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DAY3MORNINGSESSION.MOV

10/04/2020

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>> Good morning. Welcome back. Nice to have you all with us again, we're going to just begin with a quick review of some questions we got yesterday evening. Then you all will have an opportunity to submit some additional questions if you have them before we begin today's content. We're going to be starting this morning with budget development. I got two questions yesterday, first was from Heather, about CARES Act funding, and this is a good one. We touched on a question like this, I think early on the first day, but Heather says, "We wanted to purchase an internet-enabled tablet and maybe a hot spot if it still take communication between individuals in a nursing home with family and services outside of the facility. Do we need to tie that purchase to a specific individual or could we purchase it for use in a specific facility for a group of consumers?
[crosstalk]
>> That's restricted.
>> Our concern are nursing facilities-- Oh, sorry, Paula. Just quick, we have limited or poor internet access. We've heard from people, some folks have no ability to communicate outside of the facility. Obviously, Paula, you get the gist. Why don't you take this one?
>> What we've been told from ACL about the CARES Act funds is that you use them to serve specific people. You would actually enroll people in your services if you needed a streamlined intake process, but still an intake process and a goal in order to count a service. It doesn't lend itself well to being used for a group unless you have multiple people in that same facility that are enrolled and that you're working on transit with transition, or you have some other reason why you're connecting with them.
Now that said, if you enroll somebody and they want to share with their friends and family, there's no reason why they can't do that I suppose. There would still be some sanitation issues with passing a tablet around a lot. I would have a little concern about that too, but you cannot provide things to a facility, you have to actually have people enrolled.
>> Okay, great. Thanks, Paula. Before we go any further, I meant to spell this out. We have a password to the StreamText link, and I apologize that was not by design.
We tried this morning to get rid of it. Luckily the password is very simple. It's just the number 28, 2, 8. I see a few of us put that into the chat at the same time, but apologies for that. If you want to access that captioning that StreamText, just type in 28 for that password, and they'll continue to display in the webinar as you're used to.
Second question I got overnight was from Jackie, who was just wondering if we were going to talk more about program income. We touched on program income earlier. I think John wanted to just make a quick comment this morning, and we'll try to address this more after the break. Again, like yesterday's format, we do have a lot of time built in today for discussion. Jackie and others, if you have more specific questions about program income or other topics that we've already finished, don't hesitate to bring them up during our Q&A breaks. John, did you want to say anything about program income this morning before we move on?
>> Yes, Tim, just briefly. There's a general rule that if you're generating program income and you're using resource development federal funds, basically to generate that income, that the income needs to offset the federal expenditures. There are some special rules around that too, and rather than try to recite them here, we'll take a look during the break, get back to you and tell you what those exceptions are. I know there is an exception, for example, for income that continues to come in after the program is over. That income doesn't have to reduce federal funds, but let's make sure we do a thorough job of that, and we'll talk about that first part of the afternoon. I also wanted to mention that, or at least ask Paula, did we share that we have a Q&A on the COVID funds ACL? You sent me a link to that. That might be helpful for participants.
>> I'll put the link in the chat, but if you haven't used our website to find the information we have regarding the CARES Act and the COVID-19 response, there's an FAQ from ACL. There were several versions of it, but I'll post the link to the most recent version. I think I can find the link.
I have the document.
>> Easier working the document.
>> I'll get that--
>> This is Tim. We are more than happy to answer any and all of your questions, but if you have not read that FAQ from ACL and if you haven't reviewed the Q&A webinar that we did earlier this year, both of those are excellent resources if you want to look into this a little bit deeper. By all means, ask your CARES Act questions, but you've got some additional resources there that you can look to. I've got a question that just came in online from Paul. Paul, I apologize, you asked a different version of this yesterday, and I thought we addressed it, but maybe we had not. That might have been my mistake.
