Nonprofit Organization Update

Published on February 2017 | Categories: Documents | Downloads: 31 | Comments: 0 | Views: 265
of 178
Download PDF   Embed   Report

Comments

Content

Nonprofit Organization Update: 2012 in Review and Hot Topics for 2013
January 11, 2013

Agenda
9:00–10:15 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 10:15–10:25 am: Break 10:25–11:15 am Accounting & Audit Update – Looking Back at 2012 Jeffrey Stefan, CPA, Audit Partner; Rich Banner, CPA, Senior Audit Manager 11:15–12:30 pm Revisiting Executive Compensation Reporting on the Form 990 Subrina Wood, CPA, Tax Manager; Sara Smith, Senior EO Tax Specialist 12:30 pm–1:15 pm: Lunch

Agenda
1:15–2:30 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 2:30–3:20 pm Trending Towards CRM Christopher McCarthy, MCP, Principal, T3 Information Systems 3:20–3:30 pm: Break 3:30–4:45 pm How to Prevent and Detect Common Frauds at Nonprofit Organizations Christian Spencer, CPA, Audit Partner, and John Kubichek, CPA, CFE, Audit Manager

Exempt Organizations in the News – A Retrospective of What Made Headlines in 2012
Douglas Boedeker, CPA, CMA Audit Partner Katrina Henderson, CPA Audit Manager

January 11, 2013

Course Outline

     

Introduction Charity Fundraising Issues Super-PACs & Campaign Activities Governance Issues Disaster Relief Issues General Scrutiny of Exempt Organizations

Copyright © 2013 Tate & Tryon CPAs and Consultants

Charity Fundraising Issues

Copyright © 2013 Tate & Tryon CPAs and Consultants

Bloomberg Takes Notice


“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

Senators Are Taking Notice


“Don’t Be Taken In by Bogus Charities”


Senator Blumenthal; www.blumenthal.senate.gov/blog/dont-be-taken-inby-bogus-charities; May 25, 2012.

 



Be aware when making donations Veterans Support Organization hired paid solicitors to serve as volunteers to solicit contributions Several complaints of similar tactics

Copyright © 2013 Tate & Tryon CPAs and Consultants

The Senate Committee on Finance Remains Active


“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

An Interesting Take on Grant Proposals


“Guarding Against Grant Fraud”


Barbara Floersch; The NonProfit Times; December 3, 2012.

 



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

Fighting the Fiscal Cliff…


“Charitable-Deduction Limit Would Hurt Poor, Say Nonprofit Leaders”


Doug Donovan; The Chronicle of Philanthropy; November 13, 2012.



Cap on deductions will reduce the amount of donations received by nonprofits as the additional tax will be taken from their overall donation

Copyright © 2013 Tate & Tryon CPAs and Consultants

….and still Fighting the Fiscal Cliff


“In Fine Print of Fiscal Debate, Charities Unite to Defend Deductions”


Annie Lowrey; The New York Times; December 5, 2012.

 

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, I’ve seen the sector coming together. We’re like Rip Van Winkle waking up and saying, This is not O.K.” said Diana Aviv, Chief Executive of Independent Sector

Copyright © 2013 Tate & Tryon CPAs and Consultants

New Fundraising Initiatives Keep Popping Up



“Organizers launch “Giving Tuesday” to help charities”


Annie Gowen; The Washington Post; November 27, 2012.

 



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 season…We thought it would be great to give the giving season an opening day” said Henry Timms, Deputy Executive Director of 92nd Street Y

Copyright © 2013 Tate & Tryon CPAs and Consultants

Scrutiny of “Cause Related Marketing”


“Breast Cancer Awareness Month Criticized for “Little Pink Lies””


Rick Cohen; Nonprofit Quarterly; October 18, 2012.





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?

Copyright © 2013 Tate & Tryon CPAs and Consultants

Super-PACs & Campaign Activities

Copyright © 2013 Tate & Tryon CPAs and Consultants

Super-PAC Spending
“Rove Biggest Super-PAC Loser, Trump Says Waste of Money”


Julie Bykowicz & Alison Fitzgerald; Bloomberg L.P.; November 8, 2012.



Are Super-PACs productive? How will future donations be impacted?



Copyright © 2013 Tate & Tryon CPAs and Consultants

Super-PAC Governance
“Post-Campaign Super-PAC Cash Still Flowing to Consultants”


Julie Bykowicz; Bloomberg L.P.; December 3, 2012.



Administration vs. Program Expense Ratios for some Super-PACs are shockingly high. An amazing lack of governance and oversight.



Copyright © 2013 Tate & Tryon CPAs and Consultants

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”.

Copyright © 2013 Tate & Tryon CPAs and Consultants

Governance Issues

Copyright © 2013 Tate & Tryon CPAs and Consultants

BoardSource Governance Index
“Nonprofit Governance Index 2012 Suggests Some Positive Trends and Continued Concerns”


Philanthropy Journal Staff Report; Philanthropy Journal; October 3, 2012.



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”


Alice Korngold; The Huffington Post; September 9, 2012.

   

Achievement Accountability Ownership Oversight

Copyright © 2013 Tate & Tryon CPAs and Consultants

Call to Strengthen NFP Oversight
“Improve Oversight of Nonprofits”


Nicholas P. Carardi; Pittsburgh Post-Gazette; April 8, 2012.

