Tuesday, September 2, 2014

Best practices in the digital age

By Chris Mennel, audit manager, Alerding CPA Advisory Group

How prepared are you to prevent fraud or financial misstatements in the digital age? Technological advances have forced everyone to continually reassess their internal controls. 

Technology has improved efficiency and expedited basic transactions like paying by check and depositing cash and checks.  On the downside, these improvements have created opportunities for fraud. 

Because technology is constantly changing, your control environment must be continually reassessed. Here are a few technological changes that have had an impact on a variety of cash-related transactions and should be closely overseen to minimize opportunities for fraud.

Credit cards

Credit card use for businesses and nonprofit organizations has dramatically increased in the past five years.  Employees are being encouraged to use their company credit cards for all business expenses, not just for travel.  Whether it is for increased rewards points or for ease of use, this method of payment is very popular.  The downside is that all cardholders essentially become authorized signers.  This may sound fine, but in our experience, organizations are more lenient as to who may carry a company credit card or have access to the “office card” compared with those they allow to be authorized check signers.  Instead of having a few authorized check signers, the organization now has multiple people who can make purchases with company credit cards.

If this is the case in your organization, consider limiting the number of cards in use or implement detailed review procedures on all monthly statements.

And finally, require receipts!  Not only will they be necessary for a sales tax audit, but credit cards are one of the most common sources of fraud.  Don’t make yourself an easy target.

Electronic funds transfers (EFTs)

Electronic funds transfers aren’t as prevalent as credit cards, however, like credit cards, companies and nonprofit organizations are utilizing EFTs much more frequently.  Some companies, especially larger ones, are even requiring vendors to accept payments by EFT.  Again, this type of payment method can be convenient and beneficial to organizations, but it increases their vulnerability to new risks.

The first step in managing this risk is to know your bank’s processes and requirements for sending funds by EFT.  Do they only allow authorized signers to initiate an EFT?  Can anyone else gain access to this information over the phone? 

Once you fully understand the banking side, then you can properly design controls in your organization to prevent any unintended access.  When it comes time to make the payment, every EFT request should be documented and approved.  Since there isn’t a written document (like a check), creating a form for the requestor and the approver to sign would be beneficial.  All invoices and receipts can then be attached to the form and filed by the vendor.

Remote check scanning

Remote check scanners popped up a few years ago and have become quite popular. Not only do they prevent employees from having to leave the office to make daily deposits, they also allow funds to be deposited faster so that they can be available for use earlier. 

As is the case with most banking transactions, the details of remote check scanners vary from bank to bank.  Some provide copies of the scanned check images while others do not.  Maintaining check copies is always a good idea, so whether you plan to save the hard copies of the checks or you prefer electronic images, it’s important to have a plan in place before you start using your remote scanner.  In addition, access to the scanner remains important.  While it seems the risk is minimal since someone wouldn’t voluntarily deposit extra funds into your account, limiting access to the scanner ensures you have knowledge of who is initiating all transactions should a questionable transaction arise.

Mobile card readers

Finally, credit card readers that attach to a mobile phone are the latest method of receiving payments (think of a vendor with a booth at a farmer’s market that couldn’t accept credit cards until now).  These devices aren’t overly common among companies with more than a few employees, but are likely to become more popular in the future.  As they do, companies will want to monitor access and ensure proper controls are in place before they jump on board.

As long as organizations have someone opening the mail, making deposits and paying bills, they will be vulnerable to fraud. New technologies provide many conveniences, but they also create new risks the we must continually adopt new systems of control.  Make sure you are prepared by creating a control environment that will deter fraud and ensure the long-term health of your business or organization.  

Christopher J. Mennel, CPA

Chris oversees audit and accounting services, not-for-profit and consulting services. Since joining Alerding CPA Group in 2006, Chris’ clientele has grown to include several of the firm’s larger for-profit clients, as well as approximately 20 nonprofits located throughout Central Indiana.
If you have questions or would like to discuss ways to further protect yourself and your business, contact Chris Mennel, 317-569-4181 ext. 260 or cmennel@alerdingcpagroup.com.

Finding a niche: reshaping the idea of disability

By Lindsey Hill, marketing manager, Tangram

Listen to Scott McGuire, a UIndy student, talk about the differences his life coach has made. Diagnosed with severe dyslexia, this spring he completed his junior year, passing all his classes. During the summer, he worked on campus and made connections for his senior social work practicum. Scott and his life coach, Megan Lauman, continue to work on organizational skills, time management and setting priorities. Together, they have developed a plan and work in tandem with UIndy’s Baccalaureate for University of Indianapolis Learning Disabled (BUILD), program and the school’s tutors to attain his academic goals.
The problem

Four years ago, nearly 2.8 million of 53.9 million school-aged children were reported to have a disability. What this U.S. Census Bureau statistic did not include were students who had learning differences or “undiagnosed” disabilities.

