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I am pleased to recommend Mark and his firm. He has helped us to become a better organization and better people as well.

Rev. Louis R. Lothman, Th.D., Director, Pastoral Counseling Services, Presbyterian Minister, Presbyterian Church (U.S.A.)

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Reduce your nonprofit’s liability risk with D&O insurance

Not-for-profit organizations may operate under the assumption that their missions and their board members’ good intentions protect them from litigation. Sometimes, this assumption is proven wrong with a lawsuit. To protect your leaders from financial exposure, consider directors and officers (D&O) liability insurance. This coverage allows board members to make decisions without fear that they’ll be personally responsible for any related litigation costs.

Protecting key individuals

D&O policies are designed to protect both your organization and its key individuals: directors, officers, employees and even volunteers and committee members. Normally, D&O insurance covers allegations of wrongful acts, errors, misleading statements, neglect or breaches of duty connected with a person’s performance of duties.

Such coverage typically would protect from allegations of mismanagement of funds or investments and employment issues such as harassment and discrimination. D&O insurance also usually covers claims of self-dealing, failure to provide services and failure to fulfill fiduciary duties.

If a legal complaint is filed against them, insured organizations contact their insurer to determine whether the matter is insurable and includes defense costs. Most policies reimburse the insured for reasonable defense costs, in addition to covering judgments against the insured.

Observing policy periods

D&O policyholders need to be aware of a few caveats. This type of insurance is claims-made, meaning that the insurer pays for claims filed during the policy period even if the alleged wrongful act occurred outside of the policy period. So D&O insurance provides no coverage for lawsuits filed after a policyholder cancels, even if the alleged act happened when the policy was in effect.

If you need to make a claim after your policy has been canceled or expired, you might still be covered if you have extended reporting period (ERP) coverage. It generally covers newly filed claims on actions that allegedly occurred during the regular policy period.

Considering cost constraints

Most nonprofits are cost-conscious and you may be wary of adding another insurance policy. To keep costs down, think seriously about the people and actions that should be covered and the amount of protection you need — and don’t need. If you already have general liability and workers’ compensation insurance, you probably don’t need coverage of bodily injury or property damage. And if you opt for higher deductibles, your policy will be less expensive.

Nonprofits in some states may not need D&O insurance because volunteer immunity statutes provide limited protection for negligence. For more information about the insurance you need and general risk-prevention strategies contact the Online Stewardship team of accountants at (904) 398-4747 or Lynn@OnlineStewardship.com

© 2021


It may be time to tune up your nonprofit’s accounting function

Many organizations get stuck in procedural ruts because it’s easier in the short term to continue doing things the way they’ve always been done. But it generally pays to regularly review your not-for-profit’s accounting function for inefficiencies and oversight gaps. You might plan to conduct a review once a year or perform an assessment whenever significant changes, such as staff turnover or the introduction of new software, warrants one.

Room for improvement

Be sure to consider the following items in your review:

Cutoff policies. Your nonprofit should set and adhere to monthly invoicing and expense recording cutoffs. For example, require all invoices to be submitted to your accounting department by the end of each month. Too many adjustments — or waiting for staffers or departments to turn in invoices and expense reports — waste time and can delay financial statement production.

Account reconciliation. You may be able to save considerable time at the end of the year by reconciling your bank accounts shortly after the end of each month. It’s easier to correct errors when you catch them early. Also, reconcile accounts payable and accounts receivable data to your statements of financial position.

Processing in batches. Don’t enter only one invoice or cut only one check at a time. Set aside a block of time to do the job when you have multiple items to process. Some organizations process payments only once or twice a month. Make the schedule available to everyone and fewer “emergency” checks and deposits are likely to surface.

Increased oversight. Make sure that the individual or group that’s responsible for financial oversight — for example, your CFO, treasurer or finance committee — reviews monthly bank statements, financial statements and accounting entries for obvious errors or unexpected amounts.

Software use. Many organizations underuse the accounting software package they’ve purchased because they haven’t learned its full functionality. If needed, hire a trainer to review the software’s basic functions with staff and teach time-saving shortcuts. Make sure you install updates as they become available and know when it’s time to buy new packages — for example, when your software is no longer “supported” because the vendor has gone out of business.

Add value

Accounting systems can become inefficient over time if they aren’t monitored. So look for labor-intensive steps that could be automated or procedures that don’t add value and might be eliminated. Often, for example, steps are duplicated by two different employees or the process is slowed down by “handing off” part of a project. That said, it’s essential to maintain the segregation of accounting duties to prevent fraud.