  

Editorial in the wake of the Penn State scandal. Questions effectiveness of Boards Advocates a “Private Attorney General” statute – a charity’s stakeholders could sue for mismanagement.

Copyright © 2013 Tate & Tryon CPAs and Consultants

The University of Maryland
“Legality of University System of Maryland’s Big Ten Vote Questioned”


Jenna Johnson; The Washington Post; November 20, 2012.

  

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

The University of Virginia
“Anatomy of a Campus Coup”


Andrew Rice; The New York Times; September 11, 2012.





  

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”


Gillian Wee; Bloomberg Markets Magazine; January 7, 2013.

  

Basic conflict of interest issue. Can safeguards overcome perception? But, what if the conflict is profitable?

Copyright © 2013 Tate & Tryon CPAs and Consultants

The Corcoran Gallery of Art
“Corcoran Gallery of Art to Remain in Historic Washington Home”


David Montgomery; The Washington Post; December 10, 2012.



 

Capped a six-month period of public exploration about the Corcoran’s future. Public discussion appears to have been fruitful. A fascinating story to follow as it unfolded.

Copyright © 2013 Tate & Tryon CPAs and Consultants

Disaster Relief

Copyright © 2013 Tate & Tryon CPAs and Consultants

Hurricane Sandy Funds


“N.Y. Sandy Fund Scrutinized”


Laura Nahmias; The Wall Street Journal; December 9, 2012.



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

Contingency Plans in the Wake of Sandy


“Charities Strike Back After Sandy’s Knockdown Punch”


Mark Hrywna; The NonProfitTimes; December 3, 2012.

 

Raised over a $100M for aid within 1 week of the storm Contingency plans initiated for relief agencies impacted


Ex. moving departments to other states, learning from past situations

Copyright © 2013 Tate & Tryon CPAs and Consultants

Hurricane Katrina’s Impact


“Lessons Learned From Katrina”


Ann Silverberg Williamson; The NonProfitTimes; December 3, 2012.





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

Copyright © 2013 Tate & Tryon CPAs and Consultants

General Scrutiny of Exempt Organizations

Copyright © 2013 Tate & Tryon CPAs and Consultants

Bloomberg’s Expose’
“Tax-Exempt Firm Gets $600 Million Profit Flying First Class”


David Evans; Bloomberg Markets Magazine; November 14, 2012.

 

 

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

Bloomberg’s Editorial
“Making Sure Nonprofits Aren’t All About Profit”


Editors; Bloomberg View; November 14, 2012.

  

Dovetails off of the Bloomberg’s various articles examining exempt organizations. Calls for increased Federal and state enforcement of exempt organizations. Interesting discussion of the Tax Reform Act of 1969’s 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 college’s television, sponsorship, and royalty revenue be tax exempt?
Copyright © 2013 Tate & Tryon CPAs and Consultants

Charities as Fraud Conduits
“Bronx Councilman is Convicted of Fraud and Loses Seat”


Benjamin Weiser; The New York Times; July 26, 2012.

“Ex-D.C. Council member Harry Thomas Jr. gets 3-year sentence”


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

Thank you for your time!

Copyright © 2013 Tate & Tryon CPAs and Consultants

Speaker Biography
Douglas Boedeker , is a partner within Tate & Tryon’s 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 [email protected]

Speaker Biography
Katrina Henderson, CPA, is a manager within Tate & Tryon’s 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 [email protected]

Revisiting Executive Compensation Reporting on the Form 990
Speakers: Subrina Wood, CPA Tax Manger Tate & Tryon Sara Smith Senior Exempt Organization Tax Specialist Tate & Tryon

January 11, 2013

Agenda


General Overview of Compensation Reporting


Voting members and independence Definitions and time periods Common paymaster treatment Reporting on the Statement of Functional Expenses







Agenda


Schedule J and Compensation Information


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
 

Board Officers Organization Officers
 Deemed Officers CEO and CFO

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



Five Highest Paid


Salary threshold - $100,000 in reportable compensation

Overview


Officers, Trustees and Key Employees are separately reported on Line 5.




  

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


Common paymaster treatment




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.

Schedule J – Compensation Information


Special Topics


First class travel and travel for companions
 Not business class or bumps to first class  Any guest or family member not on bona fide business purpose



Health or social clubs dues or initiation fees
 Does not include on premise facilities  Does not include athletic facilities provided by a school



Tax indemnifications and gross ups
 Any reimbursement of any tax obligation paid by the organization.

Schedule J – Compensation Information


Special Topics


Business use of personal residence
 Payment for use of all or any part of a listed person’s residence for any purpose of the organization.



Discretionary spending accounts
 Any sum of money controlled by a listed person’s control that is not under an accountable plan, whether or not used for any personal expense.



Personal services
 Babysitter, bodyguard, chauffeur, chef, tax preparer, pet sitter, financial planner, lawyer, personal assistant.

Schedule J – Compensation Information


Expense reimbursements


Accountable plans – require substantiation
Method is not material: credit card, reimbursement or cash advances are permitted by these plans Payments to employees that were not substantiated or allowances for more than spent are compensation





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.

