Accounting and Auditing Update

1. Accounting and Auditing Update Janet Brocklehurst, Partner Angela Cain, Senior Manager

2. Agenda • Legislative Developments • IRS Form 990 • Cost Allocation

3. Environment • Corporate Scandals • Sarbanes-Oxley Act • Charitable Scandals • United Way • American University

4. Issues Identified by IRS and Presented to Senate Finance Committee • Misuse of charitable entities to benefit the donor rather than the public good • Overstated charitable deductions by taxpayers most often involving non-cash contributions • Widely varying methods for determining the compensation of executives • Inconsistent and limited disclosure of governance practices

5. Congressional Intent vs. Charitable Community Self Regulation • Panel on Non-Profit Sector • Over 120 specific recommendations • Fall in three major categories • Governance • Transparency • Accountability

6. Overview of Panel’s Recommendations • The governing boards of charitable organizations must be more active • Audit Procedures • Conflict of Interest Policies • Travel Policies • Whistleblower Policies

7. Overview of Panel’s Recommendations • Greater transparency is needed to help the public make informed choices and to assist with government oversight and enforcement • Improve design of Form 990 • Mandated financial statement audits for organizations with revenues over $1,000,000 • Mandated financial statement reviews for organizations with revenues between $250,000 - $1,000,000

8. Overview of Panel’s Recommendations • Congress should strengthen laws to address abuse and clarify standards and penalties • Donor advised funds • Supporting organizations • Abusive tax shelters • Executive and Board compensation • All to protect against personal benefits to donors

9. Overview of Panel’s Recommendations • Enforcement of laws and regulations governing charitable organizations be strengthened • IRS is understaffed • Do away with laws that limit IRS sharing information with state Attorney Generals and other state charity officials

10. Legislative Status

11. IRS Form 990 Discussion • E-Filing • Require highest ranking officer to sign 990 • Organizations exempt from filing would be required to file basic contact and financial information • Revision of Form 990

12. Revision of Form 990 • Separate sections and schedules • More disclosure required on potential abusive items • Donor advised funds, financial awards, grants • More disclosure of executive compensation and benefits • Require same accounting method used to prepare audited financial statements

13. Functional Expenses • Requirements • Voluntary Health and Welfare Organizations • Cost Allocation

14. Cost Allocation • Functional expense reporting • Required in financial statements and IRS Form 990 • Program Services • Management and General • Fund-Raising • Reporting allocated indirect costs • OMB, Federal, State or Local agency requirements • Grant reimbursement • Unrelated business income

15. Cost Allocation – Indirect Costs • Salary and benefit cost • General and administrative • Human Resources department • Accounting department • IT department • Executive officers • Program directors and staff

16. Cost Allocation – Indirect Costs • Cost of operating and maintaining facilities • Utilities • Insurance • Repairs and maintenance • Building and equipment depreciation • Equipment leases

17. Cost Allocation Criteria In decreasing order of preference: • Cause and effect • Benefits received • Equitable or reasonable • Ability to bear

18. Cost Allocation Common Allocation Bases • Office support – Direct labor dollars or hours • Occupancy – Square footage • Data processing – Computer time

19. Contact Information Goodman & Company, L.L.P. 4510 Cox Road, Suite 200 Glen Allen, Virginia 23060 804-282-7636 jbrocklehurst@goodmanco.com acain@goodmanco.com