Category: Meetings

January 2017 Meeting: Best Practices and What’s New with Procurement Compliance

NPFM

Best Practices and What’s New with Procurement Compliance

The focal point of the presentation was new procurement requirements for organizations receiving federal grants. Explanation of the standards anchored a broader discussion of best practices for procurement.

The Uniform Guidance (“UG”) containing procurement and contract standards is under Title 2 of the U.S. Code of Federal Regulations (CFR), Part 200: “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.” (See Subpart D and Appendix II)

See also: Federal Register – notice regarding the final guidance, 12/26/13

The UG sets forth revised guidelines for the procurement of goods, services, and property using federal funds. The standards apply only to direct expense charged to federal awards, not to procurements allocated to a grant as part of indirect costs. The revision primarily affects grantees that are subject to A-110, namely, educational institutions and nonprofits.

One change is semantic: Under the new guidance, “must” signifies a requirement, whereas “should” (which formerly marked a requirement) now indicates a recommendation.

Major provisions and changes were highlighted:

  • New provision covering conflicts of interest with parent, affiliate or subsidiary organizations
  • Requirement for more detailed record-keeping around procurement (which may be construed as a nudge toward digital records; doing this on paper will likely prove onerous)
  • Focus on adequate competition for contracts
  • A new framework for cost and price evaluation, and new thresholds for mandated methods of procurement
  • Provisions for small and minority-owned businesses
  • Standards for contracts involving pass-through entities

Grantees were given a two-year grace period to implement the guidance on procurement, and the expiration of the grace period depends on your fiscal year. For December 31 year-ends, the grace period ended 12/31/16, and the standards should have been implemented by 1/1/17. If you have a June 30 fiscal year end, you need to implement the standards fully by 7/1/17. If you relied on the grace period, you should have documentation on file that your policy-making body (e.g., your board) elected to do so – it does not need to be submitted, just recorded.

If you receive federal grants, your written policy must comply with the guidance as of the deadline, and from that point on, you need to document compliance with your policy.

When procuring property or services with federal funds, states must follow the same policies they use for procurement with non-federal funds. Nonprofits using federal funds – including those receiving federal funds through the state – need to adhere to the new UG.

Under the new standards, there is an emphasis on adopting well-documented procedures that conform to the guidance, and maintaining oversight to ensure actual compliance with contracts and purchase orders. As part of an overall orientation toward cost containment, the guidance mandates avoidance of superfluous or redundant purchases. In addition, the conflict of interest provisions were strengthened and extended to related organizations, and the standards mandate disciplinary action when procurement standards are flouted or neglected.

The standards encourage the use of federal surplus property in place of new purchases. Also, grant recipients are asked to make use of value engineering clauses in major construction projects. Time and material contracts are acceptable only if other types of contracts are not suitable, and if used, require closer oversight. The overarching theme is cost containment.

The new standards reflect an effort to eliminate favoritism, and to ensure full and open competition. For example, if a contractor is involved in drafting standards or specifications for a contract, they are barred from competing for that contract. In general, organizations need to keep detailed records of the procurement process, including why a method was chosen, what drove particular decisions, and how costs were negotiated. Practices that unnecessarily restrict competition are to be avoided. Geographical preferences cannot be applied, except where mandated by federal standards, such as with architects and engineers who need local expertise. If you use prequalified lists of vendors or suppliers, the lists should include enough options to ensure competition, and should be reviewed regularly.

As a general rule, the scale of procurement dictates the method used. Note that the threshold applies to the aggregate amount directly allocated to a federal contract, and excludes charges from the contractor or supplier that do not involve federal funding.

  • Micro-purchases (under $3K, in the aggregate)
    • Should be distributed equitably among qualified suppliers, to the extent practical
    • If the price is reasonable, these purchases do not require competitive quotes
    • Cost analysis not required
  • Small purchases ($3K-$150K)
    • Must document that quotations were gotten from an “adequate number” of sources, which should be defined by your policy
    • Methods of obtaining quotes should be spelled out in your policy
    • Cost analysis not required
  • Sealed bids (over $150K)
    • Request for bids must be publicly advertised; must define deliverables; and must indicate when and where the bids will be opened.
    • Lowest responsible bidder wins fixed-price contract
    • Sealed bids are the preferred method for construction projects
  • Competitive proposals (over $150K)
    • RFPs must be publicized; must spell out all evaluation criteria; and must be submitted to an “adequate” number of sources, as defined in your policy.
    • Method of technical evaluation and selection must be recorded before process starts
    • Must be more than one source
    • Contract is awarded to proposal that is evaluated most advantageous; factors other than cost and price can be considered
    • Can be either fixed price or cost-reimbursement
    • Competitive proposals are used only when sealed bids are not appropriate
  • Noncompetitive proposals (sole source), regardless of size, must meet at least one of these conditions:
    • The product or service is only available from one source
    • A public exigency or emergency does not allow a competitive process
    • The federal department has approved a written request for a noncompetitive proposal
    • After multiple sources are solicited, competition is judged inadequate

