Governance: Financial Oversight

6th in a Series

Financial OversightAs a follow-up to our initial tax tip in this series entitled “Governance Issues for Tax-Exempt Organizations”, which was released on April 25, 2012, WithumSmith+Brown has compiled a list of what we believe to be “best practices” with respect to each topic included in the Federal Form 14114, Governance Check Sheet. This tax tip focuses on Form 14114, Part 6, Financial Oversight.

FEDERAL FORM 14114, PART VI, FINANCIAL OVERSIGHT

Questions 19 through 23 of Federal Form 14114, Part VI, address issues with respect to an organization’s financial oversight. Outlined below are the questions included in the Financial Oversight section of the Governance Check Sheet:

Question 19: Are there systems or procedures in place intended to make sure assets are properly used, consistent with the organization’s mission?

Question 20a: How often did the organization provide board members with written reports of the organization’s financial activities?

Question 20b: How often did the board discuss/consider reports of the organization’s financial activities?

Question 21: Prior to filing, was the Form 990 reviewed by the full board and/or a designated committee?

Question 22: During the primary year under examination, was an independent accountant’s report prepared? If yes, was the accountant’s report discussed/considered by the full board and/or a designated committee?

Question 23: Was a management letter prepared by the independent accountant? If yes, was the management letter reviewed by the full board and/or a designated committee and did the organization adopt any of the recommendations contained in the management letter?

FEDERAL FORM 990 AND FINANCIAL OVERSIGHT

Copies of the IRS Form 990; IRS Not-for-Profit Governance Best Practices document and Federal Form 14114, Governance Check Sheet can each be accessed at the healthcare services section of our Firm’s website.

The Federal Form 990, Return of Organization Exempt from Income Tax, addresses financial oversight in various sections.

Core Form, Part VI, Governance, Management and Disclosure, includes question 11 in Section B, Policies, which asks whether or not the organization provided a full copy of the Form 990 in final form to each member of its governing body for review prior to filing with the Internal Revenue Service (“IRS”). In addition, organizations are required to describe their Form 990 review and approval process in Schedule O.

Core Form, Part VI, Section C of the Form 990 requires a tax-exempt organization to list the name, physical address and telephone number of the person who is in possession of the organization’s books and records.

Core Form, Part XII, Financial Statements and Reporting, includes questions pertaining to an organization’s accounting method used and whether or not that method has changed during the year. Additionally, the Form 990 asks whether the organization’s financial statements were compiled, reviewed or audited by an independent accountant, whether or not the organization has a committee which assumes the responsibility for the oversight of this process and the selection of an independent auditor and, finally, whether or not the oversight process for the annual audit, compilation or review has changed during the year.

WS+B RECOMMENDED BEST PRACTICES

Directors must maintain a careful stewardship over a tax-exempt organization’s resources. The board, either directly or through an appointed committee, should ensure that all financial resources are used to further the organization’s exempt purpose and that there is appropriate accounting for all funds. Organizations need to be aware that they need to operate consistently with their tax-exempt purpose as outlined in their Federal Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, for which the IRS granted tax-exempt status originally. In the event a tax-exempt organization engages in new activities not originally included with its Form 1023, notification should be provided to the IRS to ensure that tax-exempt status is not jeopardized.

As a “best practice”, tax-exempt organizations should provide each board member with a written report of the organization’s financial activities at each scheduled board meeting. Depending on the size and type of tax-exempt organization, ideally, board meetings should be held on a monthly basis, however, tax-exempt organizations should meet on at least a bi-monthly basis to ensure proper financial oversight of its activities and operations. This will provide each board member with timely information with respect to a tax-exempt organization’s current financial activities and operations and will enable them to make informed decisions with respect to the future activities and operations of the organization.

As a “best practice” associated with the composition of a tax-exempt organization’s governing body, we recommend that the governing body include a certified public accountant (“CPA”). This CPA should also be a member of the tax-exempt organization’s audit committee.

With respect to the Form 990, we believe that as a “best practice”, a tax-exempt organization should have a detailed review of the Form 990 done at a committee level, preferably audit or finance. This review should include a presentation by the firm that prepared the Form 990. Following this review and prior to filing with the IRS, the audit or finance committee chairperson should report to the organization’s full governing body that the committee has completed a detailed review of the Form 990. Thereafter, a complete copy of the final Form 990 should be provided to each member of the organization’s full governing body, in paper or electronic form. This will give each board member the opportunity to review the form and discuss any comments or questions they may have prior to it being filed. In addition, each board member will be educated with respect to the information disclosed in the Form 990.

As an additional “best practice”, a committee of a tax-exempt organization’s governing body, preferably an audit committee, should be given the responsibility for the oversight of its annual audit, compilation or review process. Any report prepared by an independent accountant, including any management letter with recommendations, should be reviewed by the committee of the board. Similar to the Form 990 review process outlined above, the committee chairperson should report to the full board that the committee has reviewed the report and provide a copy of the final report and associated management letter to each voting member of the organization’s governing body for their consideration prior to issuance. Any recommendations included in the management letter should be discussed along with the necessary steps to adopt and implement these recommendations.

As outlined in our original tax tip in this series, the IRS has stated that the check sheet information will ultimately be used as part of a long-term study to gain greater awareness of the relationship between tax compliance and effective governance practices with respect to tax-exempt organizations. The check sheet is now used and completed by all EO Revenue Agents in the examination of an Internal Revenue Code §501(c)(3) public charity. Given the IRS EO focus on the governance practices of tax-exempt organizations we recommend that each organization complete the Form 14114 annually as part of its tax compliance plan.

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