KLR Mission Matters Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

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Oct 16

Top 6 Areas of Documentation in Non-profit Organizations

By Patrick Martin

Successful business practices depend on documentation and accountability, especially for not-for-profit agencies. It can be difficult to remember and account for all the business activities that need detailed documentation, but lawful and dependable business rests on careful tracking of all business activities.

6 “Must Have” areas of documentation:

  1. Donors- Cash or property donors contributing $250 or more must obtain a contemporaneous written acknowledgement of the donation from the donee Section 501(c)(3) organization that contains the donee organization’s name, address, contribution date, amount donated, and a description of any property donated. The most crucial piece that must be included in the written acknowledgement is a statement detailing whether any goods or services were offered in consideration for the contribution. Make sure you complete the acknowledgement sooner rather than later to avoid the possibility that a donor files his/her tax return before receiving the acknowledgement.
  2. “Who’s who?” Lists - It is vital for both tax and governance purposes for a non-profit organization to maintain a detailed list of every relationship connected to the company. These lists should be updated every six months. Some important people to include:
    • Disqualified persons/ conflict of interest persons- Any “disqualified person” who receives economic paybacks from a section 501(c)(3) public charity, (c)(4), or (c)(29) organization which exceeds the value of the consideration for such benefits are required to pay a tax of 25% of the additional benefit received. Anyone who (during the 5 year period ending on the date of the excess benefit transaction) exercises control over organization’s activities is considered a disqualified person, as well as members of that person’s family or entities where the person or his/her family has more than a 35% ownership interest. The same applies for conflict of interest purposes, but both adopted and natural children are included in the definition of “family”, in this case.
    • Related organizations- An organization is required to identify all related organizations (like a Brother/Sister organization or a supporting/supported organization) to validate all applicable transactions and make sure all disclosures are made on Form 990.
    • Donor advised funds- Again, it is important to list family members and any connections the organization has, and in the case of donor advised funds, a distribution from a fund that results in excess benefits to specific people that can influence an excise tax on the recipient.
  3. Conflict of interest policies- Though a written conflict of interest policy is not required, the IRS strongly suggests one. Any transaction in a not-for-profit organization can present a possible conflict of interest when the people held responsible for safeguarding the company’s financial interest are in a position to reap personal benefits from it.
  4. Compensation reviews- It is important for organizations to carefully detail the compensation of all trustees, directors, officers and employees. Those who receive compensation deemed excessive by the IRS can be obliged to pay an excise tax. Be sure to research the amounts usually paid for similar services and see how your compensation policies compare (one of the IRS safe harbor requirements).
  5. Public Inspection and Distribution of Form 990 and 990 T- Make each annual information return available for a period of 3 years beginning on the date the return is required to be filed or is actually filed, whichever is later.
  6. Written Disclosure- A charitable organization is required to provide written disclosure to a donor who receives goods or services in exchange for a single payment exceeding $75 partly as a contribution and partly for goods and services provided by the organization.  A contribution made by a donor in exchange for goods or services in known as a quid pro quo contribution.

Making sure your organization is aware of these documentation requirements are key to avoiding any tax or governance consequences. Organization and detailed tracking will help ensure that you are staying in line with the law and are operating ethically and effectively. For more information or questions on gathering your organizations documentation, contact us.


Oct 10

Grant Questions Every Executive Director Should Ask

By Meyer Levy

In efforts to avoid non-compliance issues and to encourage grant funding, executive directors of tax exempt organizations should be aware of the basics of pre and post grant award work and be mindful that data concerning grants must be monitored regularly.

Questions that every executive director should ask:

Look into the proposals that have been submitted.

  1. Which funders are they going to, and is there an appropriate budget?
  2. Does the organization have the organizational capacity?
  3. What is the status of each proposal?
  4. Does the proposal have realistic goals and outcomes?
  5. Is there a sustainability plan?
  6. When and why was it denied or approved?
  7. Was it fully funded if approved?
  8. If it is pending, when do you expect to hear from them?

Look into the status of the grant opportunities.