There is more flexibility for purchases below the “Simplified Acquisition Threshold” of $150K. Above that level, you must record a cost or price analysis for every procurement, including modification. In the case of single bid contracts, you must negotiate profit as part of the price. Cost estimates must be reasonable, and are permitted only if allowed under the UG Cost Principle (Subpart E). Cost plus percentage and percentage of construction cost methods are not allowed.

Nonprofits must take affirmative steps to use small and minority businesses (SMB), women’s business enterprises (WBE), and labor surplus area firms.

  • Solicit qualified SMB and WBE whenever possible, and include them on any standing lists
  • Break requirements into smaller packages, to create more opportunities for participation
  • Set project schedules to encourage SMB and WBE participation
  • Tap agencies (e.g., SBA) that promote SMB and WBE businesses
  • Require the prime contractor to adopt these steps when subcontracting

Where pass-through entities are involved, the nonprofit must make technical specifications and procurement documents available to both the federal agency and the pass-through entity. If either the federal agency or the pass-through entity decides that your procurement system complies with the UG, your organization is exempt from pre-procurement review.

Best practices for procurement:

  • Familiarize yourself with the procurement requirements contained in:
  • Understand all contracts – not just federal – for your programs
  • Place procurement in the context of your organization’s culture and experience
  • Review and revise your policies in the context of the requirements flowing from all of your contracts
  • Clearly define roles and responsibilities in policy and practice
  • Train staff on the parts of the procurement process that they are involved in
  • After an implementation period, evaluate the effectiveness of your procedures
  • Ensure that your procurement policy covers all requirements discussed in this presentation in addition to other issues, such as evaluation, disputes, and claims. Some of the key policies and procedures in the context of federal standards are:
    • Conflict of Interest (§ 200.112)
    • Mandatory Disclosures (§ 200.113)
    • Financial Management (§ 200.302)
    • Internal Controls (§ 200.303)
    • Procurement Standards (§ 200.117)
    • Sub-recipient Monitoring (§ 200.331)
    • Personnel Compensation (§ 200.430)
  • Put a working system in place for documenting compliance with your procurement policy

Other resources provided at the presentation: Links to procurement resources, links to federal agency-specific requirements.

Carla McCall is co-managing partner of AAFCPAs and specializes in providing assurance, tax, and business consulting services to sophisticated nonprofit organizations and closely-held companies. Carla’s diverse client base includes health care, arts and cultural, affordable housing, manufacturing and distribution. Carla advises her clients in the specialty areas of revenue recognition, stock option plans, and government contract compliance. She has extensive experience with federal, state and other regulatory compliance requirements of nonprofit organizations.

Hui-Ting is a manager at AAFCPAs and has audit and tax experience with various types of nonprofit organizations, including community development corporations and their development projects with HUD and MHFA requirements, nursing homes, health centers, educational institutions, and social services and behavioral health agencies. She also provides audits in accordance with Uniform Guidance/Single Audit and Government Auditing Standards.

 

 

 

December 1 Meeting 2016: Common Errors in Financial Statement Preparation And how to Avoid Them

NPFM

Alexandria Regan, Partner at Citrin Cooperman, gave a presentation  about some of the most common errors found in not-for-profit financial statements, the impact that these errors could have on financial statements, and how to avoid errors in financial reporting, including reduction of adjusting entries during your audit. Alex is a an auditor and has over 21 years of experience working with non-profits.

Financial Statements are the responsibility of the organization that is being audited. The number of audit adjusting journal entries that are included in the final audit documents is an indicator of the adequacy of the organization’s internal controls. During the planning stage of the audit, management should use the previous years’ audited statements as a guide. Ask your auditor for advice about any complicated transactions that you are unsure of and try to resolve any issues before you send the final trial balance to the auditors for the audit.

The first area that Alex discussed where mistakes are commonly made, is revenue recognition.  There are various forms of revenue and sometimes there is a grey area when it comes to categorizing the type of revenue.  One of those areas is   contributions versus exchange transitions.  A contribution involves the donor making a donation to support the recipient’s programs, the donor determines the amount and delivery method of the payment, and the recipient is not penalized for non-performance.  An exchange transaction is more of a fee for service arrangement.  A cost reimbursement contract is an exchange transaction.  The resource provider makes it clear that it is making payment in exchange for certain benefits or outcomes, determines the delivery method and amount of payment, and the recipient can be penalized for non-performance.

