EisnerAmper Blog

Not-for-Profit Trends and Tips Blog

Overhead: Good vs. Evil

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July 28, 2015

Grossman KimBy Kim Grossman, CPA

Every organization in the world has overhead. It is a fact of life. Expecting an organization to not have overhead is like asking someone to stop breathing for a couple of hours each day to conserve oxygen for the rest of the world. There are watch dogs agencies that have put out edicts on the level of overhead that not-for-profit organizations should have. However, have you ever heard of someone criticizing a for-profit company for incurring overhead? Ever hear the saying “Gotta spend money to make money?” We generally support for-profit organizations in spending money to make money, yet we handicap not-for-profit organizations by encouraging them to keep their overhead ratios as low as possible. There is a movement currently happening against this “overhead myth”.

A not-for-profit should not be locked into the  concept that overhead is bad when it expects  to continue to survive, let alone grow, in this economy. Because not-for-profits are cautious about increasing their overhead, they often have issues attracting talented individuals as well as retaining the talent they might have been lucky enough to get because they can’t meet their compensation requests. Not-for-profits might not invest in their infrastructure or take the time to plan strategically because those would be considered overhead costs. Without a competitive infrastructure or a clear strategic plan, how does a not-for-profit continue to grow its footprint?

I don’t have an answer for your organization on how to overcome this “overhead myth” right now. It is something that has to happen nationally in the minds of millions of individuals but here are some ideas that might help the not-for-profit survive in this world when it has to incur more overhead than society might want to see.

#1 – Add a Management’s Discussion & Analysis to your financial statements. For-profit companies do this frequently – whether they are required to do it or not. In this MD&A (as we accountants affectionately call it), you can address all of the questions readers are going to have before they even see the financial statements. If you had a rough year because the organization decided to invest in a new program, this would be the place to explain that – before the readers even see the loss on the statement of activities. Knowing the reason behind some of the results before seeing them eases the surprise and helps them really understand the organization.

#2 – Consider revising/expanding/enhancing the “Nature of the Organization” footnote within the financial statements. Did you enter a new market? Start a new program? Get a new major funding source? Some of those types of qualitative updates can be included in this footnote – the FIRST footnote that the readers see.

#3 – Write a cover letter for your financial statements and include in all packages sent to funders, potential donors, banks, etc. Similar to the MD&A, yet a little less formal (and the auditor really isn’t involved in this process at all since it is not included in the audit package).

#4 – Add a “Cost of Programs” report or schedule to the supplementary information at the back of the financial statements. We all have seen the functional expense statement with just the three columns – Program, Management & General, and Fundraising. Why not break down the program column into the specific programs your organization has? Let the readers see where the money is being spent within the programs so they understand why there is so much allocated to salaries, subcontracts, etc. This report together with an expanded Nature of the Organization footnote (which could describe each program) would be a good combination to consider.

#5 – Change the presentation of your financial statements to disclose operating vs. non-operating items or the availability and use of certain assets. This would require a little bit of footnote disclosure to explain the two categories, but would give the readers a better sense of what is “real” and what is ingrained in the organization and not really a part of the mission. 

What Is an Indirect Cost Rate? How Does My Organization Get One?

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July 21, 2015

Grossman KimBy Kim Grossman, CPA

An indirect cost rate is a ratio of indirect and direct costs that is approved by your cognizant federal agency which you are allowed to use in budgets in future governmental contracts. There are several words in that sentence that I think we need to define before discussing anything else.

#1 – Your organization’s cognizant agency is the federal department with the largest dollar amount of direct federal awards. Federal funding received through another agency, such as a state or city government agency, does not count towards this determination.

#2 – Indirect costs are expenses your organization incurs for activities that cannot be specifically identified with a project or program. Examples of these expenses are operations, maintenance, depreciation, legal, IT, accounting, auditing, etc. Other terms that you might recognize as indirect costs are overhead costs, administration costs, and facilities costs.

Your organization is eligible to apply for an indirect cost rate if you have a direct federal award (already issued and final – not pending) and the award’s budget allows for indirect costs. To receive an indirect cost rate, the organization submits a proposal to its cognizant agency. Some agencies provide examples of such proposals; DHHS Division of Cost Allocation handles a lot of proposals and has examples as well as the checklists that its people use to approve the proposals on its website.