  1. What is the status of each active grant?
  2. What are the basics of the award?
  3. What is the status of report submissions and budget adjustments?
  4. Is the organization applying for appropriate opportunities?
  5. If not, is there a way the organization can improve this?
  6. Are you keeping track of grant spending and reviewing each grant’s monthly accounting statement?

Make sure you have progress and evaluation reports.

  1. Is program delivery on track?
  2. Is the program reaching desired goals?

Senior staff members will monitor these steps and report back to the executive director, however when it comes to small non-profit organizations, all responsibility rests on the executive director. It is vitally important that executive directors pay close attention to grant acquisition, and the management duties that go along with it.

For more information or guidance for executive directors, please contact any member of KLR’s Not-For-Profit Services Team.


Oct 3

Should your Nonprofit Organization have an Audit Committee?

By Meyer Levy

In our August 2011 blog “To Audit Committee or Not to Audit Committee, that is the Question”, we raised the question – does your organization need an audit committee? A little more than three years later, I still have clients asking whether they need an audit committee, who the audit committee should report to, and whether the finance committee can play the role of the audit committee in addition to their current responsibilities..

Why it is a good idea to have an audit committee?

Although Massachusetts does not require a tax exempt organization to have an audit committee, I would argue that having an audit committee in place is good governance. The difference between the other Board committees, such as the investment committee, the distribution committee or the compensation committee, is that these committees are responsible for very specific areas whereas the role of the audit committee is understanding the overall risk of the Organization. In addition, many organizations have one “financial committee” where they combine the finance committee with the audit committee.

The Non Profit Risk Management Center explains that many organizations are looking for ways to economize and combine resources, however the benefits of separating these functions and having an audit committee separate from the finance committee is significant. In general, the finance committee is involved in the detail, whereas the audit committee monitors the process. For example, the finance committee’s main task is the approval and periodic review of the budget, while the audit committee reviews and understands the process to ensure policy is being followed.

What is the Audit Committee’s Role?

The National Council of NonProfits lists the following responsibilities of an audit committee:

  • Hire the audit firm
  • Evaluate the audit process
  • If deemed necessary, work closely with management to prepare for the year-end audit
  • Present the audit findings to the Organization’s Board of Directors

In order to fulfill their responsibilities, the audit committee should develop an audit committee charter, to be reviewed annually, appoint the auditors and agree on the audit fee. They will meet with the independent auditors, ideally prior to commencement of the audit fieldwork and at the conclusion of the audit to review the audited financial statements and related findings, if any, and finally report to the Organization’s Board of Directors.

Having the nonprofit’s finances independently audited doesn’t get a board off the hook, either. Technically, the board oversees the external auditor’s activities, and it is the board that accepts the audit. If the audit misses something, the board can be held responsible. An audit committee can assist the board with the auditing process, from selecting the auditor to accept the results of the audit.

Who serves on the audit committee?

So now that your organization (your Board) is in agreement that they should have an audit committee – who serves on the audit committee? Generally, an audit committee is made up of three to five members, comprised of board members and audit committee members who are not board members, but have a good understanding of the applicable accounting concepts, a financial background, and an understanding of internal controls.

If you do not have an audit committee in place, it is in your best interest to consider doing so. If your organization does have an audit committee, make sure they have an audit committee charter and that they are helping the board of directors with respect to the integrity of the financial statements and compliance with legal and/or regulatory requirements.

Have questions about creating an audit committee for your nonprofit organization or would like more information on this topic? Contact us.

Aug 29

Why Choose a CPA that has a Peer Review?

By Meyer Levy

If your nonprofit organization has gone out to bid for their accounting or tax work it is important to keep in mind that accounting firms always need to adhere to the law and act in the public’s best interest. Accounting firms that have documentation of a tri-annual peer review can be a valuable tool for you when making a decision on a new firm. Peer reviews ensure that the accounting firm you will potentially be hiring is honest, professional, trustworthy, and most importantly carrying out audit engagements in accordance with authoritative auditing and accounting standards.

What is evaluated in a peer review?