Contributions can be either unconditional or conditional.  The organizational will recognize unconditional contributions when they occur, but it can only recognize conditional contributions when the conditions are met.  Another distinction occurs between intentions to give and promises to give. Intentions to give are not recorded until the contribution is received (such as inclusion in a will). Promises to give are subject to a different standard.  An example would be if a grant is promised over a 5 year period, but you have to match it – then you should not book it until the match is achieved.  Contributions or pledges receivable that are paid by donor advised funds should not be recognized until payment is received. If an organization receives a 5 year unconditional pledge, then you can book it as a temporary restricted asset. You should use a risk adjusted discount rate (present value calculation). The rate should be determined at the date the promise is initially recognized and should not be subsequently revised.  Please be aware the multi-year pledges are subject to an implicit time restrictions even if the donation is unrestricted for general operations. Multiyear grants should be released according to the due date schedule included in the grant. If expenses are incurred for which both restricted and unrestricted revenue is available, you should book the restricted revenue first.  Also, it is not possible to release funds greater than the net asset class balance even if you anticipate future funds.  Board designated net assets are recorded as temporarily or permanently restricted net assets However, even if funds are designated or restricted for a purpose by the Board, they are still unrestricted for GAAP purposes. Keep in mind that only donors can impose restrictions that create temporary or permanently restricted net assets.

Other common mistakes on financial statement is the failure to account for an operating lease in a straight-line basis; failure to report fundraising expenses fully; failure to report gifts-in-kind; and the failure to include a statement of functional expenses when required.

The PDF of her presentation is here: npfm-presentation-12-1-16

October 2016 Meeting: Background Checks: the Who, What, When, Where, How & Why

NPFM

What we covered:

  1. Why should you background check?
  2. Who should you background check?
  3. When should you do it in the hiring process?
  4. What should you check for?
  5. How should you go about it?
  6. What if you find negative information and don’t want to hire?

Dave Wilson, a partner at Hirsch Roberts Weinstein LLP, who advises businesses and non-profits on employment matters, gave a presentation on how to navigate the Commonwealth’s CORI and non-discrimination laws in the hiring process.  Kimberly Napoli from the same firm assisted with the presentation. He covered the following areas: 1) why should you background check?  2) Who should you background check?  3) When should you do it in the hiring process? 4) What should you check for? 5) How should you go about it? And 6) What if you find negative information and don’t want to hire?
According David and Kimberly, the new Massachusetts CORI Law went into effect in 2009, which triggered taking any kind of criminal record questions off the job application.  The new sequence of hiring is:  applicant fills out the initial written application form with no questions about criminal background, applicant takes skills assessment test (if applicable), and then applicant interviews for the job.  Doing a telephone screening first can save time. After an interview, you can have the applicant fill out a Supplemental Application Form, which can include questions about criminal background.   The next step is to make the job offer, conditional on a satisfactory CORI (Criminal Offender Record Information) check.  The employer then gets the applicant’s written permission for the CORI check and other background screening checks (such as a credit check).

ICORI is the on-line method for doing CORI checks.  If you use this site, you need to put in the exact name of the person you are checking.  In general, you can check the background of a prospective employee, but you cannot ask about salary history. You can ask what his/her preferred salary range is.  If you get a CORI back with an issue on it, the best practice is to give the applicant “Due Process” – ask them to explain the issue.  It could be something that happened a long time ago when they were a teenager, etc. You must provide a copy of the CORI to the applicant. If you are considering not proceeding with the employment based on negative information in the CORI, then your company should send out a “pre-adverse action disclosure letter” to the applicant.  A company is not allowed to make a negative hiring decision based on a CORI without discussing it with the applicant first.  So the next step is to have further discussion with the candidate, then make a decision, inform the candidate, send out a “post-adverse action disclosure” letter if you use an outside background check service, and then hire or no hire.  One helpful hint would be to have someone else besides the person doing the hiring, do a Google and Facebook search on the candidate for all those who will be called in for final interviews.