For more information or if you need help streamlining your accounting function, contact the Online Stewardship team of accountants and consultants at (904) 398-4747 or Lynn@OnlineStewardship.com

© 2021


Nonprofits: Heed these financial danger signs

Many not-for-profits are just starting to emerge from one of the most challenging environments in recent memory due to the COVID-19 pandemic. Even if your organization is in good shape, don’t get too comfortable. Financial obstacles can appear at any time and you need to be vigilant about acting on certain warning signs. Consider the following.

Budget variances

Once your board has signed off on a budget, you should carefully monitor it for unexplained variances. Although some variances are to be expected, staff should be able to provide reasonable explanations — such as funding changes or macroeconomic factors — for significant discrepancies. Where necessary, work to mitigate negative variances by, for example, cutting expenses.

Also make sure you don’t:

  • Overspend in one program and funding it by another,
  • Dip into operational reserves,
  • Raid an endowment, or
  • Engage in unplanned borrowing.

Such moves might mark the beginning of a financially unsustainable cycle.

Messy financials

If your financial statements are untimely and inconsistent or aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP), you could be heading for trouble. Poor financial statements can lead to poor decision-making and undermine your nonprofit’s reputation. They also can make it difficult to obtain funding or financing.

Insist on professionally prepared statements as well as annual audits. Members of your organization’s audit committee should communicate directly with auditors before and during the process, and all board members should have the opportunity to review and question the audit report.

Declining donations

Let’s say you’ve noticed a decline in donations. Then you start hearing from long-standing supporters that they’re losing confidence in your organization’s finances or leadership. Investigate immediately.

Ask supporters what they’re seeing or hearing that prompts their concerns. Also note when development staff hits up major donors outside of the usual fundraising cycle. These contacts could mean your nonprofit is scrambling for cash.

Faulty leadership

Even the most experienced and knowledgeable nonprofit executive director shouldn’t have absolute power. Your board needs to step in if an executive tries to ignore expense limits and breaks other rules of good fiscal management. The board also should question an executive who attempts to choose a new auditor or makes strategic decisions without the board’s input.

Don’t ignore the signs

If one of these danger signs appears, it’s important to act swiftly. Financial problems don’t disappear on their own. For help evaluating the situation and for advice on how to get your organization back on track, contact the Online Stewardship team of accountants and consultants at (904) 398-4747 or Lynn@OnlineStewardship.com

© 2021


Events of the past year put a dent in many not-for-profit’s reserves. Perhaps you tapped this stash to buy personal protective equipment or to pay staffers’ salaries when your budget no longer proved adequate. As the pandemic wanes and economic conditions improve, you’ll need to start thinking about rebuilding your operating reserves.

Back on steady ground

Assembling an adequate operating reserve takes time and should be regarded as a continuous project. Obviously, it’s nearly impossible to contribute to reserves when you’re under financial stress. But once you feel your nonprofit is on steadier ground, your board of directors needs to determine what amount to target and how your organization will reach that target. It’s also a good time to review circumstances under which reserves can be drawn down.

Reserve funds can come from unrestricted contributions, investment income and planned surpluses. Many boards designate a portion of their organizations’ unrestricted net assets as an operating reserve. On the other hand, funds that shouldn’t be considered part of an operating reserve include endowments and temporarily restricted funds. Net assets tied up in illiquid fixed assets used in operations, such as your buildings and equipment, generally don’t qualify either.

Protection and flexibility

Determining how much should be in your operating reserve depends on your organization and its operations. Generally, if you depend heavily on only a few funders or government grants, your nonprofit probably will benefit from a larger reserve. Likewise, if personnel costs are high, your organization could use a healthy reserve cushion.

Three months of reserves is typically considered a minimum accumulation. Six months of reserves provides greater security. A three-to-six-month reserve should enable your organization to continue its operations for a relatively brief transition in operations or funding. Or, in the worst-case scenario, it would allow for an orderly winding up of affairs.

An operating reserve of more than six months provides greater protection if, for example, something similar to the COVID-19 lockdown occurs again. And a bigger reserve can give you financial flexibility. For example, you might have the funds to pursue a new program initiative that’s not fully funded, or to leverage debt funding for needed facilities or equipment.

