing of advance dues payments and lower revenues associated with the Domestic Exam and a volume true-up received from Prometic last year that was not triggered to be received in the current year. Cash used in investing activities was $14 million in Fiscal 2012 compared to $7.4 million in Fiscal 2011. In Fiscal 2011, $7 million of investments were liquidated to fund the CGMA initiative in Fiscal 2012. Cash used in nancing activities was $8.7 million in Fiscal 2012 compared to $10.7 million in Fiscal 2011. The net cash outow for nancing activities is primarily related to principal payments on the long-term debt.
CONCLUSION
Today, as in 1887, the AICPA continues to focus on serving the public interest and supporting members in achieving the highest ethical and technical standards. Expanding on the initiatives outlined above, we continue to build on the progress of prior years to enhance the strength and effectiveness of the profession. We understand the changing needs of the CPAs and of the public they serve. While paving the way for accountants to navigate that change, we remain committed to our core values and scal responsibility. In Fiscal 2012, with approval from the Board of Directors, we began planning for our technology business solutions roadmap, which launched in August 2012. Over the next three years, the Institute will evaluate and implement staged technology solutions to keep pace with the rapidly changing marketplace and to best address the specic needs of our members and the CPA community. This initiative will be driven by and focused on our commitment to provide our members with the best possible tools, resources and service experience. Although the Plan had a negative impact on our nancial results, we have sufcient liquidity to meet our goals and execute on our strategic initiatives in the upcoming scal year. Along with the Finance Committee and our Board of Directors, we monitor our liquidity both on a short-term basis as well as a long-term basis to ensure we can execute on our strategic plan. As noted, we are not expecting a material change to the annual amount of pension funding that will be required. We also enhanced our nancial statement presentation to give further transparency to the Plans impact on our fund balance. This enhanced presentation format reects the AICPAs healthy nancial status in a more clear and concise manner.
Moderator:
Charles Tate, CPA Managing Partner Tate & Tryon
January 2013
Camille M. Alexander, CFA Institutional Consulting Director Graystone Consulting 12505 Park Potomac Avenue | Suite 420 Potomac, Maryland 20854 301-279-6411
SECTION 2
SECTION 3 SECTION 4
Hedge Funds
Commodities Real Estate
Section 1
Introduction to Alternative Investments
Considerations: Long-term investment horizon Lack of liquidity and limitations on transferability Limited access to performance and investment information
Section 2
Hedge Funds
Primarily invest in publicly traded securities Employ return enhancement tools such as leverage and derivatives Typically treated as a limited-partnership for US taxable investors, and as a corporation domiciled in a low-tax or no-tax jurisdiction for US tax-exempt investors and non-US persons
Definition
Equal-weighted long and short equity portfolios with similar risk characteristics Typically a two-sided strategy involving purchase and sale of related securities. Depending on strategy, includes equity, convertible, and bond instruments Investing in securities that have been or are expected to be affected by a situation such as bankruptcy, distressed sale, or reorganization
Sources of Value
Relative changes in value of long and short portfolios Mispricing of related securities
Arbitrage
Distressed
as
companies
are
Global Macro
Leveraged, directional investing in global currency, equity, bond, and commodity markets
Long/Short Equity
Can short-sell securities they believe will fall in value and thereby may profit from declining markets
Face limits on short-selling and may be required to be invested even if they believe markets are in a declining trend
Risk and Return Diversification Benefits from Broadening the Opportunity Set
10
Illiquid
Bonds
Private Equity
Equities
Real Estate
Managed Futures
11
Description
Certain alternative investment funds trade in esoteric or illiquid securities. In normal markets, it is sometimes difficult to price these instruments, causing managers to estimate market values.
Specialized Trading
Special investment techniques such as leveraging, short-selling and investing in derivatives, including options and futures, require unique skills and are associated with additional risk.
Manager Risk
In alternative investment strategies, idiosyncratic risk is much greater than traditional investments which derive more of their return from market direction than from manager strategy and/or decision .
Liquidity Risk
Investments in Hedge Funds are not readily marketable and often entail lock-up periods.
12
Facts
Hedge funds have been around since the late 1940s.