Schedule J – Compensation Information


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

Schedule J – Compensation Information


Participation in supplemental non-qualified plans


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





Schedule J – Compensation Information


Participation in equity based plans


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





Schedule J – Compensation Information


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


Form 8925 – Report of Employer Owned Life Insurance Polices
 Only for contracts issued after 8/17/06 and in force at the end of the tax year  Insured must be a US citizen or resident  Answer YES to payment of premium of personal benefit contract on page 5

Miscellaneous Topics


Payments to Owners of Single Member LLCs




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
 

Professional employer organization (PEO) Reporting is the same as above, if appropriate.

Reference Material and Website

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 Firm’s 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 ASAE’s Annual Association Law Symposium.

Subrina Wood, CPA Tax Manager Tate & Tryon 202-419-5129 [email protected]

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 Firm’s 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 [email protected]

Form 990 (2012)

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 organization’s 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 organization’s 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 organization’s 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 organization’s 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 Another’s 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

Form 990 (2012)

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 organization’s tax year. • List all of the organization’s 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 organization’s current key employees, if any. See instructions for definition of “key employee.” • List the organization’s 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 organization’s 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 organization’s 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)

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

4

5

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

2

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)

Form 990 (2012)

Page 9

Part VIII Statement of Revenue
Check if Schedule O contains a response to any question in this Part VIII. .
(A) Total revenue

. . . . . . . . . . . . . .
(C) Unrelated business revenue (D) Revenue excluded from tax under sections 512, 513, or 514

(B) Related or exempt function revenue

Contributions, Gifts, Grants and Other Similar Amounts

1a b c d e f

1f g Noncash contributions included in lines 1a-1f: $ h Total. Add lines 1a–1f . . . . . .

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

.

.

.

Program Service Revenue

Business Code

2a b c d e f All other program service revenue . g Total. Add lines 2a–2f . . . . . . . . . 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 11a–11d . . . 12 Total revenue. See instructions.

. .

. .

. .

. .

. .
Form 990 (2012)

Form 990 (2012)

Page 10

Part IX

Statement of Functional Expenses
Check if Schedule O contains a response to any question in this 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)

Department of the Treasury Internal Revenue Service Name of the organization

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

OMB No. 1545-0047

Open to Public Inspection

2012

Employer identification number

Part I
1a

Questions Regarding Compensation
Yes No

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 organization’s 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

2

3

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 4a–c, 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 5–9. 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: . . . . . .

5

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

organization provide any non-fixed . . . . . . . . . . . .

7

9

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.

Schedule J (Form 990) 2012

Schedule J (Form 990) 2012

Page

2

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.

Schedule J (Form 990) 2012

Schedule J (Form 990) 2012

Accounting & Audit Update – Looking Back at 2012
Speakers: Jeffrey Stefan, CPA Audit Partner Tate & Tryon Rich Banner, CPA Senior Audit Manager Tate & Tryon

January 11, 2013

Agenda
  

Not-for-Profit Advisory Committee Accounting Standards Update Clarity Project

FASB Not-for-Profit Advisory Committee


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:



Not-for-Profit Advisory Committee – cont.
1.

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.



Not-for-Profit Advisory Committee – cont.
Net Asset recommendations


Revising the net asset classification to have only two general net asset classes:
1. 2.

Donor-restricted Other net assets



NAC believes that the distinction between temporarily and permanently restricted net assets has outlived its usefulness.

Not-for-Profit Advisory Committee – cont.
Net Asset recommendations – cont.


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.



Not-for-Profit Advisory Committee – cont.
Presentation recommendations


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.



Not-for-Profit Advisory Committee – cont.
Notes to financial statements recommendations


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.



Not-for-Profit Advisory Committee – cont.
Communications other than financial statements


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.

Lease Accounting Changes (again)
Right of Use Model
Control of the use of the leased asset ROU asset Consumption of ROU Asset


Significant portion of ROU asset
 

Other than property Amortization expense and interest expense



Insignificant portion of ROU asset
 

Property (land and/or buildings) Lease expense

Lease Accounting Changes
Schedule for the Proposed New Standard
Second Exposure Draft


due in the first quarter of 2013

After Exposure Draft


Consultations and outreach

Final Standard Released


TBD

Intangibles – Topic 350 (ASU 2012-2)
Testing Indefinite-Lived Intangible Assets for Impairment
Why was the standard changed?


Cost and complexity of recurring quantitative impairment testing

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



What does “more likely than not” mean?


Likelihood of more than 50%

Statement of Cash Flows
Donated Securities – exposure draft


If directed for immediate sale, then operating activity. If donor restricted for long-term purposes, then financing activity. Otherwise, investing activity.





Contributed Services from an Affiliate


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.