No hoarding

Note that it’s generally not a good idea to put aside more than 12 months of expenses. Increasingly, donors want to see the nonprofits they support put funds to work, not hoard them. For more information about operating reserves, contact the Online Stewardship team of accountants at (904) 396-5400 or Lynn@OnlineStewardship.com.

© 2021


Defrauded? How to help your nonprofit recover

Thousands of not-for-profit organizations fall victim to embezzlement schemes every year — some even losing millions of dollars. But losses go beyond actual dollar amounts. The hit to a group’s reputation may scare off donors, grantmakers and other supporters. However, with the right response, nonprofits can bounce back from fraud. Here’s how.

One best practice

A study published in the Journal of Accounting, Ethics & Public Policy makes the case that the specific steps an organization takes following a fraud incident can mitigate significant reputational damage. In its hypothetical example, the study lists several ways a nonprofit might act after discovering money has been embezzled:

  • Make a formal apology,
  • Undergo an external audit,
  • Improve the board of directors’ oversight function,
  • Pursue legal action against the guilty party,
  • Improve internal controls, and
  • Terminate the executive director.

The study found that improving board oversight was the only response to elicit a statistically significant positive effect on supporters’ intentions to donate. Stronger oversight also helped restore an organization’s perceived trustworthiness.

To signal improved board oversight to would-be donors, the authors suggested that an embezzled organization start requiring board members to be completely independent from management and bar employees from serving on the board. Researchers also informed study participants that a nonprofit should increase the number of voting board members and mandate that at least one member has a financial or accounting background. Participants were further told that all board members must review the financial statements at least monthly.

Comply with regulations

The study’s authors call improving board oversight “an ideal image repair strategy” because it comes at a relatively low cost. But while reputational repair is of utmost importance, it’s not the only consideration for victimized nonprofits. If your nonprofit loses funds to fraud, it must comply with federal and state reporting obligations, too.

The IRS generally requires organizations to report any “significant diversion” of assets on Form 990. A significant diversion happens when the gross amount of all diversions discovered during the tax year exceeds the lesser of 1) 5% of gross receipts for the year, 2) 5% of total assets at year end or 3) $250,000. Check with your state for other required reporting.

Act now

You may be able to save yourself a lot of heartache by preventing rogue employees from committing fraud in the first place. Tighten internal controls and board oversight now. And just in case a criminal slips through the cracks, be ready with a fraud contingency plan that can guide you in the aftermath of an incident. For help to investigate fraud or create a mitigation plan, contact our parent company, Patrick & Raines CPAs, either directly or through the Online Stewardship team at Lynn@OnlineStewardship.com or (904) 398-4747.

© 2021


If your not-for-profit has lost financial support during the pandemic, you may be looking for ways to raise new revenue. But if your proposed solution is a side business, be careful. Even when business ventures are related to a nonprofit’s exempt purpose, they can run afoul of the commerciality doctrine — and jeopardize an organization’s tax status.

Countering an unfair tax advantage

The commerciality doctrine was created along with the operational test to address concerns over nonprofits competing at an unfair tax advantage with for-profit businesses. In general, the operational test requires that a nonprofit be both organized and operating exclusively to accomplish its exempt purpose. The test also requires that no more than an “insubstantial part” of an organization’s activities further a nonexempt purpose. This means that your organization can operate a business as a substantial part of its activities as long as the business furthers your exempt purpose.

Here’s the catch: Under the commerciality doctrine, courts have ruled that the otherwise exempt activities of some organizations are substantially the same as those of commercial entities. Courts and the IRS consider several factors when evaluating commerciality. No single factor is decisive, but asking the following questions about your nonprofit and its business activities can help you evaluate risk:

  • Have you set prices to maximize profits?
  • To what degree do you provide below-cost services?
  • Do you accumulate unreasonable reserves?
  • Do you use commercial promotional methods such as advertising?
  • Is the business staffed by volunteers or paid employees?
  • Do you sell to the general public?

Also consider the extent to which your organization relies on charitable donations. They should be a significant percentage of total support.

Avoiding UBIT

There’s another risk for nonprofits operating a business. You could pass muster under the commerciality doctrine but end up liable for unrelated business income tax (UBIT).

Revenue that a nonprofit generates from a regularly conducted trade or business that isn’t substantially related to furthering the organization’s tax-exempt purpose may be subject to UBIT. Much depends on how significant the business activities are to your organization as a whole. There are also several exceptions, so be sure to check with us.