Different hedge fund strategies have widely different risk characteristics that can be diversified.
Hedge funds are regulated, however, regulation differs with respect to other forms of investing as it relates to disclosure requirements and reporting. Most hedge funds are registered with the Securities Exchange Commission, and pending legislation may cause all remaining funds to register. Different hedge fund strategies are exposed to different risk factors, such as market risk, mergers and acquisitions activity, credit spreads, and volatility.
Not all hedge funds are hedged. However, some funds are always hedged against market risk.
The range of hedge funds varies from extremely short-term (trading) to extremely long term (distressed securities).
13
Section 3
Commodities
Base metals (such as copper, aluminum, lead, nickel, zinc and tin)
Precious metals (such as gold, silver, platinum, palladium and rhodium) The second may be characterized as perishable, consumable and affected by weather and includes: Grains(such as corn, soybeans and wheat)
15
Collateralized commodity futures Returns are determined by: the price performance of the underlying commodity
the return derived from the continuous rolling of near-term commodity contracts into more deferred lower-priced contracts or higher-priced contracts
the interest earned from the investment of any excess margin collateral used to secure the overall unleveraged futures position. Regulated Commodity Trading Advisors (CTAs) Employ highly leveraged, trend-focused high-turnover trading strategies in commodity futures markets and in financial futures involving currencies, interest rates and stock indexes.
Exchange-traded funds (ETFs), exchange-traded notes (ETNs), and commodity mutual funds may also be used to provide exposure to commodities.
16
Disadvantages
May involve leverage in the form of futures and/or be commissionturnover- and fee-intensive investment vehicles, many of which tend to be tax-inefficient.
In their original form and/or after some form of processing, commodities offer intrinsic utility to fulfill basic human needs.
Commodities price trends may often reflect a magnified degree of exposure to upward or downward movements in the global economy. Commodities borrowing and lending activity may exacerbate supply-demand imbalances and exaggerate price movements.
May serve as an effective hedge against inflation, generally preceding upward moves in consumer prices by 9 to 12 months.
Returns generally have negative correlations with US equity, bonds, cash, high-yield bonds, real estate and emerging markets debt and equity. Modestly positive correlations with non-US equity and bonds, hedge funds, private equity and inflation-indexed bonds.
Although producer prices, consumer prices and commodity futures prices tend to move upward together during periods of accelerating inflation, they do not necessarily move together during periods of disinflation.
Different kinds of commodities tend to be subject to different kinds of economic influences and may have low correlations with each other.
Sometimes viewed as illiquid, volatile assets that exhibit intense and somewhat transient price movements in response to economic or other developments.
17
Section 4
Real Estate
Real estate is likely to offer its best performance during a time of rising inflation from low and moderate absolute levels or high and persistent inflation. Income returns do not seem to have a positive correlation with inflation, whereas capital returns are positively correlated with inflation in some countries.
Timber Farmland
19
Outright ownership of real estate properties, participation in real estate opportunity funds, core funds, and other types of funds that focus on underperforming assets, or co-investment with partnership sponsors
Farmland, forestry and timber, and oil and gas properties
20
Disadvantages
May not be a good investment in credit constrained, disinflationary, or deflationary global, national or local economic environments. May at times, be subject to feast-or-famine prices and returns, with substantial divergences between property prices and replacement values; and share prices and per share net asset values. Often not divisible and are characterized by illiquidity, high transactions costs, lengthy time periods to effect the sale or purchase of a property, and significant price discounts associated with distressed sales. May be expensive and/or complicated to locate, research, value, finance, maintain, manage, lease, pay taxes on, recapitalize, improve, transfer, calculate returns and identify exit strategies.
Skilled participants may be able to identify and capture value through understanding the structure and potential of specific properties, financial and operating expertise, market knowledge and access to relationships.
May be subject to a number of special considerations, including bubble-like price movements, environmental laws and claims relating to the property itself or its building materials, depreciation, depletion or obsolescence, and the quality of funds from operations (FFO).