While some of these young people try college or enter the workforce, many are unsuccessful.  Just a quarter of students who received help for their disabilities in high school acknowledge in college that they need the same assistance, according to the National Center for Learning Disabilities. And while 94 percent of high school students with learning disabilities get some kind of help, just 17 percent of learning-disabled college students do and are more likely to drop out.

One nonprofit’s solution

While some community organizations serve this population, Tangram, a local nonprofit, also took on this challenge. With nearly 30 years of experience serving individuals with disabilities, four years ago, it created Tangram Life Coaching to help young adults with hidden or undiagnosed disabilities become independent. Specifically, they work with families/support teams, incorporate clinical oversight and pair students with life coaches.

Last fall, Tangram recognized this need to provide services to schools concerned about graduation rates for this underserved population. It secured a grant from Nina Mason Pulliam Charitable Trust to design and implement a pilot program that would improve graduation rates by intensifying services to complement and enhance the existing supports available to students. As part of the project, they would also develop tools that can be useful to other nonprofits that serve these students.

The grant provided services for 10 students, who were juniors and seniors at Midwest Academy High School in Carmel and University of Indianapolis. Five students from each school were assigned a life coach who could provide continuity and meet individual student’s needs.

As part of the project, Tangram developed Workforce Accelerator, a database to match students and other individuals with disabilities, including veterans with employment possibilities. The tool uses a patent-pending algorithm to match individuals to jobs, leading to more successful placement and better potential for long-term employment.

Before using the database, however, students completed the Wisconsin Quality of Life Index (W-QLI) Assessment to evaluate quality of life. Armed with these results, together they developed a personalized Quality of Life Plan (QLP) to shape personal goals.

During the past semester, students met weekly with their life coaches to work on:

  • Finding a tool to keep them organized and then putting it to use daily.
  • Evaluating service eligibility, like vocational rehabilitation, student loan services, and then applying for appropriate services.
  • Working to find and secure employment by practicing job searches and job procurement skills, assembling a portfolio, and using social media if applicable to job searches.
  • Completing a career inventory to identify potential career paths and/or identify potential areas of study to further education.
  • Working with a life coach to widen professional and social networks.
  • Identifying and getting involved with interest groups.

Application to nonprofits

Tangram believes this program can be replicated at other schools and nonprofits to improve graduation rates and post-graduation success for these undiagnosed students.

Nonprofits and schools interested in exploring Tangram Life Coaching opportunities for their students should e-mail coaches@tangramlifecoaching.org or call the information line at (317) 968-9035. You can also visit www.tangramlifecoaching.org for more information.

After Lindsey Hill graduated from Butler University in 2010 with a B.A. in English Literature, she put her talents to work for the organization, spreading the word about Tangram’s innovative solutions to barriers faced by those with disabilities.

Tuesday, August 26, 2014

Are new “EZ” charities second class?

By now you’ve likely heard of the new IRS Form 1023-EZ, a streamlined Application for Recognition of Tax Exemption that greatly reduces entry barriers for new, small charities. There are some potential benefits. There are some serious potential drawbacks.
The benefits are fairly obvious.
·       The application fee is only $400, instead of $850. The total form is only 2½ pages, rather than 12 pages with eight schedules and scores of pages of attachments.
·       The time necessary to complete the new EZ application is less than 10 percent of the time necessary to complete the regular application. Less time is spent on administrative and managerial tasks.
·       The organization still gets an IRS “determination letter” and in about three weeks instead of 12 to18 months.
·       The organization may receive tax-deductible contributions.

This is the good news.
But what are the drawbacks? They are more serious than you might imagine.
Some drawbacks are obvious. With the new simple form, nonprofits now may fail to think through business planning, program development or board development. Most charities that complete the full Form 1023 receive substantial guidance from an accountant, lawyer or other professional. As part of the startup process, these professionals usually advise on the overall regulations and wise business practices.
The major issue lurking is that highly respected attorneys in the field are advising private foundations and, by extension, other major funders and grantmakers NOT to respect or honor the EZ “determination letter.”
Private foundations are responsible for how their money is used, even after it leaves their possession, which is why their grant application process can be so cumbersome. Without the built-in safeguards of the “long form,” private foundations would want to complete an extensive, expenditure-responsibility-like, in-depth review of all activities of a grant applicant. This would be cost-prohibitive and fraught with risk, risk that was once borne by the IRS. Most private foundations cannot afford this kind of responsibility.
This effectively creates a “second class” of charities, those who took the “EZ” route, and those who took the time and energy to complete a full Form 1023.
The kicker? Once a charity takes the “EZ” route, they cannot undo it. They cannot go back and reapply with the full Form 1023. They may forever be second class.
Charities and donors should seek competent counsel when determining whether a novel process is as good as it seems. Most often, if it seems too good to be true, it probably is. 
Attorney Zac Kester provides generalist and strategic nonprofit legal and consulting services. He holds a Master of Law, a post-law school advanced degree, in which he studied the unique needs of tax-exempt nonprofit organizations. His legal and consulting career has focused on nonprofit organizations.