Reducing risk

If you’re thinking about launching a new business venture to raise revenue, talk to us first. We can review your proposed idea and help you reduce the risk that the commerciality doctrine or UBIT will trip it up. We want to help your nonprofit succeed! Contact the Online Stewardship team of accountants at (904) 398-4747 or Lynn@OnlineStewardship.com

© 2021


Nonprofits: Get the word out in 2021

Many not-for-profits have been too busy trying to stay afloat to put a lot of resources and energy into public relations. But as the new year begins, you might start thinking about how you’ll promote your organization, mission and programming in 2021. Here are five suggestions:

1. Report regularly. Raise your nonprofit’s profile by releasing news releases often rather than just occasionally. The addition of a key staff member, an operational milestone, a new grant you’ve received or the kick-off of a fundraising campaign, can warrant a press release. Social media platforms are especially useful for publicizing news less formally — not to mention quickly.

2. Choose the best outlet. Focus on outlets that are most likely to use your press releases such as local television stations that cover community news. Get to know producers, editors and publication and broadcast schedules. By taking the time, you can pinpoint the most suitable outlets for your news.

3. Tell a good story. Human beings are naturally attracted to compelling narratives and are more likely to remember stories than disconnected facts. Work with your communications team to craft a story that dramatizes your nonprofit’s challenges and features real constituents. Your story will resonate if you focus on situations many people have experienced — such as mourning the death of a family member or struggling to find a new job.

4. Time it right. When it comes to good publicity, timing can be everything. You might increase your odds of coverage by submitting requests to certain outlets at the start of new publication cycles. Another tactic is to host an event or release an important announcement on a typically slow news day. Also connect your mission and programs to current events. Over the past year, many nonprofits have pivoted to address pandemic-related needs. Such pivots call for publicity so you can keep current supporters on board and attract new support.

5. Stay close to home. Providing a local angle on an issue of national importance will increase your appeal to the media. Whenever possible, offer an expert source from your organization who can talk knowledgeably about the local impact of a national story. By positioning yourself and your organization as an authority and noting trends and other interesting items, you can grab attention.

As nonprofits recover from an incredibly challenging period, they need to place new emphasis on public relations. It’s not enough to hold on to your supporter base — you also need to grow it.

If you need advice on how to manage the finances of growing your nonprofit, contact the Online Stewardship team of accountants at (904) 398-4747 or Lynn@OnlineStewardship.com.  

© 2021


Principles to guide your nonprofit’s relationship with donors

In 1993, a consortium of philanthropic organizations came up with the Donor Bill of Rights to guide not-for-profits in their interactions with financial supporters. For the most part, the basic principles remain valid. But over the past quarter century, some in the nonprofit and donor communities have suggested amendments and additional “rights.” If you aren’t already familiar with the Bill, it’s a good idea to review it and recent updates while thinking about ways you might improve your organization’s relationship with donors.

Bill of Rights

The original list states that donors have these 10 rights:

  1. To be informed of the organization’s mission, how it intends to use donated resources and its capacity to use donations effectively for their intended purposes.
  2. To be informed of who’s serving on the organization’s governing board, and to expect the board to exercise prudent judgment in its stewardship responsibilities.
  3. To have access to the organization’s most recent financial statements.
  4. To be assured gifts will be used for the purposes for which they were given.
  5. To receive appropriate acknowledgment and recognition.
  6. To be assured that donation information is handled with respect and confidentiality to the extent provided by law.
  7. To expect that relationships between individuals representing organizations and donors will be professional.
  8. To be informed whether fundraisers are volunteers, employees of the organization or hired solicitors.
  9. To have the opportunity for donors’ names to be deleted from mailing lists that an organization may intend to share.
  10. To feel free to ask questions and receive prompt, truthful and forthright answers.

List update

Obviously, a lot has changed since 1993. Notably, web-based and digital communications have largely replaced traditional methods of getting the word out. And new technologies, including mobile devices and apps, have changed how many supporters donate. The 2019 eDonor Bill of Rights, assembled by the Association of Fundraising Professionals, addresses this new world.

Among the additions to the original list are technology-specific items. For example, nonprofits are advised to provide secure donation methods that protect personal information and to enable supporters to opt out of data lists and email solicitations. Charities are also encouraged to provide donors with communication channels other than email and web-based apps.