21
Disclaimers
This document is confidential and solely for the use of Graystone Consulting and the clients of Graystone Consulting to whom it has been delivered. By accepting delivery of this presentation, each recipient undertakes not to reproduce or distribute this presentation in whole or in part, nor to disclose any of its contents (except to its professional advisers), without the prior written consent of Graystone Consulting . The sole purpose of this document is to inform, and it is not intended to be an offer or solicitation to purchase or sell any security, other investment or service. Investments mentioned in this document may not be suitable for all investors. Before making any investment, each investor should carefully consider the risks associated with the investment and make a determination based upon the investor's own particular circumstances, that the investment is consistent with the investor's investment objectives. Although information in this document has been obtained from sources believed to be reliable, Graystone Consulting and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use. Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed, and is subject to change without notice. This presentation is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Graystone Consulting and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. 2011 Morgan Stanley Smith Barney LLC. Member SIPC. Graystone Consulting is a business of Morgan Stanley Smith Barney LLC.
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As a nonprot trustee, keeping your organizations portfolio on track through the markets ups and downs can be a challenging proposition. To help with this process, many institutions benet from creating a clearly dened investment strategy to guide present and future portfolio decisions. A formal, written investment policy statement can provide ongoing guidance on a number of critical subjects, including individual roles and responsibilities; investment guidelines; performance evaluation standards; and the frequency of communications and policy statement review. By understanding how investment policy statements come togetherand how they can go awryyou can be better equipped to help your organization make prudent nancial decisions for the long-term management of its assets.
hrough their philanthropic efforts, foundations from Maine to Maui have been making a lasting impact on their region, nation and the world. Taking on the responsibility for a nonprot organization, such as a foundation, means assuming responsibility for that organizations stewardship and maintaining compliance with federal, state and local laws that govern your entity. Many institutional investors have long used formal, written investment policy statements to set duciary guidelines and dene their decisionmaking process. While not specically mandated in the federal or state regulations that govern nonprot organizations, a carefully crafted and well maintained investment policy statement is one of the best ways to document a prudent investment process. While the importance of investment policy statements is rarely questioned, some nonprot organizations continue to operate without this governing document. Unfortunately, the biannual survey conducted by
the Association of Small Foundations found that more than a third (34%) of its members surveyed were operating without a formal written investment policy.1
Dene strategic and tactical asset allocation strategies Guide the evaluation and selection of investment managers and advisors Discourage random or emotional investment decisions inconsistent with prudent management principles Promote long-term investment decision-making Provide written documentation against allegations of duciary imprudence. Studies have illustrated that nonprot duciaries and directors do indeed spend a signicant amount of time (21.5%) during board meetings on investment oversight and that they review their investment performance on average four times per year.2 Written investment policy statements provide committees and board members with the structure to conduct these regular discussions.
Performance benchmarks How endowment earnings or returns relate to spending policy The degree of risk permitted in the investment portfolio Portfolio rebalancing strategies and frequency of rebalancing Considerations relevant to the hiring, retaining and ring of investment managers Use of social investing criteria and/ or mission-related investing and related investment restrictions Endowment sustainability as an inuence on investment decision making The degree of liquidity required in the investment portfolio Denitions of roles and responsibilities of members involved in the investment process Frequency of investment policy statement review The following sections describe some common components of an investment policy statement in more detail.
Dene and assign the responsibilities of all involved parties Establish a clear understanding of the overall investment goals and objectives Discuss how the investment policy statement will meld with the spending policy statement Establish the relevant investment horizon for which the foundations assets will be managed In general, this section will outline your philosophy governing the management of assets. It is intended to be sufficiently specic to be meaningful, yet exible enough to be practical and effectively implemented.
statement of responsibility
Your foundation most likely has a board that oversees your mission, guides operations, makes investment decisions and ensures ethical conduct. Members of your governing board should be involved with the creation of the investment policy statement and possess the knowledge and experience to make informed investment decisions. The statement of responsibility section should clearly dene who is responsible for directing and monitoring assets. It should also outline
statement of purpose
The statement of purpose should dene your entity, its mission and include information about overall investment operations. It should:
The chart below shows the dollar-weighted asset allocations of institutions grouped by the size of their endowment assets over the past two years. While allocations to international equities remained relatively consistent across all cohorts surveyed, average allocations to alternatives, domestic equities and xed income changed signicantly as the size of the institutions increased.
