Essentials of Accounting for Governmental and Not-for-Profit Organizations

1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 13: Auditing; Tax Issues for Exempt Entities; Service Efforts and Accomplishments

2. Overview of Chapter 13 • Auditing GNP organizations • Tax issues for nonprofit organizations • Reporting Service Efforts and Accomplishments (SEA Measures)

3. Financial Statement Audits • Financial statement audits help assure quality financial statements and provide oversight of government and nonprofit moneys -- these are the most common type of audit. • Financial stmt audits involve • examination of transactions on a test basis, • forming judgments about internal controls and compliance with laws and regulations, and • rendering an opinion about whether the financial statements are prepared fairly in accordance with GAAP.

4. Financial Statement Audits • Financial stmt audits may be conducted in accordance with • AICPA basic generally accepted auditing standards (GAAS), • GAO (General Accounting Office) generally accepted governmental auditing standards (GAGAS), • OMB (Office of Management and Budget) single audit standards. • GAGAS and Single Audit standards are written by the US federal government, but may apply to many SLGs and NFP organizations as well.

5. Other types of audits • Financial related audits -- • are a subset of a full financial stmt audit -- may look at only specific financial items or at internal controls or compliance only • Performance Audits • Economy and efficiency audits -- • involve aspects of appropriate acquisition, use, and safeguarding of resources • Program audits -- • assess the degree to which mission objectives have been achieved while adhering to applicable laws and regulations

6. Purpose of Single Audits • Before 1984, SLGs and NFPs receiving financial aid from several different federal agencies, had multiple audits. • The initial Single Audit Act sought to impose one set of stringent audit guidelines so that only one audit would have to be conducted to satisfy multiple grantor agencies.

7. Single Audits • The initial Single Audit Acts in OMB circulars A-128 and A-133 required a single audit if federal financial assistance was over $100,000. • In 1996 A-133 was revised and replaced A-128 . The current threshold for a single audit is federal financial assistance EXPENDITURES of over $300,000. • If federal assistance > $300,000 but is all from one agency, a program audit may be used instead of a single audit.

8. Supervision of Single Audits • Oversight agency • Agency with largest grants receive audit reports • Cognizant agency • Auditees with $25 M or more of federal awards are monitored by a cognizant agency -- agency with largest grants normally selected • Compliance supplement -- includes any special guidelines for particular grants

9. Audit process • Must consider effect of pass-through entities and subrecipients • Must identify MAJOR programs • Group programs using risk-based approach • Type A - larger programs • Type B - smaller programs and low risk large programs • Type A programs receive closer auditing than Type B’s

10. Primary Single Audit Reports • Opinion on basic financial statements • Report on general internal control and compliance with laws and regulations • Report on internal controls in federal programs • Opinion on compliance for major programs • Opinion on Schedule of Federal Awards

11. Types of Audit Opinions on Overall Statements • Unqualified -- • Statements appear to be in conformity with GAAP -- no “ifs, ands, or but” exception type of qualifying language. • Qualified - • Largely in conformity with GAAP except for some specified item(s). • Adverse - • Not in accordance with GAAP. • Disclaimer - • Not able to express an opinion, usually because auditor was precluded from doing some necessary procedure.

12. Distribution of Reports • Reports are given to oversight or cognizant agency • In addition, condensed Data Collection Form information is submitted to a Federal Clearing House

13. Tax Issues for Exempt Organizations • Most nonprofits file IRS form 1023 to claim exemption from federal taxes on income earned from their main mission. • Local law may also allow exemptions from sales tax and property tax. • Most NFPs must still file an IRS Form 990 information return if gross receipts are over $25,000. • NFPs with over $1000 of unrelated business income file Form 990-T. • Other reports may be filed with the state.

14. 501(c)(3) organizations • The tax code specifies several different classes of nonprofit organizations by purpose. • The most common types are 501(c)(3) organizations • Include religious, charitable, scientific, literary, educational, amateur sports organizations, orgs for prevent of cruelty to children or animals. • Requires that no dividends be paid and no substantial political activity. • 501(c)(3)’s status allows donors to take a charitable deduction on their U.S. tax return for donations.

15. Form 990 Information Return • Requires financial statement information similar to that required by GAAP. • Also reveals information about compensation of highest paid employees and contractors. • Form 990 often subject to state freedom of information laws -- must be made available to those who request it -- commonly posted to a web site. • Also asks questions to make sure the organization is still operating in accordance with its exempt mission.

16. Unrelated Business Income Tax • Even unrelated business income will be exempt from income tax if • Not carried on regularly • Run by volunteers • Involves sales of donated items • Operated for convenience of employees and patrons. • Given specific exemption: • Royalties, dividends, interest and annuities • Research revenues • Income from public entertainment at a fair • Revenues from labor, ag, business trade shows • Income from rental or exchange of membership lists

17. Service Efforts and Accomplishments • Because the bottom line does not tell the whole story of NFP mission accomplishment, the GASB is experimenting with developing other measures, some nonfinancial in nature. • Examples include crime statistics, lane-mile of highways maintained, cost per student, etc. • Efficiency measures relate costs to outcomes • For example, cost per student graduated within five years of college enrollment. • Trade off of relevancy and reliability of these statistics -- may be a tendency to report only positive statistics.

18. Slides prepared by • Dr. Louella Moore • Arkansas State University