Audit Clarity Project – SAS 122
Changes to Auditing Standards


58 AU sections
    

47 new “AU-C” 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



Effective for audits of periods ending on or after 12/15/2012

Audit Clarity Project – SAS 122 (continued)
Examples of Impact of Selected Standards—Auditor Reports
Headings and Subheadings Management’s Responsibilities Opinion (Basis for qualified, adverse, or disclaimer) Emphasis of Matter • Matters appropriately presented or disclosed Other Matter • To understand audit matters Other auditor reporting responsibilities

Audit Clarity Project – Group Audits
Special Considerations—Audit of Group Financial Statements (AU 600)
Acceptance and continuance - group auditor; identify components; preconditions Understanding - group; components; component auditors; make reference? Materiality decisions and responding to risks of material misstatement Other procedures - consolidation process; subsequent events; evaluating evidence Communications - with component auditors; with group governance and management

Audit Clarity Project – SAS 122
Impact of Selected Standards—Group Audits
Understanding of entity includes components Extent group auditor will be able to be involved with component auditor

Decision to make reference

Obtaining misstatements above trivial noted by component auditor

Communications between group and component auditor increased

Group auditor’s reporting of component auditor’s MW and SD

Speaker Biography
Jeff Stefan, is the partner in charge of Tate & Tryon’s 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 [email protected]

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 [email protected]

AICPA Management Discussion and Analysis – Fiscal 2012
This year we reflect not just on the past year, but on more than a century as we celebrate the 125th anniversary of the Institute. Although we live in a time of rapid change, the profession’s core values have remained consistent since 1887. Our core values — integrity, objectivity and competence — have cemented the CPA profession’s strong foundation and remain the compass of the AICPA today. Since its beginnings, the Institute has been at the forefront of raising the professional performance of its members by setting high professional standards, a strict code of professional ethics and a commitment to serving the public interest. We are proud to continue this legacy while evolving to lead future generations of CPAs to the same level of success. The following is a discussion of key accomplishments achieved during the year and management’s report on operations for the fiscal year. This discussion should be read in conjunction with the audited combined financial statements and notes to the combined financial statements. with the FAF’s announcement, the AICPA also announced plans to develop a financial reporting framework for small- and medium-sized entities (SMEs). This special purpose framework will be a less complicated, more relevant and less costly system of accounting for SMEs that do not need financial statements prepared in accordance with U.S. GAAP. It will meet the financial reporting needs of the SME community and the lenders and others who use their financial statements. We launched The Total Tax Insights™ calculator (totaltaxinsights.org) in May 2012 as a public service to give taxpayers a clearer picture of the types and number of taxes they pay throughout the year and the estimated amounts of each. By linking federal tax rules with the country’s abundant and varied state and local tax conventions — including more than 20 of the most widely applied taxes — this first-of-a-kind online tool fosters greater public understanding of taxes and provides key insights to enhance one’s financial well-being. Fiscal 2012 efforts to launch the National Commission on Diversity and Inclusion (Commission) were realized in early September 2012. The Commission includes representatives from minority professional advocacy groups; large, medium and small firms; state CPA societies; and leaders from business and industry, government and education, and is designed to identify strategies that will increase the number and the advancement of underrepresented groups in the accounting profession. This process will involve investigating and understanding the barriers that impede the long-term retention and advancement of minorities in the accounting profession. In addition, the Commission will closely monitor population trends and analyze the impact of these trends on the profession and the clients CPAs serve and the employers for whom they work. The Institute continues to provide tools and research in the growing niche areas. These specialized niches include personal financial planning, forensic and litigation services, business valuation services and information technology and offer the CPA the opportunity to provide a broader array of services to their clients and companies. Increased opportunities in providing services to CPA clients and companies have led to a 30% growth in section membership in the last five years. The AICPA offers credentials in the services most commonly offered and include the Accredited in Business Valuation (ABV®), Certified in Financial Forensics (CFF®), Certified Information Technology Professional (CITP®) and Personal Financial Specialist (PFS ). The credentials demonstrate a commitment to a specialty and distinguish our members in the marketplace.
SM

Regulatory and Legislative Advocacy
On September 16, 2011, our long-term efforts paid off as comprehensive patent reform was signed into law. A provision actively supported by the AICPA, which prohibits the U.S. Patent and Trademark Office from issuing new patents for tax strategy methods, was included in the America Invents Act. On November 21, 2011, the Three Percent Withholding Repeal and Job Creation Act was signed into law. Strongly supported by the AICPA, this act repeals a requirement that the federal or state governments or their instrumentalities or subdivisions (including multistate agencies) withhold 3% of payments to any person for services or property. After championing for new solutions for private company U.S. generally accepted accounting principles (U.S. GAAP) for many years, the Institute supported the May 2012 decision of the Financial Accounting Foundation (FAF) to form a Private Company Council to help set differences in U.S. GAAP, where appropriate, for privately held companies. While the structure was not exactly as supported by the AICPA, the Institute acknowledged significant modifications by the FAF and the step forward. In conjunction

Membership
For the fifth 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 reflect the AICPA’s 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 final 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 Certified 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

Organization & Membership Development

4%
Communications & Public Relations

13.9% 10.5%
Other Professional Development & Member Service Conferences

10.5% 9.2% 9.8%
Publications Investment & Other Income

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

Operating Revenue By Activity

Total Expense By Activity

4

Financials

management accounting skill set of combining financial 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 CPA’s CPA Exam Aid. The Journal of Accountancy News App for iPad® is a benefit 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 definitive news source for CPAs. The CPA Exam Aid is a benefit 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 first 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 AICPA’s growing list of e-books, including the AICPA’s Codification 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 efficient, 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 benefit of our members, the accounting profession and the public interest. A detailed account of our operations follows and illustrates management’s analysis of our resources, which are carefully managed to fund and support these activities.

REPORT ON OPERATIONS
Investments
In Fiscal 2012, the Institute’s investments portfolio remained relatively flat as a result of a slight decline in the market offset by the reinvestment of dividends and interest income. The Institute’s 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 diversified across equity and fixed 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, office to streamline operations and gain efficiencies. 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 financial 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 first 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.

