Accounting and auditing update VDA

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

Accounting and Auditing Update

Janet Brocklehurst, Partner

Angela Cain, Senior Manager

Agenda

• Legislative Developments

• IRS Form 990

• Cost Allocation

• Corporate Scandals

– Sarbanes-Oxley Act

• Charitable Scandals

– United Way

– American University

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

Congressional Intent vs Charitable Community Self Regulation

• Panel on Non-Profit Sector

• Over 120 specific recommendations

• Fall in three major categories

– Governance

– Transparency

– Accountability

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

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

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

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

Legislative Status

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

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

Functional Expenses

• Requirements

• Voluntary Health and Welfare Organizations

• Cost Allocation

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

Cost Allocation – Indirect Costs

• Salary and benefit cost

– General and administrative

– Human Resources department

– Accounting department

– IT department

– Executive officers

– Program directors and staff

Cost Allocation – Indirect Costs

• Cost of operating and maintaining facilities

– Utilities

– Insurance

– Repairs and maintenance

– Building and equipment depreciation

– Equipment leases

Cost Allocation Criteria

In decreasing order of preference:

• Cause and effect

• Benefits received

• Equitable or reasonable

• Ability to bear

Cost Allocation

Common Allocation Bases

• Office support – Direct labor dollars or hours

• Occupancy – Square footage

• Data processing – Computer time

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