A peer review details a firm’s accounting procedures and auditing services. There is great value to be had in choosing a firm that has completed a peer review and that has been certified by the American Institute of Certified Public Accountants (AICPA). The AICPA completes a full review of the accounting firm’s engagements including:

  • Each function of the firm- The peer review must contain detailed descriptions of each person within the organization and their job functions. A reliable peer review contains explanations of each person’s credentials, and for those firms conducting Yellow Book audits, whether he/she meets the requirements under the Generally Accepted Government Audit Standards (GAGAS).
  • The CPA firm conducting the actual peer review will select audit workpapers for certain clients of the organization to ensure that audits are carried out in accordance with authoritative auditing and accounting standards
  • Paper files and reports- A firm is evaluated for its quality control policies in a peer review, so it is important that firms have all the necessary paperwork and records of all activity within the organization.
  • Requirements- Firms working on certain not-for-profit engagements must have Continuing Professional Education (CPE) following GAGAS requirements. The firm must be clear of any disciplinary action by professional organizations, and must have a clean history of sanctions against the firm or any individual (current or older than three years).

Peer reviews provide written documentation of a firms honest business practices. It is also a critical component of validation and confirmation of truthful business operations and business exchanges that your nonprofit should be reviewing when evaluating potential accounting firms. If you have questions about what you should be looking for in a new accounting firm for your NPO? Please contact any member of our Not-For-Profit Team.


Jul 23

When is the Right Time to Leave Your NFP Board Position?

By Frank Monti

There are plenty of articles written and many reasons why you should consider joining a nonprofit board, yet few help you to identify the warning signs of when it might be the best time for you to surrender your board position and volunteer your time elsewhere. This blog will help you to identify some situations which, if they exist, should cause you to consider whether remaining on a board is the right decision for you.

Organizations evolve over time and the organization you joined as a Board member years ago may be very different today.  Occasionally you should take a step back and evaluate whether the organization’s values and activities are still consistent with your personal values. If they are not, you may want to either try to move the organization back to where it once was, or consider parting ways.

It is absolutely appropriate to vote with your conscience on all Board votes.  However, after the vote, all Board members must support the majority decision and proceed along the selected path with a united front.  If you are unable to support the organization when a board action is taken contrary to your vote, you should consider resigning. Supporting the majority decision is one of the basic and most important fundamentals of holding a Board position. If that is not possible for you, you may need to look into alternative organizations.

If you (and other board members) are not informed about the organization’s current activities and its mission-oriented results or the performance of the chief executive, this is an organization which is likely no longer being run by the board.  If, after making an effort to change the situation or make right of an issue, you should consider resigning from the Board.  Continuing to participate in an ineffective board only reinforces the ineffective behavior.

Another example of an ineffective board is one that does not receive and review the organization’s financials on a regular basis.  Financial resources are what allow the organization to address its programmatic mission.  Board oversight of the financial picture is critical.  Likewise if you don’t spend a significant amount of time thinking about whether the organization is effective at advancing its mission and how the organization could be more effective at advancing its mission, you (and the rest of the board) are probably becoming more and more disconnected from the organization.

Among the more obvious reasons for leaving a board position is that you recognize that you’re serving more for personal benefit than for the public benefit.  Remember, your position on a not-for-profit board is as a representative of the public – the public that has granted tax-exempt status to this organization because that public values the organization’s tax-exempt mission and has entrusted the board members with keeping the organization focused on that mission.  Also, if you have a material financial interest in a transaction with the organization that would be damaging or embarrassing if known by the public, it is time to sever your ties with the organization.

In more than one instance above, we mentioned working to change the board’s activities back to what they should be.  In doing this, however, if you find yourself unable to work collaboratively with the other board members in a productive manner, it probably does not make much sense for you to continue your efforts.  It certainly is not easy to resign from an organization which you joined and worked so hard and for so long to improve. However, sometimes, needed change will only come about when you emphasize your position or feelings and take action to correct them.

Jul 15

Lobbying Activity Reporting & Registration Requirements in Massachusetts

By Frank Monti

Are you a not-for-profit organization beginning to engage in permitted lobbying activities?  You should be aware of regulations under Massachusetts General Law c. 3, §§39-50.