Institution Size
$25 - 50 million
2009 2010
Asset Class Domestic Equities Fixed Income International Equities Alternative Strategies Short-term Securities/Cash/Other 26% 17 17 33 7 25% 17 17 35 6 34% 21 17 22 6 31% 21 18 24 6 37% 23 15 18 7 35% 24 16 17 8 38% 27 13 13 9 40% 27 13 12 8
Source: Consulting Group, based on data in the NACUBO-Commonfund Study of Endowments 2010
the delegation of responsibilities to investment consultants, investment rms and custodians. Additional specialists such as attorneys, auditors and actuaries should have their responsibilities and obligations outlined in this section.
on certain assets such as xed income investments (e.g., only investment grade bonds rated BBB [or equivalent] or better). Some of these stipulations would in turn govern the selection of investment managers, a process that must be based on prudent due diligence procedures. These procedures could include a review of key qualitative factors such as the overall nancial health of the rm, the depth of its portfolio management and research team, its technological capabilities and the strength of its investment process. Other key factors could be quantitative, such as a review of past performance results and levels of investment risk. The specic investment guidelines section should also include the market benchmarks that will be used to evaluate the performance of each asset class, investment style and the investment manager responsible for each portion.
Failure to adhere to any aspect of the statement of investment policy, including communication and reporting requirements. Signicant quantitative or qualitative changes to the rm or its investment process. Over time, market forces may pull your portfolio away from its stated long-term targets, which may leave your organization exposed to more risk than you want or expect. This section of your investment policy statement should also include guidelines on rebalancing strategies and how frequently those periodic course corrections will be made.
nied the 2008-2009 Recession reviewed to ensure the continued and clearly state their guidelines. alerted nonprot investment relevance of its guidelines, objecAvoid vague and misleading statecommittees and boards to the true tives and capital markets expectaments. For example, few investors meaning of risk management and tions. In general, investment policy would probably state that their liquidity requirements. Estabstatements should be reviewed no tolerance for investment risk is lishing a process to re-evaluate less frequently than annually. a standard deviation of 10.5%. A conclusion risk tolerance and setting liquidstatement like this would be more Your investment policy stateity guidelines directly within the useful when translated into somement cannot be a simple boilerplate investment policy can help your thing more tangible. 3. Unrealistic goals. Ensure that your document; it must reect the goals foundation stay on track during investment committee and governand objectives of your individual times of market stress. ing board understand historical 6. Lack of communication. A copy of foundation. It should represent the your investment policy statement market performance and investhearts and minds of your trustees should be sent to each investment ment results. Obviously, while it and governing boards. To be effecwould be well retive, trustees and board ceived, it would be members should have a virtually impossible clear understanding of Accepting the role of trustee in the past was often to guarantee a 30% more of an honorary title. It involved a high degree its contents and agree annual rate of return on its key sections. of community recognition with little personal over an applicable Your organization risk, time commitment or aggravation, unless you market benchmark. should view its invest4. Overly restrictive ment policy statement were selected to be a member of the inner circle guidelines. Investas a roadmap to the inof leadership. Today, in our litigious society, the ment policy statevestment process. Only role of a trustee requires a high degree of active ments can often be then can it provide the participation, searching inquiry into management overly restrictive. guidance necessary for Minimize restrictive your trustees, board, decisions and careful monitoring of investment language as much as investment managers 3 activities, personnel and other operating policies. possibleespecially and consultants. when delegating investment authority 1, 2 2009-2011 Foundation Operations & to professional managers. For exmanager, consultant and advisor Management Report, Association of Small ample, each investment manager involved with your foundation. Foundations. should be allowed to invest in speYou should ask each individual or 3 Meadows, Curtis W., Duties and Responsibilities of a Trustee - The Family cific sectors depending on their rm to acknowledge, in writing, Advisor: Trustee Orientation. Council on individual investment philosophy their understanding of the policy Foundations, www.cof.org. (Originally and process. and their responsibility to the published in Family Matters, Fall 1996.) 5. Failure to set risk parameters and endowment. 7. Failure to review. Your policy liquidity requirements. The severe market downturn that accompastatement should be regularly