2011 – 2012 ANNUAL REPORT

5

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 profit 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 Plan’s assets in fixed income investments and decrease the overall target allocation of the Plan’s assets in equity investments. At July 31, 2012, the Plan was 55% allocated to fixed 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 benefit accruals will occur after this date. Furthermore, all AICPA employees hired after November 2005 receive a lower pension benefit 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 refinance 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 financial statements. Highlights from our combined financial statements as of and for the year ended July 31, 2012, include the following: ƒ 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. ƒ 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. ƒ 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. ƒ 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 first 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
CPA2Biz’s 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 firms now leveraging CPA2Biz’s 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 significant 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 finance and accounting.

Defined Benefit Plans
In Fiscal 2012, the AICPA contributed more than $6.7 million to the pension plan (Plan) and has contributed more than $36 million into the Plan since Fiscal 2005, taking a proactive step to ensure the Plan is properly funded even before the mandatory funding requirements of the Pension Protection Act of 2006 were enacted by Congress. The Plan’s assets increased during the year to a value of more than $95 million at year end. Consistent with organizations both domestically and globally who sponsor pension plans, the Plan was negatively impacted by a steep decline in the discount rate as a result of the current interest rate environment. This decline in the discount rate increased the Plan’s unfunded status, but does not materially impact the AICPA’s future cash flow funding requirements. Furthermore, future increases in the discount rate will have a positive impact on the Plan’s funded status and will decrease future expenses. The AICPA uses a dynamic asset allocation strategy for the Plan, which is intended to reduce volatility of the Plan’s funded status. As the Plan’s funded status improves, the AICPA will
6 Financials

Combined Financial Results
These combined financial statements include the accounts of the AICPA, its subsidiaries, CPA2Biz, Inc. and NorthStar Conferences, LLC (NorthStar), and the Related Organizations (AICPA Foundation, AICPA Benevolent Fund, Inc. and Accounting Research Association, Inc.) and the majority owned

applications, further enhancements to aicpa.org and development and launch of the CGMA website in conjunction with the new designation. ƒ 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 financing activities was $8.7 million in Fiscal 2012 compared to $10.7 million in Fiscal 2011. The net cash outflow for financing 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 fiscal 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 specific 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 financial results, we have sufficient liquidity to meet our goals and execute on our strategic initiatives in the upcoming fiscal 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 financial statement presentation to give further transparency to the Plan’s impact on our fund balance. This enhanced presentation format reflects the AICPA’s healthy financial status in a more clear and concise manner.

2011 – 2012 ANNUAL REPORT

7

How to Effectively Facilitate the Investment Manager Selection Process
Speakers:
Lisa Swatkoski, Investment Consultant Vanguard Institutional Advisory Services Camille Alexander, CFA, Institutional Consulting Director Graystone Consulting

Moderator:
Charles Tate, CPA Managing Partner Tate & Tryon

January 11, 2013

Graystone Consulting a business of Morgan Stanley

January 2013

Introduction to Alternative Investments

Camille M. Alexander, CFA – Institutional Consulting Director Graystone Consulting 12505 Park Potomac Avenue | Suite 420 Potomac, Maryland 20854 301-279-6411

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Table of Contents SECTION 1 Introduction

SECTION 2
SECTION 3 SECTION 4

Hedge Funds
Commodities Real Estate

2

Section 1
Introduction to Alternative Investments

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Introduction to Alternative Investments
• What is an Alternative Investment? – Alternative investments typically utilize traditional investment instruments such as equities and bonds, but may approach investing in different ways. • May involve holding both long and short positions in publicly traded investments as well as holding private securities • May use derivatives or hedging strategies • Benefits: – – – • – – – Potential to enhance the risk and/or return characteristics of an investment portfolio as low correlation to traditional investments may improve diversification and produce lower portfolio volatility. Ability to be more flexible and invest in a wider opportunity set Can hedge certain portfolio exposures, reducing concentration risk

Considerations: Long-term investment horizon Lack of liquidity and limitations on transferability Limited access to performance and investment information

4

Section 2
Hedge Funds

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

What Is A Hedge Fund?
• • • • • No standard definition – term mostly describes the vehicle Typically seek an absolute return




Unlike traditional vehicles which manage relative to a market oriented benchmark
Stocks, Bonds, Commodities, Currencies

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

6

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Available Hedge Fund Strategies
Strategy
Equity Market Neutral

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

Value appreciation restructured

as

companies

are

Global Macro

Leveraged, directional investing in global currency, equity, bond, and commodity markets

Directional price movements

Long/Short Equity

Long and short equity investments generally with a long bias

Directional price movements

7

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Potential Advantages of Hedge Fund Investing
• Alpha – Skill-based returns

– Seek “absolute returns”
– May exceed returns generated from risky asset exposures • Controlled beta exposure – Hedge fund “beta” tends to come from relative value properties rather than the market properties that are contained in asset classes themselves, resulting in lower correlations in relation to traditional asset classes. – Hedge fund managers tend to manage direct market exposures – whereas fully invested strategies attempt to track market risk and manage returns. – Use risk management techniques to help reduce volatility » Important note: Lower beta exposure tends to outperform during declining markets • Dynamic beta exposure – Hedge fund managers may increase risk exposures to increase market participation while still managing downside risks. – Evaluate risk/reward opportunistically