Our latest white paper outlines the laws that your organization may be subject to if you engage in lobbying and what you need to look out for. Here’s a summary of what is reviewed:

  • From December 1st-15th each year, the Secretary of State will hold mandatory educational seminars for executive and legislative agents (defined in Massachusetts General Law section 39).
  • Each legislative agent and executive agent is required to file an annual registration statement with the Secretary of State (to be completed no later than December 15th each year).
  • Semi- annual financial reports must be filed with the secretary of state (due on July 15th and January 15th for the six month period ending on the end of the month preceding these dates).

Compliance with these laws is necessary if you engage in lobbying activity, so make sure you pay attention to of all the deadlines and requirements.

For more information on lobbying activity in Massachusetts, read our whitepaper: Federal & Massachusetts Reporting and Registration Requirements Related to Lobbying Activity.


Jun 26

Board Member Independence

By Frank Monti

Board members play a critical role in the governance of a not-for-profit organization. Their role in supervising the decision making process in the organization – including the decisions reserved for the Board itself – are critical in keeping the interests of the organization and its mission top priority.  One of the key legal obligations of board members is their loyalty.  This means maintaining objectivity in making decisions; assuring an unbiased approach to issues; being free of any conflicts of interest when choosing between options and being free from external control or ulterior motives.

The IRS Form 990 specifically asks questions relative to board member independence;  however, these questions stem from a strict definition of independence which is related to financial reward.  For example, the IRS questions whether board members receive compensation either as a board member or as an employee.  They also question compensation that may be received as an external contractor and other financial transactions with either a board member or family member.

States Taking Action

In addition to the IRS, various state laws address the independence of not-for-profit board members.  On July 1, 2014 a revised New York nonprofit law goes into effect.  This law addresses board independence as one of the key aspects of an accountable board.  Among other things the law indicates that a board member may not be or have been an employee or have a relative who is a key employee of the organization for the past 3 years.  The board member may also not have received direct compensation from the organization or an affiliate of more than $10,000 in the past 3 years.

The goal of every organization is a board comprised of individual board members, each possessing genuine independence.  This leads to decision making that derives simply from the obligation and need to help the organization.  This independent-mindedness results in candor and a thorough reflection of the issues as evidenced by a willingness to ask questions until an issue has been thoroughly examined and discussed. Everyone on the board should feel free to question current practices and traditions without being influenced by the seniority, position, or reputation of fellow board members, staff members or donors.

Defining Genuine Independence

Organizations can create a structure that will lead to genuine independence. For example, the CEO shouldn’t have double duties by also serving as the chair of the organization. To the same respect, no paid staff member should also be a voting board member. This also applies to spouses and close relatives.  The organization should have a solid conflict-of-interest policy with unequivocal enforcement. Full disclosure of potential conflicts should be the norm with recusal from both discussion and voting when a conflict is present.  This fact should also be noted in the meeting minutes.

The role of the board should be periodically reinforced so that members understand their individual and shared responsibilities.  This understanding is aimed at linking board decisions to the future success of the organization and reinforcing the concept that the board and the organization are a team.  The board should hold regular executive sessions without the staff and develop a culture where the skills of the individual board members are brought to the organization as assets. 

A highly effective board leads to a highly effective organization. We urge everyone who serves on a board to commit the time and energy needed to run an effective, independent board. Learn more about board development by reading our 10 Basic Responsibilities of Not-for-Profit Boards blog series.

Jun 17

More on Nonprofit Lobbying Activities

By Frank Monti

Earlier this year I wrote a blog about political campaigning and lobbying activities since 2014 is another important election year.  This blog will discuss the federal and Rhode Island registration and reporting requirements for organizations that engage in lobbying activities.

In the spirit of greater transparency both the federal and state governments have enacted laws requiring greater disclosure of who is lobbying for what, how much they are spending and how they relate to other organizations, if at all.  These lobbying registration and reporting regulations do not change or affect any of the information contained in my previous blog.

The KLR Not-for-Profit services group has also written a whitepaper on this topic with greater detail for organizations that are engaged in any amount of lobbying activity. Download the whitepaper “Federal & Rhode Island Reporting and Registration Requirements Related to Lobbying Activity” now.