This report has been prepared for informational purposes only. Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute Morgan Stanley Smith Barneys judgment as of the date of this article and are subject to change without notice. Past performance is not a guarantee of future results. Morgan Stanley Smith Barney LLC, its afliates, and its employees are not in the business of providing tax or legal advice. For information or advice about any legal issues raised in this piece, including those surrounding duciary responsibility, and how they may apply to you or your organizations specic situation, please consult your legal advisor. Investing in the markets entails the risk of market volatility. The value of all types of investments may increase or decrease over varying time periods. There may be additional risks associated with international investing involv-
ing foreign economic, political, monetary and/or legal factors. International investing may not be for everyone. With respect to xed income securities, please note that, in general, as prevailing interest rates rise, xed income securities prices will fall. Alternative investments are speculative and include a high degree of risk. An investor could lose all or a substantial amount of their investment. Alternative investments are suitable only for eligible, longterm investors who are willing to forgo liquidity and put capital at risk for an indenite period of time. Asset allocation and diversication do not assure a prot or protect against loss. This material, or any portion thereof, may not be reproduced without prior written permission from Morgan Stanley Smith Barney LLC. 2011 Morgan Stanley Smith Barney LLC, member SIPC. Graystone Consulting is a business of Morgan Stanley Smith Barney LLC. 2011-PS-537 4/11
Speaker Biography
Lisa Swatkoski is an investment consultant in Vanguard Institutional Advisory Services (VIAS). As a member of the VIAS team, Lisa assists institutional clients with asset allocation, portfolio design, and investment policy consulting for defined benefit, endowment, and foundation portfolios. Before joining Vanguard in 2008, Lisa was an investment consultant with Towers Perrin's Asset Consulting Services group, where she was primarily focused on investment manager research, selection, and monitoring. Lisa earned a B.A. in mathematics and economics from Lafayette College.
Lisa Swatkoski Investment Consultant Vanguard Institutional Advisory Services 610-669-9230 lisa_swatkoski@vanguard.com
Speaker Biography
Camille Alexander is a Chartered Financial Analyst and an Institutional Consulting Director with Graystone Consulting in the Washington DC office. She is responsible for the advice, construction, implementation, and oversight of investment portfolios for a broad array of defined benefit plans, defined contribution plans, and nonprofit organizations including universities, foundations, trade associations, membership organizations, and other educational institutions. Before joining Graystone, Camille served as the Mid Atlantic Regional Director for Bank of Americas Institutional Retirement and Philanthropy business, specializing in investment consulting to nonprofit organizations. Having spent the past 20 years in the financial services industry, her previous experience includes CoManager for the USAA Science and Technology Fund and Investment Team Lead for USAA Private Investment Management. Camille earned a Bachelor of Arts degree in Economics as well as a Master of Arts in Political Science from the University of Texas at San Antonio. She has held the CFA charter since 1998. She is a member of the CFA Institute and a member of the board of directors of the CFA Society of Washington DC.
Camille Alexander, CFA Institutional Consulting Director Graystone Consulting 301-279-6411 camille.alexander@morganstanl eyGraystone.com
Speaker Biography
Charles Tate, is the Managing Partner of Tate & Tryon and has over 35 years of experience working with nonprofit organizations. Prior to forming the Firm, he worked in the Washington, DC office of Ernst & Young, LLP where he began working with nonprofit organizations. Mr. Tate works directly with the management and boards of hundreds of organizations in helping them assess and improve key aspects of the organizations financial governance, strategy, and operations, such as:
Establishing critical links among the key elements of the strategic, operational, financial, reserve, and investment plans; Development of guidelines for financial oversight by top management and the board of directors based on best practices Establishing and benchmarking key performance indicators Enhancing internal control design and structure using the COSO framework
Charles Tate, CPA, MS Managing Partner Tate & Tryon 202-419-5101 ctate@tatetryon.com
He is a regular presenter to the Greater Washington Society of CPAs and the American Society of Association Executives (ASAE) on these and other related topics on emerging financial practices and financial governance.