Let's look at this. Can Part C funds be used for direct consumer services such as paying for transportation, housing, transition, et cetera? I've been told it's a hard and fast rule that Part C cannot be used for direct consumer services, that's what Part B is for, but I can't find that written anywhere. Paula.
>> I'm sorry, I was typing a response. [laughs]
>> Oh, sorry.
>> Help me again, I'm sorry.
>> I've been there before. Can we use Part C funds for direct consumer assistance, like transportation, rental support, transition, those sorts of expenses? Paul was led to believe that that was not allowed, but that Part B was allowed for those purposes.
>> Both Part B and Part C are bent the same way. If it's allowed with one, it's allowed with the other, if it's not allowed with one, it's not allowed with the other. The only difference is it's administered by your designated state-entity instead of being administered directly from ACL but what's allowed there is the same. The program purpose has all to do with independence, has to do with independent-living philosophy, people being able to access community services. If you read that first paragraph of the Rehab Act, you'll see right away that it doesn't lend itself well to direct support. The services that are the key services, the core services we call them, none of those are direct support services either.
You've got a situation right out of the gate where it just isn't a good fit, and this is that it's wrong. In fact, there's another list of permissible services that you can offer, and transportation is one of those services. It's listed in a long laundry list of other things you might do as a center if you have extra cash. It's not the core services and it doesn't lend itself well to the independent-living philosophy, not prohibited, but not a good fit. With the CARES Act, it's a good fit because you're assisting people with staying safe and healthy in their own homes or as they isolate in the community. Completely different focus, so a completely different response.
>> Great answer, Pauline. I know a lot of centers do that kind of direct support especially on situations like transitions, but they typically have separate grants to do it, private money or grant funding or whatnot. Let's see if there are any more. Also, my center gets a federal grant that passes through our local transit system that funds a program to train people with disabilities within our service area to use public transportation, common-travel training. This is from independent living skills training. Would this still be considered a separate cost objective from Part B and Part C to do that kind of travel training or transit training?
>> It would because it's not doing all of the core services. They're not providing all the same services to the same people at the same time. It would be its own cost objective.
>> Okay, great. We've got a few minutes left. Again, if you'd like to submit a question in the, ask a question box there on the webinar platform, you can email them to at tim@ncil.org. If you're only on the phone, you can press *9 to ask a question, and finally, if you're on that StreamText link, you can enter your question in the chatbox there. If you joined a little bit later today, that StreamText link is asking for a password. That password is just 28. 2, 8. We'll give about just 15 seconds to see if any other the questions come in, otherwise, we'll get started.
[silence]
>> Like I said earlier, we'll have plenty of time for question and discussion today. I don't see anything else, so Paula and John, I will turn it over to you to get started on budget development.
>> Thanks, Tim. If there ever was a year or a time period that needed budget development, I think this is it. Highly unusual. So much of the world facing very, very difficult times. Individuals facing very difficult times, including the individuals you serve, and yet we've got this injection of CARES Act funding that is a one-time thing. After that, as we discussed yesterday, or as I stated yesterday, I believe the States are going to have a very, very difficult time with their budget.
The counties are going to have a very difficult time with their budget because they've got more unemployment that they've been paying, they have less income tax revenue, they have, in many cases anyways, less sales tax revenue, and there's a lot of push back against raising real property taxes. There's really no place to go for these governmental agencies other than to look at all of the funding that they provide. That's what we're going to be facing for a couple of years. Very important that we prepare a budget, very important that we have some flexibility in that budget. Maybe we prepare a best-case and a worst-case or something certainly lower.
Let's talk about the mechanics of budget preparation. I wish we were all sitting in a group because I'd love to know how many of you prepare budgets, how many of you, and how frequently you look at budget, the actual comparisons, and in what level of detail. Again, let's talk about some of the mechanics. Most accounting software, QuickBooks being the prime example, we just use that as the benchmark because so many of you use that based on my experience. I know it's not the only one out there, but you can put a budget information into QuickBooks. Can you export your historic data, your actual numbers from your accounting system into Excel?