8

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Hedge Fund Managers Generally Have Increased Investment Flexibility
Hedge Fund Managers
Have the flexibility to invest opportunistically where they see value

Traditional Money Managers
May be constrained to invest in certain pre-defined markets

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

Can use derivatives and leverage to hedge or magnify returns

Are limited in their use of derivatives and leverage

9

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Risk and Return – Diversification Benefits from Broadening the Opportunity Set

10

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Liquidity Characteristics Vary
Liquid
Convertible Arbitrage Fixed Income Arbitrage Statistical Arbitrage Equity Market Neutral Long/Short Equity Global Macro Merger Arbitrage Distressed Debt

Illiquid

Bonds

Private Equity

Equities

Real Estate

Managed Futures

11

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Despite Attraction, Hedge Funds Have Unique Risks
Risk
Valuation Risk

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

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Some Hedge Fund Myths
Myths
Hedge funds are a new investment product

Facts
Hedge funds have been around since the late 1940s.

Hedge funds are risky

Different hedge fund strategies have widely different risk characteristics that can be diversified.

Hedge funds are unregulated

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.

Hedge funds generate strong returns in all market conditions

Hedge funds are always hedged

Not all hedge funds are hedged. However, some funds are always hedged against market risk.

Hedge funds do not invest, they trade

The range of hedge funds varies from extremely short-term (trading) to extremely long term (distressed securities).

13

Section 3
Commodities

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Two Broad Groups of Commodities
• The first is characterized by its relatively fixed supply and low degree of perishability and includes: – Energy (such as crude oil, heating oil, natural gas and unleaded gasoline)

– 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)

– Softs (such as coffee, sugar, cocoa, orange juice and cotton)
– Livestock (such as live cattle, feeder cattle and lean hogs). • Spot market indices also track the prices of basic materials such as scrap metals; selected textiles and fibers, fats, oils and foodstuffs; and raw industrials.

15

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Choices for Investing in Commodities
• Physical form – • Returns determined by the commodity’s upward or downward price movements, less any applicable storage, financing, insurance and other costs.

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

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Advantages and Disadvantages of Commodities Investing
Advantages
Tend to lower the overall volatility of a portfolio by functioning as a diversifying, countercyclical asset relative to many other asset classes.

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

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Broad Groups of Real Estate
• Real Estate (Commercial and Residential) – Real estate is a traditional asset that is perceived to offer significant inflation protection.

• Private real estate has a positive correlation with inflation
• REITs have sometimes demonstrated negative correlation in inflationary environments when inflation is relatively high and rising. Conversely, during quarters when inflation was lower than average, REITs substantially outperformed other inflation hedges, TIPS, commodities as well as the S&P 500.



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

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Access to the Real Estate Markets
• Public securities markets exposure to real estate and other real assets is available through direct or mutual fund investment in: – REITs dedicated to the apartment, office/industrial, hotel, retail, and other sectors in the US, Europe and Asia – Non-REIT real estate operating companies – Equities with significant real estate assets, in the hotels, gaming, and healthcare industries – Real estate-related companies such as homebuilders, construction firms and title insurers • The non-public markets for US and non-US real estate and other real assets are many times larger than the public markets and include leveraged or unleveraged exposure to: – Owner occupied residential homes, second homes, single-family rental properties, and smaller commercial assets

– 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

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

Advantages and Disadvantages of Real Estate Investing
Advantages
Can possess important defensive characteristics. Increasing cash flows may also allow real estate to prosper in favorable economic and demographic environments. May have low correlations of returns with US and developed nonUS equities, and slightly negative correlations of returns with US and non-US bonds, high yield bonds, and emerging markets equity. A tangible asset whose supply is reasonably fixed and whose income generating ability and/or capital values respond to such forces as employment trends, immigration, new household formation and long-term inflation. Standard deviation of real estate returns tends to be lower than the standard deviation of equity returns, and for REITs, tends to be higher than the standard deviation of bond returns.

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

GRAYSTONE CONSULTING Introduction to Alternative Investments January 2013

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.

22

Graystone Consulting
12505 Park Potomac Avenue | Suite 420 Potomac, Maryland 20854 301-279-6400

1 2 3

The Importance of Investment Policy What’s in the Policy? Common Pitfalls

online report

Investment Policy Statements for Nonprofit Organizations
summary a template for prudent investment decisions

As a nonprofit trustee, keeping your organization’s portfolio on track through the market’s ups and downs can be a challenging proposition. To help with this process, many institutions benefit from creating a clearly defined 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 together—and how they can go awry—you can be better equipped to help your organization make prudent financial 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 nonprofit organization, such as a foundation, means assuming responsibility for that organization’s 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 fiduciary guidelines and define their decisionmaking process. While not specifically mandated in the federal or state regulations that govern nonprofit 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 nonprofit organizations continue to operate without this governing document. Unfortunately, the biannual survey conducted by

T

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

the importance of investment policy
Following the severe market downturn in 2008 and 2009, investment policy statements for nonprofit organizations have become more important than ever. Trustees and other governing board members are bound by the “prudent investor” standards that judge investment decisions. Prudent investors are required to invest with the care, skill, prudence and diligence under the circumstances prevailing at the time. Investment policy statements, which include asset allocation strategy as one of their most important components, form the essence of endowment and foundation investment practices. The investment policy statement becomes a compass that guides organization fiduciaries; it can also help: • Demonstrate procedural prudence

online report / investment policy statements for nonprofit organizations

• Define 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 fiduciary imprudence. Studies have illustrated that nonprofit fiduciaries and directors do indeed spend a significant 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.

what’s in the investment policy statement?
Typical investment policy statement features may include: • Investment objectives of the institution • Asset allocation strategy

• 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 firing of investment managers • Use of social investing criteria and/ or mission-related investing and related investment restrictions • Endowment sustainability as an influence on investment decision making • The degree of liquidity required in the investment portfolio • Definitions 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.