In our previous blog and whitepaper we indicated that any organization that is engaged in lobbying activity should make a safe harbor election under Section 501(h) of the Internal Revenue Code.  This election is for lobbying purposes only and your organization remains tax-exempt under Section 501(c)(3) of the Code.  Making this election is relatively easy and any member of our team can help.

The federal regulations for lobbyist registration and reporting are part of the Federal Lobbying Disclosure Act.  Typically with federal regulations, the definitions of various lobbying related activities under the Act and under the Internal Revenue Code differ a bit.  However, the Act has indicated that organizations that have made a 501(h) election have the option of using either set of definitions to determine the organization’s reporting and registration requirements. Clarity and consistency is unusual coming from the federal government, but makes us accountants happy! Therefore, in addition to all of the other reasons we have provided in other documents as to the advantages of a 501(h) election, this is yet another.

As mentioned above, in addition to the federal lobbying registration and reporting requirements, a similar registration and reporting obligation has been instituted in Rhode Island (and other states).  In Rhode Island, there are actually two laws governing lobbying activity.  One set of laws deals with lobbying activity and the other addresses ballot question advocacy. 

The Rhode Island laws may appear very similar but the lobbying law is limited to activity relative to matters before the General Assembly or on the Governor’s desk for signature.  The ballot question advocacy laws apply only to ballot questions and advocating in support or opposition of those questions.

Because of the relatively short period of time during which legislation or a ballot question comes before the legislature or the voters, all legislation contains very strict deadlines for registration.  In addition, reporting is mandated generally on a monthly basis and, in some situations, even more frequently. 

Of course, there are financial penalties for noncompliance so it is in your best interest to be aware of the law and be ready to comply as soon as you become active in the lobbying arena.

To read more about lobbying, download our whitepaper “Federal & Rhode Island Reporting and Registration Requirements Related to Lobbying Activity”.

Jun 3

Your Questions About Board Meeting Minutes Answered

By Frank Monti

Recently I received some questions on the subject of keeping records of board meetings.  The minutes of the meeting are the official record of the Board’s actions taken at meetings and should contain specific information. Below are responses to some of your recent questions on this topic.

Q: What is required to be recorded in meeting minutes on motions and votes?

It is not necessary to record who made and seconded a motion, nor is it necessary to record the exact vote (i.e. 6 in favor and 5 against).  All that is necessary is to indicate that a motion was made and seconded and whether it passed or was defeated.

In general, the concept behind the recommendations above is that the decisions of the Board represent the decisions of the entire Board acting in unison in its capacity as the body responsible for overall governance of the organization.  Decisions of the Board are binding upon the organization whether they passed unanimously or by a one-vote margin. 

After a decision is reached, all Board members (and management) must act to implement and support the decision.  A motion that passes is not the responsibility of only those Board members who voted in favor of it.  The Board members who voted against the motion must never act in any way to diminish the impact of the decision or the effectiveness of the course of action decided upon.  This also means that you should not refer to a decision as “one that barely passed” or “passed with the thinnest majority of support”.

Q: Should Board members record negative votes in the meeting minutes?

If a Board member wants their negative vote recorded in the meeting minutes, the board as a whole should first examine what that member’s objective is. While there is no rule or regulation prohibiting that fact from being noted in the minutes, it would be best to remind the member that the majority rules and that the organization must move in concert as it makes decisions. This will hopefully convince the member that there is no value to the organization to make note of their negative vote on the matter. 

Q: What happens if a member of the Board doesn’t agree with a motion or insists a negative vote be recorded?

If a Board member is so set against the direction that the organization is taking as evidenced in the previous question, that Board member must evaluate their ability to support the organization going forward.  While volunteer Board members may be difficult to recruit, retaining a member who truly believes that organization is making an error may become very problematic in the near future.  The time to lobby and fight for the course of action you believe is right is during the discussion prior to the vote.  Once the vote is taken, the majority position becomes the position of every single Board member.  If a Board member can’t live with this, merely noting that they voted against the motion is not a solution. 

Read our whitepaper titled “Board Meeting Minutes” to learn more about the various aspects of the normal meeting processes and how those processes should be documented in the meeting minutes.

