Reading Financial Statements and Audits

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Reading Financial Statements and Audits

• American Legion Auxiliary October 3, 2005

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Why do I need to know this stuff?

• Board members are responsible for the
  organization survival, financial viability, and
  program success.
• Who are members of your nonprofit Board?

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Financial Responsibilities of the Nonprofit
Board

• Fiduciary . A trust held for the greater
  community. Custodians of something of value to
  the community.

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Financial Issues Board Members Should Address

• Financial Planning
• evaluation of existing potential resources
• examination of internal external forces
  affecting the organization funding
• examination of alternatives their financial
  implications

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Financial Issues Board Members Should Address

• Sufficient Available Cash
• Monthly cash projections to determine if there is
  adequate cash to cover expenses for the next
  month.
• Annually the budget should outline on a monthly
  basis the anticipated needed cash.

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Financial Issues Board Members Should Address

• Satisfactory Reserves
• Most experts recommend one year of operating
  expenses.

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Financial Issues Board Members Should Address

• Relationship Between Revenue and Expenses
• More revenue (income) than expenses thats a
  good thing!!
• More expenses than revenue. could be a bad
  thing, if you are using a significant amount of
  reserves or have no reserves!!

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Financial Issues Board Members Should Address

• Meeting the Budget
• Quarterly, at a minimum, the planned budget needs
  to be compared against the actual income and
  expenses.
• Address differences to ensure procedures are in
  place to improve planning and correct where
  necessary.

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Financial Issues Board Members Should Address

• Propriety of Expenditures
• Provide oversight to safeguard against waste and
  fraud.
• Provide oversight of contractual agreements to
  ensure organizations exempt status.
• Ensure internal control procedures in place and
  followed.

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Financial Issues Board Members Should Address

• Insuring Against Risks
• Is everyone who handles cash, checks, or
  investments bonded?
• Do you carry appropriate insurance to ensure that
  the organization can continue to function under
  adverse circumstances?

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Financial Issues Board Members Should Address

• Meeting Guidelines and Requirements Set by
  Funders
• Restricted gifts must be used for the purpose
  intended by the donor.
• Each restricted fund requires a separate
  accounting of expenses.

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Financial Issues Board Members Should Address

• Avoiding Conflicts of Interest
• Inappropriate financial gain by staff or
  volunteer from the organization.
• There should be a written and approved policy
  prohibiting conflict of interest.

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So.

• In order to fulfill those responsibilities ..
• you need to know how to read financial
  statements and audits!

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Understanding Nonprofit Financial Statements

• Statements of Financial Position ..
• AKA Balance Sheet
• Summarizes assets, liabilities, and net assets at
  a point in time (end of month, quarter, or fiscal
  year normally).
• Total assets balance with the sum of
  liabilities and net assets (AKA Fund Balances).

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Understanding Nonprofit Financial Statements

• Statement of Activities
• Summarizes revenue and expenses within each
  fund during the period being reviewed.

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Understanding Nonprofit Financial Statements

• Statement of Cash Flows
• Categorizes revenue and expenditures based on
  three types of activities operating, investing,
  and financing.

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Understanding Nonprofit Financial Statements

• Annual Financial Statements
• Independent auditors report
• Statement of financial position
• Statement of activity
• Statement of functional expenses
• Statement of cash flows
• Notes to financial statements
• Supplementary information if needed

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Understanding Nonprofit Financial Statements

• Independent Auditor's report
• By law, must be done by outside certified public
  accountant, with financial information provided
  by organization.
• Includes a letter to the Board describing their
  analysis of the fairness of the financial
  statements and if they conform to generally
  acceptable accounting practices (GAAP).

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Understanding Nonprofit Financial Statements

• Independent Auditor's Report will also include
• Notes to Financial Statements
• Supplementary information
• Management Discussion and Analysis

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Understanding Nonprofit Financial Statements

• Board Response to Audit
• The auditor reports to the Board not to the
  staff.
• The Board hires the auditor to provide an
  independent oversight must ensure that the
  auditor works for the Board.
• The Board should discuss the financial statement
  with the auditor ask about any unusual
  situations or questionable figures.

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Purchasing Financial Software

• American Legion Auxiliary March 1, 2006

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Where to start????

• You need to analyze to what detail is the
  tracking and reporting you need.
• The more restricted income streams you have the
  more requirements for tracking.
• Know how many transactions (deposits payments)
  you make each month.
• Determine the expertise level of staff who will
  be using software.
• Understand the capacity of your hardware for
  software requirements.

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How to select software

• Talk to
• your auditors about their experience and what
  they would recommend to meet your needs.
• other organizations, about the same financial
  size, to get suggestions.
• college instructors who teach financial classes.

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How to select software

• Experiment with trial packages online at vendor
  sites.
• Visit www.findaccountingsoftware.com and search
  for nonprofit accounting.

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Resources

• BoardSource www.boardsource.org
• National Council of Nonprofit Associations
  www.ncna.org
• State organizations for the nonprofit sector that
  often have workshops other materials.
• Wiley www.wiley.com
• Jossey Bass www.josseybass.com
• Pfeiffer www.pfeiffer.com