The proposal will need to include your organization’s allocation method for indirect costs. There are three methods that you can use. The important thing to remember is to keep it as simple as possible and to not go outside of your organization’s comfort zone in developing the allocation method. You will need to be able to explain and possibly defend your method; and if it is too complicated, you might not be successful in obtaining the rate.

The simple method is used when significant functions benefit from the indirect costs in the same degree. Using this method there is only one pool of costs you have to allocate according to one base which results in only one rate. Your base should be appropriate for your organization and should be adjusted for any costs that your funding sources do not allow under their contracts.

The multiple allocation base method is used when the functions benefit in varying degrees. The best way to explain this is with an example: If your organization conducts research in 2 labs but one of the labs requires complete darkness and the other requires lights on 24 hours a day, then those two functions use electricity differently but utilize rental space the same way. This results in two different allocation bases for rent and electricity.

The last method is the direct allocation method which involves the organization allocating as much as reasonably possible directly to the programs, leaving only the bare bones administrative expenses that cannot be feasibly allocated directly. Under the other two methods, the indirect cost pool would include things like rent, IT, telephone, etc. Under the direct allocation method, these expenses would be allocated directly to the functions using square footage, number of employees or number of telephones. Then the remaining indirect costs are allocated based on the rate calculated.

Having an indirect cost rate is beneficial for an organization because it can use the cost rate in proposals for all types of grants and contracts funded by governmental agencies. Under the new OMB Uniform Guidance, all sources awarding federal monies (directly or indirectly) to your organization must accept your indirect cost rate if you have one approved. It is also beneficial to have an indirect cost rate that is in line with the actual indirect costs that the organization incurs (and not an arbitrary number inserted into a budget), so that the organization can recover as much as possible.

Webinar: “Understanding the Principles of the FASB’s Anticipated Exposure Draft”

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July 10, 2015
By Morgan Piscitelli

In an earlier post, Brian Collins discussed an important webinar topic presented by EisnerAmper and the Better Business Bureau, geared towards all not-for-profit leaders.  The webinar, presented by partners Candice Meth and Julie Floch on March 31, was titled “Understanding the Principles of the FASB’s Anticipated Exposure Draft on Changing the Not-For-Profit Financial Statement Model.” In their presentation, which can be viewed in full here, the partners discussed the basic features of the draft, as well as how the changes will affect the not-for-profit sector. They also walked listeners through the new principles added to the exposure draft while highlighting the changes from existing GAAP financial reporting.  

This informative webinar was created to focus on key elements of the new draft which are of critical importance to not-for-profit leaders.  Webinar attendees ranged from not-for-profit CEOs, executive directors, COOs, CFOs, board members, development officers, program officers and other individuals who work directly with not-for-profit financial statements.  Feedback on the presentation was very positive, with many eagerly awaiting the availability of a link to the recording, featured above.  Julie and Candice encourage all not-for-profit leaders to consider the potential effects of these proposed changes on their organization and offer comment directly to FASB. To stay current on this topic, follow EisnerAmper’s Not-for-Profit Trends and Tips blog and also sign up for FASB’s electronic Action Alert.

EMV Technology and Credit Card Donations

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July 1, 2015

By: Jeff Holt, CPA

There is now a new cost element for nonprofits who accept donations in person via credit card, and it relates to a credit card chip technology called EMV. EMV is an acronym for Europay, MasterCard, and Visa; the U.S. will be migrating to this credit card standard in October 2015. EMV is the global base standard for credit and debit card chip technology, in which a tiny chip on the actual card stores personal data as opposed to a magnetic stripe. So instead of being ‘swiped,’ the card is inserted and the chip is read. 

Not-for-profits need to understand how this change in technology will affect the way they accept and process credit card payments, as this may open themselves up to liability for fraud.

While the October date isn’t a hard date for implementation, the date is firm for a shift of liability from the issuer (MasterCard, Visa, and American Express) to the not-for-profit for non-EMV credit card-present transactions. When an EMV enabled card is presented to a not-for-profit that only has the old “swiping” technology instead of EMV technology, the not-for-profit is likely to be responsible to cover the cost of a fraudulent transaction if they used the old technology to read the card.

By the way, this doesn’t apply to online transactions as there is no terminal to read the chip when making a donation online. This is termed a “card-not-present” type of transaction.

The impact is that the not-for-profit, who receives significant donations via card-present transactions, may need to evaluate whether it is worthwhile to invest the time and dollars to upgrade its equipment to implement the EMV technology.  With regard to the potential for prevention of fraudulent transactions in online transactions, the not-for-profit may want to look into an address verification system or other authentication methods.