May 28

Not-for-Profit Raffle Regulations in Massachusetts

By Frank Monti

Charitable organizations frequently hold raffles to raise money.  Sometimes these are very informal such as the raffles at golf tournaments and sometimes they are very sophisticated with expensive prizes.  The first thing to know about running a raffle is that it is a gambling activity and is highly regulated in every state

Today we will talk about the laws in the Commonwealth of Massachusetts. The laws in Massachusetts are contained in two places:

  • Massachusetts General Law 271 (M.G.L. c.271) and
  • Section 940 of the Massachusetts Code of Regulations (940 CMR)

The general law is very straight forward and indicates that you cannot run a raffle unless you are a charitable organization and you need to obtain a permit to do so.  The 940 CMR regulations are where a raffle running in Massachusetts runs into complexity. 

To learn, in greater detail, about the rules and regulations regarding raffles in Massachusetts please read our white paper: Regulations Affecting the Running of Raffles in Massachusetts.

Today I am going to talk about avoiding 940 CMR.  These regulations are applicable to raffles only if the sum total of the value of the prizes exceeds $10,000 or the individual ticket price exceeds $10.00.  Obviously, if you want to save yourself a great deal of compliance and record keeping work, you would want to avoid both of these thresholds.

This Spring I was consulting with an organization running their first raffle and they had a number of cash prizes that totaled $9,500.  Good, they failed to cross the first threshold of 940 CMR.  However, because they had a limited number of people in their constituency, they priced the raffle tickets at $50 each figuring that their supporters will want to participate in the fundraising effort and the organization wants to raise a substantial sum of money.  As a result of the $50 ticket price, they were going to be subject to 940 CMR (exceeding the $10 per ticket threshold).

This made me think of a golf tournament I attended a number of years ago.  When you check in at a charity golf tournament, one of the things you can do at the check-in table is purchase raffle tickets for the drawing of door prizes which happened during the meal after the tournament.  Almost everyone buys raffle tickets. 

Since a golf tournament only has a limited number of golfers, this is the classic marketing challenge of trying to get your customer to spend more money by purchasing raffle tickets. As a matter of fact, selling more to an existing customer is one of the 4 basic ways to improve your business (think about McDonalds, “do you want fries with that?”). 

Typically, golf tournament raffle tickets are $5 each; 3 of $10 and 7 for $20.  Ideally, the charity would like everyone to purchase 7 for $20 but it doesn’t happen.  At the tournament I am thinking of, the ticket sellers sold 1 ticket for $5, 3 for $10 and your height in tickets for $25!  If you plunked down $25, two people came around the table and measured you for 6 feet of raffle tickets – what a buy.  Many, many people purchased $25 worth of raffle tickets.

While on the course that day, I thought about this.  How could they afford to give you 40 or 50 tickets for $25 when they were selling 3 for $10?  The reason is that the number of tickets sold doesn’t matter.  The same number of prizes exists no matter how many tickets are sold.  What matters is how much they raise in selling the tickets.  Raffle tickets cost next to nothing – they are not valuable to you.  Cash sales are what you are after.

Getting 100 or more of golfers to pay $25 for raffle tickets when we normally would have only paid $5 or $10 was an excellent up sell and a much better value!  The golfers were excited about their extra chances to win (and the awesome deal they got) and the organization was able to sell a ton of raffle tickets. 

Back to my raffle client from this spring . . . when they saw the amount of 940 CMR work required due to their $50 ticket price, they hoped that most people in their group would purchase; they were overwhelmed and a little disappointed.  I suggested reducing the price of a single ticket to $10 but offering 20 or 30 tickets for $50.  They eventually settled on 25 tickets for $50 because people could more easily see that the price-per-ticket was thereby reduced from $10 to $2.  As expected, and similar to the golf tournament example I gave above, most people purchased 25 tickets and their fund raising raffle was a financial success without any 940 CMR requirements.

Isn’t it fun to apply a lesson learned one day on the course to a situation many years later?! If you have questions about raffles please contact me or any member of the not-for-profit team

Read our white paper: Regulations Affecting the Running of Raffles in Massachusetts to learn more about the rules and regulations regarding raffles in MA.


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