THE A-B-C’s OF COMPLIANCE Matching The A sk to The B ooks to The C ontract

1. THE A-B-C’s OF COMPLIANCEMatching The Ask to The Books to The Contract Joanne Montagner-Hull CPA September 30, 2013

2. Goals of This Session • A frank discussion on the proven required connections between the development cycle, the accounting cycle, & the compliance • Do the right thing, your organization can keep doing the good works • Don’t – and it won’t

3. Ground Rules • No question is dumb except the one (s) not asked; but, in interests of time, let’s use the software to send in questions • All in this together, alone • No grades here; you are safe here • Participants on this webinar are from varied backgrounds, varied positions…

4. Participant Mix • From all across the US • As of last week, • Program officers 37% • Finance folk 20% • Leadership (including board) 18% • Development 8% • Other CDC positions 17%

5. Assumptions of Participant Skills • That each of you has at least one program that mandates contract compliance where failure would require repayment of funds • That each of you is in control of at least one critical part of the contract compliance, or • You are supervising the people who are directly in control of all the compliance • That most if not all of you are either subject to an A-133 audit already are will be. • RIGHT?

6. Over-Arching Theme • “Begin with the end in mind” • This is what should be driving your procedures, your methods, your processes • But you do NOT want this end like…

7. Big Brothers, Big Sisters - Philadelphia • What you see in the newspaper simply says, “Youth agency closed: Lack of funding shutters… Board decided to close at end of December.. Most of staff resigned first week of December

8. But here’s the rest of the story.. • 23 million of spending disallowed • But it was already spent • So what would YOU do if you were the board, responsible for the behaviors of results of the organization? Yes, you too would board it up.

9. 1st – The Explanation of Ask vs. Books vs. Contract

10. Compliance Requires Health:You cannot just “start” to perform. This behavior requires HABITS.

11. Compliance Requires Health:A weaker organization struggles to fulfill the challenges of contract compliance

12. PART 1: Assessing NPO Financial Strength • Sufficient unrestricted cash • Sufficient working capital • Healthy revenue mix • Diverse “customer” base • Assets managed • Risks managed • Quality, followed P&P to minimize risk • Adequate, quality oversight • Depth of staff & capacity

13. Financial Health – Know it before you enter… • Do NOT wait until you enter.. • Check things out ahead of time • Last two years’ audits • Last two years’ Form 990 • Clean opinions? • A-133 = No findings?

14. Financial Health .. before you enter… • How many months of cash on hand? • How dependent on funding sources? • How late was audit? • How many audit “issues”? Seriousness? • How many financial folks vs. complexities & # of programs? (Adequate capacity?)

15. How About YOU? • Do you feel confident, “kingly” about making such assessments? • Can you “read” an audit & 990 and see  items and  items? • Can you see the warning signs?

16. PART 2: Assessing NPO Financial Capacity • Depth of staff • Fullness & structure of policies & procedures • Depth of oversight • Depth of management • Are complexity of programs understood & planned for success? • Program data – capture & reporting

17. PART 2: Assessing NPO Financial Capacity • How many self-standing programs does NPO have? • Does its processes & procedures gather documentation, FOR EACH, FROM EACH CONTROL POINT, BEFORE any $ is spent? • Usually 70-80% of $ for human performance – • Are you getting what you need – before hand?

18. Spending on HUMANS Means DOCUMENTATION! • Staffing – • Timesheets, timely & personally completed – reflecting all time; signed as accurate; approved by manager; in B4 needed! • Processes to ensure no conflicts of interest, adequate qualifications, adequate background checks • Benefits? Drug free? • Consultants – • Qualifications • Bidding process • Form W-9 • Documentation of insurance, licensing, etc. • Invoices for time incurred at agreed-to rate

