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Understanding financial statements & fiscal responsibility at the board level

Fiscal Responsibility at the Board Level

When serving as a Board member, it is crucial to comprehend financial statements and uphold fiscal responsibility. In this blog post, we will explore best practices for reviewing financial statements and discuss the duties and responsibilities of being a Board member, ultimately equipping you with the confidence to be effective in your role.

As a Board member, you are entrusted with duties: Duty of Care, Duty of Loyalty, and Duty of Obedience.

Duty of Care

To fulfill the Duty of Care, it is essential to:

  1. Stay informed about the organization’s affairs.
  2. Establish an appropriate control environment.
  3. Invest time in understanding the organization’s operations and funding sources and exercising proper fiscal oversight.

But what does providing proper fiscal oversight entail? Here are some key responsibilities for the Board:

  • Reviewing and approving the audited financial statements and Form 990.
  • Developing the annual budget and ensuring the implementation of adequate financial controls.
  • Receiving regular, detailed, and timely financial information.
Reviewing the Audited Financial Statements

The audited financial statements are accompanied by an Independent Auditor’s Report, which contains crucial information:

  • The report provides the period under audit, outlines the responsibilities of the auditor and management, and presents the auditor’s opinion.
  • The first paragraph of the report states the opinion, such as “in our opinion, the accompanying financial statements present fairly, in all material respects…”
  • An “unmodified” opinion is the desired outcome, as it represents the highest level of assurance.
  • If the report mentions that the financial statements were “reviewed” or “compiled,” it means they have not undergone the highest forms of testing.
  • Phrases like “in our opinion, except for the effects of the matter described in the Basis for Qualified Opinion…” indicate a qualified opinion, which could suggest a problem.
Statement of Financial Position (Balance Sheet)

The Statement of Financial Position provides insights into assets and liabilities. Some key points to consider:

  • Cash, investments, accounts receivable, inventory, prepaid expenses, and fixed assets are presented in order of liquidity.
  • Identify the largest line item under assets and analyze it. For example, is cash the largest? If so, determine if it’s intentional or a sign of inefficiency in cash management. Compare cash as a percentage of total revenue.
  • Is accounts receivable the largest? Investigate if there are collection issues or timing-related challenges. Assess whether an allowance for doubtful accounts should be recorded.
  • Are investments significant? Verify if an investment policy is in place and if it complies with the organization’s objectives.
  • Examine items such as accounts payable, accrued expenses, debt obligations, unearned income, current ratio (current assets divided by current liabilities), and net assets.
  • Net Assets represent the difference between total assets and total liabilities. They fluctuate based on operational results.
  • Net assets may have donor restrictions (restricted for purpose or time) or may be unrestricted (Board-designated funds).
Statement of Activities and Changes in Net Assets

This statement outlines revenues, expenses, and changes in net assets. Key considerations include:

  • Review expenses by functional classification, aligning them with the Statement of Functional Expenses.
  • Monitor net assets released from restrictions, which occur when a purpose or time restriction is fulfilled.
  • Nonprofit organizations should aim for an appropriate profit.

Statement of Functional Expenses

This statement details the natural classification of expenses allocated to programs, fundraising, and general and administrative purposes.

Statement of Cash Flows

The Statement of Cash Flows reconciles the beginning and end-of-year cash balances.

Footnote Disclosures

Footnotes provide additional information about the nonprofit organization.

Ensure Fiscal Responsibility

There are essential aspects to consider, particularly during budget reviews and internal control assessments. Let’s explore these topics in a blog-friendly manner:

Budget Review

  1. Balanced Budget: Pay attention to the “balanced budget” concept and identify any discrepancies or “plugs” within the budget. Understanding where adjustments are made is crucial.
  2. Budgeting for Loss: Evaluate the sustainability of budgeting for a loss. Assess whether this approach aligns with the organization’s long-term financial health and goals.
  3. Program Evaluation: Conduct a thorough review of the programs in place. Determine if they are profitable, break-even (reimbursed-based), or operating at a loss. This analysis helps ensure resources are allocated effectively.
  4. Fundraising Event Profitability: Analyze the profitability of fundraising events by subtracting the total expenses associated with the event from the revenue generated. This assessment provides insights into the effectiveness of fundraising strategies.
  5. Monthly Budget Analysis: Regularly compare budgeted revenue and expenses with actual monthly figures. Identify significant variances and engage in discussions to address any deviations from the plan.

Internal Controls

  1. Familiarity with Key Controls: As a Board member, it is essential to be acquainted with the key controls of the nonprofit organization. Understand the mechanisms to safeguard assets, maintain accuracy, and prevent fraudulent activities.
  2. Awareness of Changes: Stay informed about any changes to the internal controls within the organization. This ensures that the Board is up to date and can provide appropriate oversight and guidance.
  3. Auditor Management Comments: Review management comments or recommendations in the financial statement report provided by the auditor. Address any areas of concern or improvement highlighted in these comments.
  4. Segregation of Duties: Emphasize the importance of segregating duties to maintain strong internal control. This means that the person responsible for accounting for an asset should differ from the person responsible for physically safeguarding it.
  5. Independent Inspection: Ensure that bank statements for all accounts are received, opened, and inspected by someone independent of the accounting function. This practice adds an extra layer of assurance and reduces the risk of misappropriation.

By focusing on these fiscal responsibilities and internal control measures, Board members can contribute to the organization’s financial well-being and ensure accountability.

Contact us to learn more about financial statements and fiscal responsibility at the board level.

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