David and Kimberly pointed out some practices that are important.  It is very important to have applicant fill out a written formal application form.  The applicant by signing the document is stating that everything in the application is true, and if it turns out not to be true, then that is grounds for firing the person later on if necessary.  Also, even though it is more costly, it is a better practice to use a 3rd party vendors to do the background checks.  It is very important to do background checks, especially for some positions. It is better to screen unsuitable applicant out early in the process. It is also very important that an employer be fair and reasonable when dealing with applicants.   Always give applicants and employees due process. For references, you should ask the applicant for the names of their past supervisors and ask his/her permission to talk to them.  Better yet, you should ask the applicant to actually set-up the call with their former supervisors for you.  Also, when making the call, you should state your questions upfront.  Good reference questions are:  What did the person do at your company? What did the person do well?  What were some areas that needed improvements, and rate the persons as an effective employee form one to ten? If you have questions about using CORI, you can go to the DCJIS website (http://www.mass.gov/eopss/agencies/dcjis/ to access publications with step by step instructions.

September 2016 Meeting: Exempt and Non-exempt Employees: Finding the Right Staffing and Compensation Strategy for your Organization

NPFM

Date: September 29, 2016

December 1, 2016, the new DOL regulations governing non-exempt employee compensation go into effect.  We first reviewed these changes last May.  We decided to dive in deeper and review how our employees should be classified as well as how well we apply the exempt duties test in each of our organizations.

How does one analyze and develop a solid staffing and compensation strategy around exempt and non-exempt employees?

The presentation began with a quick overview of FLSA overtime requirements, focusing on the 2004 regulations & the duties tests for the categories of white-collar employees exempt from overtime, namely: executive, administrative, professional, outside sales, and computer professionals. To qualify under the “professional” category, a job needs to require an advanced degree beyond a bachelor’s (such as an MD, JD, etc.), reflected in its scope and level of responsibilities. There was discussion about when a master’s degree would qualify. We were cautioned that the “administrative” exemption has been prone to misuse. To qualify for this exemption, an employee needs to exercise independent judgment and discretion with respect to “matters of significance,” such as strategy, establishing budgets, hiring & firing…. The category does not, for example, usually extend to administrative assistants. It might, however, be appropriate for a CFO or Finance Director, even one without an M.B.A.  The duties and extent of independent authority and discretion are determinative.

This was followed by a summary of the Department of Labor’s new regulations for overtime eligibility, which go into effect December 1, 2016. The most immediately obvious of the changes are higher salary thresholds for overtime exemption and the “highly compensated employee” test. To be considered for exempt status, an employee will need to draw a salary of at least $913 per week ($47,476 annually), a threshold more than double the current cutoff. In addition, the employee would need to pass the duties test–as described above–which remains unchanged. The annual salary threshold for highly compensated employees, who are automatically exempt from overtime rules, will rise to $134,004. The new rules also set forth a mechanism for the thresholds to be adjusted every three years, and include provisions for counting certain bonuses and incentive pay as part of qualifying salary.

There are two important features of the new $913 threshold. First, an employee must earn at least $913 every week, not merely on average over the course of the year. Secondly, the floor applies to the employee’s actual salary, not prorated for hours worked. Whether an employee works 20 hours a week or 40, she must earn $913/week or more to meet the new salary test.

Up to 10% of the salary counting toward the minimum can take the form of nondiscretionary bonuses, incentive pay, and commissions. To qualify, any such compensation must be paid out at least quarterly. An annual discretionary bonus, for example, would fail to qualify on two counts.

There was some discussion about the nonprofit exemption for organizations and individuals. It does not cover the vast majority of cases, because to apply, both the Massachusetts organizational test and federal enterprise or individual tests must be met. The individual test is quite restrictive, due to a broad interpretation of “interstate commerce.”

To comply with the new regulations, an employer might consider a number of options regarding employees who currently earn less than $913/week, including:
Raise salaries to meet or exceed the threshold
Is someone earning close to that amount already?
Are they earning bonuses or commissions that get them close?
Would they otherwise be logging a large amount of overtime hours?
Reclassify them as non-exempt, and pay time-and-a-half for overtime
Are they earning well below the threshold?
Would raising their salaries result in problematic pay compression?
Are they unlikely to log overtime?

Organizations are adapting by reclassifying employees as non-exempt, but adjusting wages so that employee’s total pay, including overtime, would stay about the same.

It was noted that non-exempt salaried employees may still be paid on a salaried rather than hourly wage basis, as long as they are paid overtime wages for any hours over 40 per week and agree to the arrangement. So an employee who works variable hours can be a salaried non-exempt employee so long as the overall salary satisfies minimum wage for all hours worked and hourly overtime would be applied when the hours worked exceeded 40. However in that case, it would be strongly advised to obtain a written agreement from the employee (such as acceptance of an offer letter) specifying that they are to be paid on a salaried basis.