One item that isn’t technology-related is an increasingly important obligation that nonprofits have to donors: To inform them that “a contribution entitles the donor to a tax deduction, and of all limits on such deduction based on applicable laws.” You can read the entire amended Bill at afpglobal.org/principles-edonor-bill-rights. If you have any additional questions, contact the OnlineStewardship team at (904) 398-4747 or Lynn@OnlineStewardship.com

© 2020


Nonprofits: How to acknowledge donor gifts

Holiday-inspired generosity and the desire to reduce tax liability makes the end of the year a busy time for charitable giving. According to Network for Good and other sources, approximately 30% of charitable gifts are made in December alone. For nonprofits, an important part of processing these donations is sending thank-you letters that acknowledge gifts. To ensure your letters contain everything they should, here’s a refresher course.

The basics and more

The IRS mandates that taxpayers substantiate single contributions of $250 or more with written acknowledgments from donation recipients. You can help build good relationships with donors by providing them with all of the information they need in a timely manner.

Along with the basics, such as your nonprofit’s name, the amount and date of the donation, make sure your acknowledgment letters state whether donors received anything in exchange for their gifts. For example, you might state that no goods or services were provided to the donor. If donors did receive something, you may need to provide a description and good faith estimate of the value of the goods or services. Religious organizations may want to say that any goods or services provided consisted entirely of intangible religious benefits.

If your state requires it, also include a tax-exempt status statement with your organization’s Employer Identification Number. And if a donor made a noncash contribution, briefly describe the contribution in your acknowledgement letter.

Details, details

Referring to such acknowledgements as “letters,” is, of course, a convention. The IRS leaves it up to nonprofits to decide on the appropriate medium for donation acknowledgments, be it a letter, postcard, email or text.

Donation letters must be sent contemporaneously with the donation. According to the IRS, this means that supporters receive them by the earlier of:

  1. The date they actually file their income tax returns for the year of the contribution, or
  2. The due date of the return.

However, you’ll probably earn greater donor goodwill by sending acknowledgments within a few days of receiving a donation.

Don’t make a habit of it

You probably won’t lose your tax-exempt status for forgetting to send one donor acknowledgment letter. But you don’t want to make a habit of it or force donors to follow up with you to get the tax information they need. If you need help with tax or compliance issues, contact the Online Stewardship team at (904) 398-4747 or Lynn@OnlineStewardship.com.

© 2020


Using footnotes to disclose your nonprofit’s financial information

Does anyone actually read footnotes? If they’re financial statement footnotes, the answer is usually “yes.” Footnotes can provide donors, governmental supporters and other stakeholders with critical information about your not-for-profit. So it’s important to work with your CPA to make sure your footnotes are accurate and thorough.

Operations and accounting policy snapshot

One important set of footnotes is the summary of significant accounting policies. This includes two sections. The first is a brief description of your operations (featuring your chief purpose and sources of revenue). The second is a list of the significant accounting policies that have been applied in preparing your statements.

Your summary should outline specific policies such as:

  • The accounting method you used,
  • Classification of cash equivalents,
  • Fixed asset capitalization levels,
  • Depreciation methods,
  • Uncertain tax positions,
  • Recognition of contributions and grants as revenue, and
  • Recognition of in-kind contributions.

Investment lowdown

Footnotes are also used to disclose information related to investments. This includes the types of investments held, the carrying amounts for each major type of investment you own and the current year income.

You also must disclose any related-party transactions such as those between board members, senior management and major donors. Include the nature of the relationships between the parties, the dollar amount of the transactions and any amounts owed to or from the related parties as of the date of the financial statements.

Note existing contingencies

Your footnotes should further cover any reasonably possible loss contingencies. Contingencies are existing conditions that could create an obligation in the future and that arise from past transactions or events. Disclose the nature of a contingency and provide an estimate of the loss (or state that an estimate can’t be made).

Contingencies might include:

  • Pending or threatened lawsuits,
  • Claims against your organization,
  • Costs already incurred where reimbursement could be disallowed under a government grant, or
  • IRS examinations related to tax-exempt status, unrelated business income and excise taxes.

Be sure to disclose any time that your organization hasn’t used funds in compliance with donor restrictions.

Your statements’ footnotes should also disclose information that allows users to compare the total amount of fundraising costs with related proceeds. If a ratio of fundraising expenses to funds raised is disclosed, you should cite the method used to calculate it.

Get help

As you can see, most financial statement footnotes contain technical information best prepared by an accounting professional. For assistance with your financial statements, contact the Online Stewardship talented team of nonprofit accountants at (904) 396-5400 or Lynn@OnlineStewardship.com

© 2020


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