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

Goals of This Session • A frank discussion on the proven required connections between 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

Ground Rules • No question is dumb except the one (s) not asked; but, 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…

Participant Mix • From all across the US • As of last week, – 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%

Assumptions of Participant Skills • That each of you has at least one program 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?

Over-Arching Theme • “Begin with the end in mind” • This is what should 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…

Big Brothers, Big Sisters - Philadelphia • What you see in the newspaper simply 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

But here’s the rest of the story. . • 23 million of spending disallowed 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.

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

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

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

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

Financial Health – Know it before you enter… • Do NOT wait until you 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?

Financial Health. . before you enter… • How many months of cash on hand? 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? )

How About YOU? • Do you feel confident, “kingly” about making such assessments? • 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?

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

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

Spending on HUMANS Means DOCUMENTATION! • Staffing – – Timesheets, timely & personally completed Spending on HUMANS Means DOCUMENTATION! • Staffing – – Timesheets, timely & personally completed – reflecting all time; signed as accurate; approved by manager; in B 4 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 – –

Spending on HUMANS Means DOCUMENTATION! (con’t) • Contractors – Qualifications Bidding process Form W-9 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

Financial Capacity Equals Depth • Grave misunderstanding that financial is 2 dimensional. • Financial 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

Financial Capacity Equals Depth • Multi-program organizations must have p&l reporting for each program 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. ) CDBG Staff Direct Indirect S 4 HHS 1 HHS 2 Other

Financial Capacity Also Means Balance Sheet Management • Does the contract require: – Separated, 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?

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

A Sample Program: Beginning with the End in Mind Real Life; Facts: • 10 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 $300 k debt, defunded by key funders; “game player” • ED sets goal of 5 years to 1 mill gov’t grant

First Year • Begins building Finance Committee & Board; seeks his own training, mentors 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

First Year (con’t) • Holds staff comp. while implementing year end bonus plan • 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

First Year (con’t) • Chart of accounts reworked; implemented “program” tracking for ALL programs 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

First Year (con’t) • Establishes annual budget process w/ full staff; monthly full F/S 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

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

Second Year (con’t) • No payments issued without key documentation in hand; no exceptions 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

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

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

Fourth Year • Development support & earned income in better mix; income = over 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

Fourth Year (con’t) • Budget process now extensive; starts with top-down, then bottom-up with 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

Fifth Year • Great Recession hits • Continued consistent behavior • More gifts, more Fifth Year • Great Recession hits • Continued consistent behavior • More gifts, more programs • Profit & cash increases • Application for $1. 7 mill to State

Sixth Year • Continued consistent behavior • More income, more programs, more profit, more 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

Sixth Year (con’t) • But staff love it there-all known as “winners, ” great 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

Seventh Year • Full A-133 audit, perfectly clean • State audit of documents, perfectly 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

What did they do right? So… • What did YOU catch them doing right? 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?

Questions? joannemh@yourbeancounters. com Questions? [email protected] com