• Define 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 foundation’s assets will be managed In general, this section will outline your philosophy governing the management of assets. It is intended to be sufficiently specific to be meaningful, yet flexible 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 define who is responsible for directing and monitoring assets. It should also outline

statement of purpose
The statement of purpose should define your entity, its mission and include information about overall investment operations. It should:

Institutional Asset Allocation

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 fixed income changed significantly as the size of the institutions increased.

Institution Size

$101 - 500 million
2009 2010

$51 - 100 million
2009 2010

$25 - 50 million
2009 2010

under $25 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

graystone consulting | morgan stanley smith barney

2

online report / investment policy statements for nonprofit organizations

the delegation of responsibilities to investment consultants, investment firms and custodians. Additional specialists such as attorneys, auditors and actuaries should have their responsibilities and obligations outlined in this section.

general investment principles and objectives
In general, this section should define liquidity needs, investment time horizon, investment restrictions and unique circumstances. It should include general guidelines for: • Adherence to prudent investor standards • The overall investment goals of the foundation • Allowable assets including the use of alternative investments • Definition of annual spending policy and liquidity requirements • Asset allocation and diversification requirements • The selection, hiring and monitoring of investment managers General guidelines for investment management might cover: • Preservation of capital • Risk aversion • Investment discipline adherence • Attitude towards future gifts and bequests • The use of socially responsible investment strategies • Any investment restrictions, prohibited assets and prohibited transactions

on certain assets such as fixed 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 financial health of the firm, 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 specific 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. • Significant quantitative or qualitative changes to the firm 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.

communication, reporting and review
Foundation governing boards and trustees should outline their policies for maintaining the investment policy statement and how frequently it will be reviewed. In general, investment policy statements should be reviewed no less frequently than annually and distributed to all investment managers, consultants and other advisors responsible for providing advice to your foundation. It is advisable to collect signatures from all individuals responsible for adopting and abiding by the policies outlined in the statement. To be effective, the investment policy statement should be monitored, reevaluated and modified as needed to reflect your organization’s mission.

standards of review and evaluation
The standards of review and evaluation should stipulate the type and frequency of performance reports and who is responsible for their preparation and review. The investment performance of the total portfolio as well as the asset class and manager components should be measured against commonly accepted performance benchmarks, which are defined in the investment policy statement and are consistent with the investment objectives, goals and guidelines established by the foundation’s statement of purpose. This section could also include guidelines for the termination of an investment manager. Some reasons could include: • Investment performance that is significantly less than anticipated given the discipline employed, market conditions and the risk parameters established, or unacceptable justification of poor results

specific investment guidelines
This section should provide details about your organization’s specific asset allocation strategies. For example, an endowment seeking current income with capital appreciation— or a moderate investor profile—may wish to state investment guidelines like those in the table on the previous page. This section should also include guidelines for the selection, hiring and monitoring of investment managers. It should include any restrictions

common pitfalls of investment policy statements
A poorly written investment policy statement may often do more harm than good. Some common problems of a poorly crafted policy include: 1. Lack of consensus. Your investment committee and board of directors, whether they are one and the same, should possess a level of agreement about your foundation’s general investment guidelines and goals. 2. Unclear language. Investment policy statements should be specific

graystone consulting | morgan stanley smith barney

3

online report / investment policy statements for nonprofit organizations

nied the 2008-2009 Recession reviewed to ensure the continued and clearly state their guidelines. alerted nonprofit 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 reflect 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.” possible—especially 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 firm 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

graystone consulting | morgan stanley smith barney

4

online report / investment policy statements for nonprofit organizations

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 Barney’s 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 affiliates, 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 fiduciary responsibility, and how they may apply to you or your organization’s specific 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 fixed income securities, please note that, in general, as prevailing interest rates rise, fixed 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 indefinite period of time. Asset allocation and diversification do not assure a profit 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

graystone consulting | morgan stanley smith barney

5

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 [email protected]

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 America’s 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 organization’s 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 [email protected]

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.

Trending Towards Dynamics CRM
Speaker: Christopher McCarthy, MCP, Principal T3 Information Systems

What Is Dynamics CRM?
Microsoft Dynamics CRM is a flexible web-based database platform solution. The Microsoft CRM solution allows you to:
‒ Capture Data Easily ‒ Create Reports and Dashboards ‒ Conduct Seamless Workflows ‒ Customize Notifications ‒ Define Data Relationships

Microsoft Dynamics CRM Extensions for Non-Profit Organizations
The Non-Profit Extensions take advantage of the familiar, connected, and intelligent experiences in Microsoft Dynamics CRM to showcase how non-profit organizations can effectively manage interactions across members, donors, volunteers and constituents as well as track and optimize key non-profit activities and programs.