Above all, these new rules are an excellent opportunity to clean house: do a thorough audit of actual current job duties and job descriptions; track hours worked; review policies on work hours, scheduling and telecommuting; etc. If you need to change your compensation structure or policies, the DOL rules will serve as a concrete starting point for communicating changes to employees.

 

Presenter: Elizabeth Levine, Esq. has significant non-profit experience and will lead a discussion of these and related issues.  Counsel in Goulston & Storr’s litigation practice, her practice focuses on proactively counseling employers with respect to personnel policies and other employment law related matters as well as defending organizations in litigation.

June 2016 Meeting: What Story Do Net Assets Tell About Your Organization and How to Explain it to Your Board

NPFM
Net Asset classifications are unique to nonprofit organizations and frequently management and board members do not have the financial literacy skills to interpret this information.  The senior finance staff member is often the only one available to educate the ED and the Board. It can be particularly challenging with board members that only have experience in the for-profit sector. The net asset classifications can provide insight into an organization’s revenue mix, available capital, overall financial condition, and ultimately, stability and sustainability.  Ed Mulherin from Ecratchit explained the unrestricted, temporarily restricted, and permanently restricted net asset classifications that appear on nonprofit financial statements, how to interpret this information, and provide some tips on how to explain it all to your Board.  Edward M. Mulherin, CPA, Esquire is Founder & CEO of eCratchit.  Ed has over 30 years of experience providing accounting and business consulting services to a variety of clients. In 2001, Ed founded eCratchit, which provides web-based bookkeeping and accounting services.  Ed has been the Virtual CFO for dozens of companies over the past 10 years providing strategic financial thinking, consulting on issues of cash flow, nonprofit sustainability; short and long term financial planning, banking and financing issues.
It is very important for the Management and Development teams of an organization to have a firm understanding of the concept of what net assets mean and how to explain it to the Board of Directors.  Net assets are comprised of Unrestricted Assets, Board Designated Reserves, Temporary Restricted Assets, and Permanently Restricted Assets. When a donor give funds to an agency, those funds will be classified as 1) unrestricted; 2) temporary restricted; or 3) permanently restricted, which can be set up as an endowment. Board designated funds can be restricted or unrestricted. When looking at the Statement of Activities in the Financial Statements, you should focus on the unrestricted column.  You should also do a monthly Actual to Budget statement, showing the variance between the two.  The Temp Restricted column on this Statement shows funds that are not currently available but it demonstrates strength for future periods. Over time, the temp restricted column will go up or down, depending on whether you receive new funds or bring existing funds into the operating fund.   Temporary Restricted Funds are those funds restricted by the donor to spend for a specific purpose or program or restricted to a certain time period.  According to Ed Mulherin, a good rule of thumb is to release funds from Temp Restricted  “early and often – get it out of Temp Restricted,” otherwise it can get stuck in the category.  If you are not sure whether you can bring certain temp restricted funds into operations, ask your auditor.  However, another rule of thumb is “don’t release it if you have not received it yet.”
On many occasions, the Development Team and the Finance Team are not aligned on terminology and goals when categorizing and managing funds.   The two teams need to be on the same page as to what temp restricted means, how the funds are handled, and when they can be released into operations.   Finance and Development should reconcile monthly in the following areas:  pledges, temp restricted, and unrestricted operating revenue.   As mentioned earlier, Board Designated funds can be restricted or unrestricted.  Sometimes it is a matter of form over function – the fact that the funds are Board designated informs the reader of the financial statements that the Board has acted to limit the use of the funds and this might also appeal to certain funders.
Establishing the appropriate level of reserves funds for you agency depends on a number of factors.  It depends on the size of the organization, the volatility of your funding, and the ability of your agency to raise funds quickly.  A good rule is to have at least 6 months s’ worth of opera ting reserves on hand at all times.  You can use temp restricted funds as working capital, but you need to have sufficient funds to cover for its use this way. Finally, it is very important to have a strong balance sheet. When management, the Board, or interested parties look at your balance sheet, they get a good sense of how the organization is doing by looking at the Net Assets line.
 Edward M. Mulherin, CPA, Esquire is Founder & CEO of eCratchit.  Ed has over 30 years of experience providing accounting and business consulting services to a variety of clients. In 2001, Ed founded eCratchit, which provides web-based bookkeeping and accounting services.  Ed has been the Virtual CFO for dozens of companies over the past 10 years providing strategic financial thinking, consulting on issues of cash flow, nonprofit sustainability, short and long term financial planning, banking and financing issues.