Tuesday, August 19, 2014

A Look Rearward and Forward

Rely on Financial Statements to Make Decisions for the Future

By Yvonne de Calonne

Financial statements regularly slide over your desk and pass through board members' hands, providing a wealth of financial data on your nonprofit's most recent month, quarter or year. But do you and the board rely on this valuable information to make business decisions and plan for the organization's future?

Looking for insights
Think of the audited financial statements as a family album, providing a history of your nonprofit's financial past. Examining that past can help you better manage your organization now and in the months and years ahead.

To glean meaningful insights from these documents, you need to understand what each statement represents. Take it a step further, and you (or the board members) can use the data to create a trend analysis, an industry comparison or a projection of upcoming challenges. Such tools can springboard your organization to making better-informed decisions.

Understanding basic financials
Being able to use the information in basic financial statements to strategize for your organization starts with understanding the statements' purposes and components. Continue reading here.

Yvonne B. de Calonne joined VonLehman a year ago after her previous company, Dunbar, Cook & Shepard was acquired. She graduated with a Bachelor of Science degree in accounting from IUPUI and has over 25 years in the field. Yvonne specializes in tax, audit and accounting services for nonprofit organizations.

Monday, August 11, 2014

Welcome FirstPerson!

FirstPerson and Paul Ashley are regular sponsors of the Central Indiana Nonprofit Salary Survey and are now joining the weekly sponsor team for the Not-for-Profit News. We requested them to provide a quick overview of how they serve nonprofits.
The name FirstPerson reflects our passion for working with clients on a personal level. We are not a typical professional advisory firm—FirstPerson truly puts people first. We are partners, advisors, experts, communicators, friends, and neighbors who want you to be passionate about what you do and to succeed.
FirstPerson knows that each organization has its own story. Our solutions are designed to fit each company’s unique culture and needs. As a team, we walk alongside you to create confidence and give you the capacity to go above and beyond all expectations. http://firstpersonadvisors.com/
Ready to partner with us? Let FirstPerson tailor creative solutions for you in the areas of benefits, communication, wellness, human resources, compliance, and compensation. Get in touch with Paul Ashley today at 317.218.1518 or pashley@firstpersonadvisors.com.

Paul Ashley serves as an advisor for FirstPerson with a focus on nonprofit clients. As the ambassador of the FirstPerson brand, Paul looks for ways to grow the business and help create confidence for employers who face complex business challenges.

Tuesday, August 5, 2014

How the Camp reform draft affects not-for-profit organizations

Author: Noelle Alberto, Associate

Effect of unrelated business income tax: Most universities are considered tax-exempt entities. If the university runs a restaurant that serves both the students and the public, the proceeds from the restaurant would be considered unrelated business income. The restaurant is a business that is regularly carried on by the university, and isn’t substantially related to the school’s exempt purpose.
In February, House Ways and Means Committee Chairman Dave Camp (R-Mich.) released a draft of the Tax Reform Act of 2014. This proposal includes multiple major federal tax code changes affecting individuals, businesses and not-for-profit organizations. Here are four areas that would significantly affect the not-for-profit community.
Charitable contributions
The draft proposes a couple notable provisions regarding charitable contribution deductions on an individual’s tax return:
·       Contributions can only be deducted to the extent they exceed 2 percent of the adjusted gross income (AGI); an individual with $200,000 AGI will receive no benefit for the first $4,000 of donations.
·       Individuals may elect to treat contributions paid after the close of the tax year, but before filing the return the following April, as part of the current tax year’s deduction.

While supporters believe the simplification and extension of time will increase the amount of charitable giving, others believe the contrary. According to a 2011 Congressional Budget Office (CBO) study, the average taxpayer gave between 2.5 percent and 3.4 percent of their income to charity in 2008. The proposed 2 percent floor could decrease the incentive to donate since the tax benefit would be much lower. The CBO estimates charitable giving to fall by approximately $3 billion after the passing of such a provision, seriously affecting future contribution revenue.