Basic Features in CRM
Microsoft Dynamics CRM has benefits tailored to non-profits’ high level needs in the following features:
‒ Tracks All Member Activities and Responses ‒ Secures and Audits through Administrative Rights ‒ Markets E-mail and Phone Campaigns ‒ Records Case Management Among Relevant Staff

Customizable Features in CRM
Microsoft Dynamics CRM has robust options to benefit your specific needs in the following features:
‒ Web Portals
 1. Employees  2. Members  3. Donors  4. Contractors

‒ 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

The Ease of Microsoft Products
Microsoft Dynamics CRM has similar functionality to other MS Office Products your non-profit uses and easily syncs with Outlook and MS Office Products. Your Staff will have the ability to:
‒ Quickly Generate Reports, Charts and Dashboards to Export in Excel ‒ Import Data easily from Excel in 3 simple steps ‒ Complete integration with other Microsoft Solutions

Membership Organization Features
T3 is the expert in membership based associations and can further customize your Microsoft Dynamics CRM to meet core needs. Your Membership CRM:
‒ ‒ ‒ ‒ ‒ ‒ ‒ Automates Applications and Dues Renewals Manages Event and Sub-event registrations Organizes Committees and Positions Operates Advertising and Sponsorship Activities Extends Advocacy Programs Processes Certification, Education and Award Tracking Sequences Publication and Subscription Management

Non-Profit Dashboard

Non-Profit Programs

Constituent Management

Member Dashboard

Member Management Dashboard

Constituent Dashboard

Pledges and Donations
Pledges

Donations and Volunteer Hours

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.

Christopher McCarthy, MCP Principal T3 Information Systems 202-419-5151 [email protected]

How to Prevent and Detect Common Frauds at Nonprofit Organizations
Speakers: Christian Spencer, CPA Audit Partner Tate & Tryon John Kubichek, CPA, CFE Audit Manager Tate & Tryon

January 11, 2013

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


Definition of occupational fraud per ACFE:


The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets



Further key findings from the ACFE’s 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


Key findings (continued):


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

How is Fraud Initially Detected?
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

2012 ACFE Report to the Nations

Frequency of Anti-Fraud Controls at Victim Organizations

2012 ACFE Report to the Nations

Median Loss by Detection Method
$1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0

2012 ACFE Report to the Nations

Types of Fraud


Fraud schemes fall into three primary categories


Asset misappropriation schemes, in which an employee steals or misuses the organization’s 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 organization’s financial reports (e.g., recording fictitious revenues, understating reported expenses or artificially inflating reported assets)





Frequency by Type of Fraud

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%

Financial Statement Fraud

7.6% 4.8% 10.3%

Corruption

0.0%

2012 ACFE Report to the Nations

The Fraud Triangle


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

Elements of the Fraud Triangle


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

Elements of the Fraud Triangle


Common rationalizations / attitudes:
    





Low pay (I could make more at a for-profit business) “I really need this money…I’ll 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) “It’s for a good need” (if I don’t 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

Red Flags - Management
          

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

Other Red Flags


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









The Fraud Triangle: applied to nonprofits


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







The Fraud Triangle: applied to nonprofits


Common opportunities for fraud:


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; organization’s 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 Fraud Triangle: applied to nonprofits


Common opportunities (continued):


Brief examples of cash opportunities (continued):
 Expense Reimbursement Disbursements: overstated expenses (mileage, tips, etc.); duplicate expenses (two reports or also on corporate credit card); personal expenses; disallowed expenses by organization’s policy  Payroll: ghost / nonexistent employee; continuing employee being paid after termination (direct deposit account could be changed); falsified overtime hours; inappropriate bonuses or pay rate

Example 1 – Cash Receipts Fraud


Remote Deposit of Checks Scenario


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







Example 1 – Cash Receipts Fraud


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





Example 1 – Cash Receipts Fraud


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



Example 2 – Cash Disbursements Fraud


Improper Payments Made Online Scenario


XYZ Charity has the ability to pay bills electronically through the bank’s 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





 

Example 2 – Cash Disbursements Fraud


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

Example 2 – Cash Disbursements Fraud


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 org’s 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 bank’s site







Example 2 – Cash Disbursements Fraud


Detective Controls


The bank reconciliation being performed by someone other than the accounting manager, or the CFO’s 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 bank’s website





Example 3 – Payroll Fraud


Improper Direct Deposit of Payroll Scenario


 

  



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

Example 3 – Payroll Fraud


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 CEO’s review.

Example 3 – Payroll Fraud


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



Example 3 – Payroll Fraud


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









Example 4 – Corporate Credit Card Fraud


Personal Use of Organization’s Credit Card Scenario


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







Example 4 – Corporate Credit Card Fraud


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 Director’s 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









Example 4 – Corporate Credit Card Fraud


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 CEO’s 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







Example 4 – Corporate Credit Card Fraud


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 org’s 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. Christian’s 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 ASAE’s Dollars & Cents.

Christian Spencer, CPA Audit Partner Tate & Tryon 202-419-5124 [email protected]

Speaker Biography
John Kubichek, is a manager in Tate & Tryon’s 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 & Tryon’s Employee Benefit Plan Audit committee. Mr. Kubichek’s 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 [email protected]

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close