Electronic Payment and Credit Card Processing Website or Website Integration Accounting Integration (Quickbooks, Dynamics GP, and a number of other popular accounting solutions) Social Media Integration
Non-Profit Dashboard
Non-Profit Programs
Constituent Management
Member Dashboard
Constituent Dashboard
Christopher McCarthy, MCP, is Principal and co-founder of T3 Information Systems (www.t3infosystems.com). T3 Information Systems (formerly Tate & Tryon Technology & Pierce Financial Systems) is a Microsoft Dynamics value added reseller. The practice began in 1997 and has grown steadily each year since. Prior to forming T3, Christopher served for 6 years as President of Pierce Financial Systems, a Dynamics GP service provider and software development firm based in Fairfax, VA. Christopher is a Microsoft Certified Professional and specializes in Accounting Software configuration, design, and implementation. He also oversees software architecture for custom software developed by the firm. He has serviced the accounting software needs of clients for more than 13 years and possesses seven Microsoft Dynamics certifications. He has project managed the implementation of and the integration to Dynamics with great success. Additionally, he has also headed several efforts to integrate and consolidate the systems of large public companies onto a single accounting platform during merger and acquisition efforts. He also has extensive experience in achieving Sarbanes Oxley Compliance for several clients.
Agenda
Introduction and the ACFE 2012 Report The Fraud Triangle as Applied to Nonprofits Four Common Examples of Fraud
1. 2. 3. 4.
Cash receipts incorrect use of remote deposit Cash disbursements improper online payments Payroll fraud manipulating direct deposits Corporate credit card misuse
Conclusion
Introduction
Who does fraud effect? The 2012 Association of Certified Fraud Examiners (ACFE) Report to the Nations estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion.
Introduction
The use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets
Further key findings from the ACFEs 2012 Report to the Nations:
Median loss - $140,000 Median length of the fraud until detection - 18 months Detection most likely through tip by an employee of the victim org and anti-fraud controls resulted in significant decrease of loss and time-to-detection
Introduction
Most (about 85%) occupational fraudsters are firsttime offenders with clean employment histories In 81% of cases, the fraudster displayed one or more behavioral red flags including:
Living beyond means (36% of cases) Financial difficulties (27%) Unusually close association with vendors (19%) Excessive control issues (18%)
Small orgs (<100 employees in the ACFE report) are particularly vulnerable to fraud - fewer resources and often fewer & less effective anti-fraud controls
Types of Fraud
Asset misappropriation schemes, in which an employee steals or misuses the organizations resources (e.g., theft of company cash, false billing schemes or inflated expense reports) Corruption schemes, in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest) Financial statement fraud schemes, in which an employee intentionally causes a misstatement or omission of material information in the organizations financial reports (e.g., recording fictitious revenues, understating reported expenses or artificially inflating reported assets)
Asset Misappropriation
86.7% 86.3% 88.7% 2012 2010 2008 33.4% 32.8% 26.9% 20.0% 40.0% 60.0% 80.0% 100.0%
Corruption
0.0%
Developed by Dr. Donald Cressey in the 1950s, the fraud triangle continues to be used today as the premier model to explain when fraud can occur
Opportunity
Weak or non-existent internal controls No review/ supervision Lack of segregation of duties Management override Lack of oversight/ weak governance
Pressure
Personal financial problems - divorce/ credit cards Personal addictions - gambling/ drugs/ alcohol Unrealistic performance goals Meet budget to obtain bonus
Low pay (I could make more at a for-profit business) I really need this moneyIll repay it next payroll Underappreciated Slighted for a promotion Lack of a place to turn to (if my employer had a help fund or financial counseling available, then I would have options) Its for a good need (if I dont have an experimental procedure done, my child will die) Nobody gets hurt
Red Flags
Keep your eyes open for employee red flags Employee lifestyle changes Behavioral changes High employee turnover Refusal to take vacation Refusal to push down work Reluctance to fill vacant positions Workaholic environment
Management overrides controls Domination by one person or small group Disrespect for regulatory bodies Undocumented/ unenforced policies procedures Inexperienced accounting personnel Excessive number of bank accounts/ Frequent change in banks Excessive number of complicated year-end transactions Refusal to use pre-numbered/ sequential documents Missing support or documentation Unusually close relationship with vendors Bringing items for you to sign late on Fridays