Unrelated business income tax
The proposal alters the calculation of unrelated business income tax (UBIT) for tax-exempt entities in several ways:
·       All tax-exempt entities under Internal Revenue Code (IRC) Section 501(a) will be subject to UBIT rules regardless of the organization’s exemption under another IRC provision. For example, a government-sponsored organization exempt under Section 115(1) and Section 501(a) will now be subject to taxes on any income derived from a regularly carried out trade or business not substantially related to the organization’s tax-exempt function.
·       Royalty revenue for licensing an organization’s name or logo will be subject to UBIT.
·       Organizations will separately calculate their net UBIT for each line of unrelated business, as opposed to calculating UBIT from aggregate gross income across all unrelated trades. Net operating losses derived from each line will be carried forward to offset any future income from that same line of business.
·       Income derived from research made available to the public will be the only research income exempt from UBIT; proprietary research currently exempt will be subject to UBIT.
·       Qualified sponsorship payments could be subject to UBIT as advertising income if the organization uses or acknowledges any of the sponsor’s product lines as a result of the payment. Payment of more than $25,000 for any one event must be acknowledged in the same manner as a significant portion of the other donors of the event. This means an organization may not give special treatment or list the name or logo of the sponsor in a different format than any other donor.
·       The specific deduction of $1,000 against income subject to UBIT will be increased to $10,000.

This provision may result in increased areas of business that could be subject to UBIT; however, the increase of the specific deduction could significantly reduce the number of organizations paying tax on unrelated business income.
Excise taxes and excess benefits
The intermediate sanctions regarding excise taxes also will change considerably by the proposed provisions:
·       Tax-exempt entities under §501(c)(5) and §501(c)(6) will be subject to the excess benefit transaction rules.
·       When an excess benefit excise tax is imposed on a disqualified person, the organization also will be subject to an excise tax of 10 percent of the excess benefit unless the organization follows minimum levels of due diligence, including:
o   Approval by an independent body within the organization
o   Reliance on comparability data prior to the approval
o   Documentation of the basis for approval
·       The definition of the disqualified person mentioned above also will expand to include athletic coaches and investment advisors.

Unfortunately, the levels of due diligence above will no longer establish the “rebuttable presumption of reasonableness” supporting the organization’s valuation of reasonable compensation paid to the top management officials. If the IRS disputes compensation, the organization now would carry the burden of proving the transaction is equitable. The relating safe harbor for managers who rely on professional advice for excess benefit transactions also will be eliminated with the provisions.
Additional excise taxes proposed by the reform draft include the following:
·       Compensation in excess of $1 million paid to any of the five highest-compensated employees will trigger a 25 percent excise tax for an organization. Currently, this rule only applies to publicly traded organizations, but the new legislation will expand it to all not-for-profits.
·       Private colleges and universities will be subject to a 1 percent excise tax on net investment income. This tax will only apply to schools with at least $100,000 in assets per full-time student.
·       A 20 percent excise tax will be imposed on an organization for any donor-advised funds not distributed within five years.
·       A private foundation excise tax for net investment income will be a flat 1 percent for all organizations, rather than the current 1 percent rate or 2 percent rate dependent on meeting distribution requirements.

The authors of the Camp tax reform draft believe these additional excise tax provisions will either reduce or have a minimal effect on future revenue. While this may be true for many organizations, it is important to monitor your organization’s practices to ensure these new taxes (if enacted) won’t be triggered.
Additional requirements for tax-exempt organizations
The requirements for organizations to obtain tax-exempt status also will change with the passage of these reforms, and a number of organizations will lose their exempt status, including:
·       Professional sports leagues, e.g., the National Football League
·       Property & casualty insurance companies
·       Qualified health insurance issuers
·       Type II and Type III supporting organizations

The change for Type II and III organizations will have the biggest impact. Organizations will be able to qualify only as a Type I supporting organization or risk treatment as a private foundation.
While there are advantages to this proposal, such as the increased UBIT deduction and the simplification of tax on net investment income, there also are disadvantages that may seem daunting. Fortunately, the not-for-profit community likely has little to fear from this proposal for the immediate future. As it is an election year, it is very unlikely the legislation will make it out of committee anytime soon. However, while we may not see overall tax reform for several years, many not-for-profit provisions seem to make their way into numerous pieces of legislation that pass quickly. Therefore, exempt organizations should stay on top of legislative developments.
If you have any additional questions or concerns about how these provisions may affect your organization, please contact your BKD advisor or Paige Gerich or Noelle Alberto.

Noelle Alberto is a tax associate at BKD, LLP in the company’s Dallas office.  She graduated with a Master of Science in Accounting from Southern Methodist University in 2013.

This information was written by qualified, experienced BKD professionals, but applying specific information to your situation requires careful consideration of facts and circumstances.  Consult your BKD advisor before acting on any matter covered here.

Article reprinted with permission from BKD, LLP, bkd.com.  All rights reserved.