Not-for-Profit Fundraising Profiting After Making the Switch to Digital

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June 29, 2015
By Morgan Piscitelli
2015 is looking to be a prosperous year for New York area not-for-profits, according to an annual survey for Crain's by the Association of Fundraising Professionals-New York chapter.  Professional fundraisers in the New York area are in agreement, saying that they are optimistic about this year's fundraising environment. More than half (52%) of these organizations are even taking steps towards hiring development staff to take advantage of this generous climate, compared with just 29% who reported hiring additional hands last year.

This fundraising shift is thanks to the region’s vast wealth of individual and corporate donors in high-paying industries like finance and business services. The Crain’s survey noted that in 2014, charitable giving was up 4.4% in the U.S., the fourth straight year of increased donations since the Great Recession, according to the annual Giving USA report by Indiana University's Lilly Family School of Philanthropy.

Along with the change in attitude toward giving, there’s been a shift in the way individuals and corporations choose to make their donations. Last year, the YMCA received about 13,000 gifts, 11,000 of them from individuals or families whose average donation was $530. Gary Laermer, the YMCA’s senior vice president and chief development officer, noted that social media's immediacy has made fundraising easier.  Now donors can give whenever they want instead of waiting for something in the mail. Utilizing Facebook, Twitter and other social media can also help drive awareness of the cause for both current and potential donors, which can set the stage for increased giving.

Governance Duties of a Not-for-Profit’s Board of Directors - Part 2 of 2

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May 27, 2015

Collins_BrianBy Brian Collins, CPA

In our previous blog, we shared with you the New York State Attorney General’s announcement of a lawsuit against the board of directors of two Brooklyn-based not-for-profits alleging of gross negligence and failed management of their organizations.

Does your board of directors know its governance duties to the not-for-profit in order to avoid negative publicity?

There are three fundamental governance duties that all board members must follow. These are commonly known as fiduciary duties and apply to everything that the board of directors does. If board members fail to follow these guidelines, they could be held liable for any negative consequences of their actions.

  1.  Duty of Care —This is defined as “the amount of care that an ordinarily prudent person would exercise in a like position and under similar circumstances.” In practical application, this means that board members must exercise reasonable care when they make decisions for the organization.
  2.  Duty of Loyalty — This requires that board members keep the best interests of the organization in mind at all times when making decisions (e.g., avoiding conflicts of interest). 
  3.  Duty of Obedience — This requires that board members’ actions be consistent with the organization’s mission statement, articles of incorporation, bylaws and tax-exemption documentation. In other words, the not-for-profit’s central goals must guide all board decisions and, in addition, board members must comply with all applicable laws and regulations.

It is critical to provide thorough orientation training shortly after board members are elected. Have existing board members attend, too, for a refresher. Then provide ongoing training as needed.  Make sure the training covers federal and state laws as they relate to the duties of board members, as well as laws and regulations affecting the organization.

New York State AG Announces Lawsuit against Not-for-Profit Board - Part 1 of 2

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May 14, 2015

Collins_BrianBy Brian Collins, CPA

On April 9, 2015, New York State Attorney General Eric T. Schneiderman announced a lawsuit against the board of directors of two Brooklyn-based not-for-profits. The lawsuit alleges gross negligence and failed management of the not-for-profits. The organizations were intended to provide housing and support services for pregnant women, young mothers and their children. As set forth in the lawsuit, an investigation by the Attorney General’s Charities Bureau found that several board members listed property of the organizations for sale without necessary approval. Supreme Court Justice Genine D. Edwards granted the Attorney General’s Office a temporary restraining order earlier this week that freezes the organizations' assets.

The complaint also details evidence of several other alleged improprieties by the organizations’ board and its officers, including:

  • Unauthorized transfer of $80,000 from a charitable bank account directly into the personal account of the financial manager;
  • taking out two high-fee loans totaling $600,000;
  • forging the signature of the secretary of the board to authorize a high-fee loan, without the board member’s permission;
  • failing to pay the wages of their employees; and
  • neglecting corporate filings, including tax returns.

For the full Attorney General press release on the lawsuit, click here.

Look for part 2 of this blog titled “Governance Duties of a Not-for-Profit’s Board of Directors” for advice to all board members on how to avoid negative allegations against your not-for-profit similar to ones announced by Attorney General Schneiderman.

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