Using allowance accounts to hide fraudabuse of estimates Coding fraudulent checks to large expense accounts (postage, publishing, conference) Large unexplained miscellaneous items in the monthly bank reconciliation Many large offsetting entries in the general ledger- attempt to make it difficult to track the fraud Out of balance net assets account
Opportunities abound, especially in small organizations Fraudulent financial statements less likely, but could occur if no senior management oversight of controller / CFO Contracting process potential for bid rigging and kickbacks if no oversight of individual responsible for major contracts Conflicts of interest potential self dealings if not properly disclosed and monitored
Non-cash: theft of inventory, supplies, or fixed assets if they are not adequately tracked Cash: receipts, disbursements, and payroll Brief examples of possible cash opportunities that we are not examining today in detail:
Receipts cash donations near museum entrance; organizations identical initials being used on a checking account controlled by the bookkeeper; inappropriate refunds to a personal credit card General Disbursements: shell company; alter check payee; forge check signature; misuse of check stamp
The ABC Trade Association utilizes a bank provided remote deposit machine The receptionist opens the mail and all checks are provided to the controller The controller scans all checks to the bank and enters them in the GL The controller also has the ability to deposit checks in person to the bank or at the night deposit box
Control Deficiencies
Segregation of duties controller has custody of checks and recording of transactions Risk of unrecorded receipts (accidentally lost or intentionally stolen checks) Risk of checks being processed twice
Estimated to be a $500 million problem according to a Nov. 1, 2010 article in American Banker magazine Bank software may catch this, but often the software only matches the amount and payee, which can create false positives
Preventive Controls
The receptionist could do the remote deposit and then provide the checks and bank report to the controller The receptionist could log all the checks (same as before the remote deposit) and the CFO would compare the log to the deposited listing of checks
Detective Controls
The bank reconciliation being performed by someone other than the controller The unopened bank statement reviewed by CEO who will question identical, uncommon amounts
XYZ Charity has the ability to pay bills electronically through the banks secure website The Accounting Manager is the only employee who has the user id and password to access the site For paper checks, the Executive Director, Board Chair, and Board Treasurer are the check signors Positive pay is utilized for all checks The Accounting Manager prepares the bank reconciliation and the CFO reviews it
Control Deficiencies
Segregation of duties accounting manager has ability to pay bills electronically, records them, and reconciles them Risk of unauthorized and/or improper payments Risk of fraudulent wire transfers for personal gain The reviewer of the bank reconciliation may not review cleared transactions to the original bank statement
Preventive Controls
Change to an online banking platform that requires a separate user login to approve the payment (by an authorized account signor); it may be called a large business platform but may be available to your org Positive pay great control against outsider fraud, but inadequate against embezzlement Implement ACH filters with the bank to prevent all outside entities, except your orgs payroll provider, from obtaining funds from your account via ACH Establish with the bank who has the ability to add account users and permissions to the banks site
Detective Controls
The bank reconciliation being performed by someone other than the accounting manager, or the CFOs review needs to include the cleared transactions on the original bank statement Have an Electronic Payment Authorization Form that an authorized bank account signor signs and the forms are matched to unopened bank statement reviewed by CEO on a monthly basis Have the CEO and/or CFO have read-only access to the banks website
DEF Arts Organization processes payroll in house on a bi-weekly basis All employees are salaried and no bonuses are given HR director has access to the system to input payroll changes, such as deductions and pay increases All employees are paid by direct deposit The controller prepares the payroll The CEO reviews and approves the Gross Payroll Report to ensure pay rates are appropriate The controller finishes the payroll, including direct deposits and payroll tax returns
Control Deficiencies
Inadequate segregation of duties no review after the controller submitted the payroll Risk of missed tax payments or manipulation of payroll taxes Risk of additional direct deposit payment Risk of last minute change being made after CEOs review.