19. Spending on HUMANS Means DOCUMENTATION! (con’t) • Contractors – • Qualifications • Bidding process • Form W-9 • Documentation of licensing, insurance, bonding, workers’ compensation • Licensed staff? Background checks? Drug free? • Occupational health/safety performance • Contract (including Certificate of Insurance and other such requirements) • Billing processes per contact with performance proof & lien releases • Inspections satisfied • Documented change orders • Retainage

20. Financial Capacity Equals Depth • Grave misunderstanding that financial is 2-dimensional. • Financial reporting must be 3-dimensional. • Just like buildings, many features - height, layout, materials, design of space, change affect

21. Financial Capacity Equals Depth • Multi-program organizations must have p&l reporting for each program • A-133 requires this; cash & accrual basis, by federal budget line-item number • (This chart is highly simplistic. Accounts families, individual expense accounts, & underlying supporting documentation not listed here.)

22. Financial Capacity Also Means Balance Sheet Management • Does the contract require: • Separated, segregated cash? • If fixed assets purchased, must they be separately tagged as Property of Federal Government? (meaning, you must give it back at some point? Insured in between time? Etc.) • No encumbrances permitted on fixed assets? That means no borrowing! • Payroll tax impounds? Workers’ Comp impounds?

23. Financial Capacity Really Means… Does all your applicable, involved staff know exactly what the contract actually says? Do you?

24. A Sample Program: Beginning with the End in Mind Real Life; Facts: • 10 person NPO with ½ time bookkeeper w/o accounting degree • Founder left $300k debt, defunded by key funders; “game player” • ED sets goal of 5 years to 1mill gov’t grant

25. First Year • Begins building Finance Committee & Board; seeks his own training, mentors • Sits w/ key funders, gets advice; follows it • Many sits with Bkpr + staff, shares objective, sets goals; gets buy-in

26. First Year (con’t) • Holds staff comp. while implementing year end bonus plan • Fully implements payroll service with impounds • Actively seeks formal training for bookkeeper • Changes to “stronger” audit firm

27. First Year (con’t) • Chart of accounts reworked; implemented “program” tracking for ALL programs • No bill processed, recorded or paid (all 3) without required approval, account & program

28. First Year (con’t) • Establishes annual budget process w/ full staff; monthly full F/S issuance, accrual basis, with remainder of year forecast • Full f/s package reviewed in detail with Fin Com, monthly

29. Second Year • Debt restructured; 10 year repayment plan implemented • Finance Com. builds Financial P&P • Timesheets, payment request forms, vendor RFQ/RFP process starts

30. Second Year (con’t) • No payments issued without key documentation in hand; no exceptions • Timesheets & vendor sign-offs with Penalty of Perjury clause • Raising cash reserve

31. Third Year • Wins 2 $35K gov’t contracts, foundation support has tripled • All funders very excited about NPO deliverables in community; more applications in • Strategic plan

32. Third Year (con’t) • Audits now formality; all done by end of 4th month • Continually increasing programs with high performance & audit marks • All staff share in 

33. Fourth Year • Development support & earned income in better mix; income = over double last year of founder • Major players coming to board • Consistent restricted gift performance

34. Fourth Year (con’t) • Budget process now extensive; starts with top-down, then bottom-up with full staff buy-in; takes 3 months • Consistent performance on restricted gifts

35. Fifth Year • Great Recession hits • Continued consistent behavior • More gifts, more programs • Profit & cash increases • Application for $1.7 mill to State

36. Sixth Year • Continued consistent behavior • More income, more programs, more profit, more cash • Staff salaries still in lower ½; bonuses bring into middle of upper ½

37. Sixth Year(con’t) • But staff love it there-all known as “winners,” great @ what they do • Very low staff turnover • State awards 1.5 million

38. Seventh Year • Full A-133 audit, perfectly clean • State audit of documents, perfectly clean • All examiners loved 102 page Fin’l P&P AND how well it was followed

39. What did they do right? So… • What did YOU catch them doing right? • What would you have done differently? • What did YOU do to get YOU caught doing it right?

40. Questions? joannemh@yourbeancounters.com