Preventive Controls
Outsourcing the payroll processing If keep in house, have the full payroll reviewed prior to processing; consider using software with built in permissions Some software has a required PIN number to initiate direct deposits have this kept and utilized by the CEO or similar
Detective Controls
CEO and department head review of budget vs. actual of salary and payroll tax expenses If outsourced, the CEO to review the unopened payroll reports Have at least 2 people with access to the payroll system (applies if in-house or outsourced) As part of the bank reconciliation process, ensure the net payroll agrees to the debit in the bank account if one time amount is transferred Have someone else process payroll once or twice a year
The UVW Professional Association issues AMEX credit cards to key employees and those who travel Monthly a form is completed by each employee with date, vendor, and expense account for each line on the credit card statement; receipts are attached to the form, which is reviewed and approved by a supervisor Controller reviews forms for reviewer sign off and pays the bill by the due date The IT Director has a card for purchasing computers and other IT equipment
Control Deficiencies
Employee not required to sign stating that all of the credit card expenses are for a valid business purpose The form does not have a place to show a valid business purpose The COO (IT Directors supervisor) travels frequently and has several reports to review when s/he returns Inadequate training has been provided to supervisors so that they are knowledgeable about what they are looking for when they approve the monthly charges There are no written procedures or penalties for missing receipts or inadequate receipts
Preventive Controls
Eliminate corporate credit cards, or at least set appropriate maximum dollar limits and issue them to only employees whose positions require their use Tone at the top the CEOs charges are detail reviewed by someone on the Board Proper training for supervisors and all employees as to appropriate use, documentation requirements, and penalties for misuse or lack of documentation Utilize software (off the shelf or from the bank) to electronically complete expense coding and to have supervisor approvals obtained
Detective Controls
Someone in accounting could additionally review to ensure that all receipts are attached and expenses are reasonable and properly coded CEO and department head review of budget vs. actual of travel, supplies, and technology expenses For IT purchases, have someone with appropriate knowledge ensure the items purchased are being utilized to benefit the organization
Conclusion
Fraud is a reality of doing business Consider each of your orgs business cycles and where the fraud risks are Implement preventative and detective controls to mitigate the fraud risks A fraud prevention checkup can be a useful tool to assist your organization. Go to http://www.acfe.com/fraud-preventioncheckup.aspx
Conclusion
Sometimes you have to be a bit of a detective and think like a fraudster to catch one!
Speaker Biography
Christian Spencer, CPA, is an audit partner with over 16 years of public accounting experience, including 13 years working exclusively with nonprofit organizations. Prior to joining Tate & Tryon, Christian worked as a director at a large national accounting firm where he spent 13 years providing audit and tax services to nonprofit organizations with annual revenues ranging from $1 million to over $300 million. Christians experience includes planning and managing the audits of a wide range of nonprofit organizations, including associations, charitable and educational organizations including those with for-profit subsidiaries and political action committees. Christian sits on the audit committee of a large 501(c)(3) Washington, D.C.-based nonprofit organization that focuses on providing food and shelter services to individuals in need. In addition, he is a member of the Finance and Business Operations Section Council of the American Society of Association Executives. He participates in ongoing continuing education courses for nonprofit accounting and has written articles for various publications including ASAEs Dollars & Cents.
Christian Spencer, CPA Audit Partner Tate & Tryon 202-419-5124 cspencer@tatetryon.com
Speaker Biography
John Kubichek, is a manager in Tate & Tryons Audit and Assurance Services department with more than 15 years of public accounting experience working with a variety of clients. Over the past decade, Mr. Kubichek has worked on diverse forensic accounting and litigation support cases. As a Certified Fraud Examiner (CFE), he is an accredited expert in fraud prevention and detection. He has spearheaded forensic accounting investigations, business office reviews, and prepared expert witness reports. Additionally, Mr. Kubichek has managed a variety of employee benefit plan audits, and he is currently the chair of Tate & Tryons Employee Benefit Plan Audit committee. Mr. Kubicheks emphasis on nonprofit organizations serviced include multiple trade associations, charitable foundations, and healthcare facilities. The size of clients has varied from $100K to over $200M in annual revenues. He also has considerable experience with OMB Circular A-133. John received a Bachelor of Science degree in accounting from Geneva College. He is active in the community by serving on a local church committee dedicated to hunger relief.
John Kubichek, CPA, CFE Audit Manager Tate & Tryon Direct: 202-419-5149 jkubichek@tatetryon.com