If you can, that makes the budgeting process a lot easier. For years that's been something that's been built into QuickBooks and many other programs. Worst case, you probably need to go through an intermediate step to export the numbers to a different type of file and then convert that to Excel, but most of these programs will let you export your actual numbers to Excel.
That makes the budget process much more manageable because some things will be the same, some things will increase a bit with inflation, some things will change with new funding or reduced funding, changes in staff, et cetera. You've got your starting point. You might even look at it in the context of the past couple of prior years, so you can look at trends as well. Then once you've gotten your annual budget together, you can put it back into your accounting system, keeping in mind that some costs are fairly uniform, some costs vary quite a bit. Your insurance bill might be paid in one lump sum or a couple of times during the year.
Payroll taxes, even payroll, aren't fully uniform. You may have some months with three payroll periods in there. If you're going to have a good comparison of budget to actual, you need to put some work into getting that monthly budget back into your accounting system. Some general ledgers will allow you to just automatically divide by 12, and that's a good starting point, but then you probably want to make adjustments for things, like I just mentioned, insurance, et cetera. There we go.
>> Just click up there [inaudible]
>> We talked about exporting to Excel and then adjusting upwards for inflation or other known variables. If you've hired new people, if you've changed facilities or added facilities or renegotiated your lease, any of these things should be taken into account. It's a brainstorming looking at your historic numbers and saying, "What's going to change?" Again, I keep pushing having a fairly concise set of expenses and a fairly concise income and expense statement or statement of activities, as we call it. That makes the budgeting process easier too. How many times a year do you share budget to actual comparisons with your board? Because we can't really do a survey. Some do it monthly. Quarterly seems to be adequate. Paula, I wonder if you have any thoughts on that as more of an insider here.
>> Yes. One of the things that we see quite a bit is a finance committee. If you have a finance committee, they might review detail monthly, and then the full board receives a quarterly statement. That's a fairly common practice. If you have a small board then your full board is probably going to serve that function. If your full board is serving that function, I like to see it monthly. Things can change so quickly sometimes when you don't anticipate it. I think a monthly report causes you to look at it too when you're preparing it for your board. Otherwise, sometimes you're too busy as an executive director, and you think, "Well, somebody will let me know if something's not right."
As you're preparing for your board meeting, that's when you sit down and go through it in detail and make your notes about what you're going to say, about why there was a variance. That's when you're going to catch some of that stuff. You don't want to wait more than monthly. You really do want to see it monthly, in my opinion. If your board only meets quarterly, you might need a committee to help you.
>> Budget data should be for the same time frame as actual data. I sit on a board, and we were getting reports that show the actual year to date, but the budget data for the year. There's no way to make sense of that. A lot of work went into developing that budget. The only value of a budget is to see if you're on track. We got that changed, and we now have some better data here.
>> That makes good sense because you're looking at year to date, year to date, budget year to date, actual side by side.
>> Start at the top, start with your revenue. That's always your constraint. Grants, federal grants, any contributions, program income, any other revenue. If you do receive contributions, keep in mind that some of them may be restricted. It can only be used during a certain time frame, it can only be used for a certain activity, so be thoughtful about those restrictions. By the way, we suggest that you track those restrictions in Excel. The accounting systems don't always track those for you that easily.
>> Related to contributions, John, sometimes I see centers estimating that very conservatively because you can always get more, but if you're giving drops for any reason, you don't want to be depending on it for your day-to-day. They usually put a very conservative estimate in for the contributions.
>> I think that's a good idea. I know this organization that I sit on the board of, we've had some struggles. We've had all sorts of reports about the level of contributions, but I think while they may have gone up in some areas, they've been focused on some of today's really current issues, and they haven't been across the board, probably not to your organizations because of the immediacy of some of the other needs here. I think being conservative with estimating contributions is wise. The prior year surplus is not part of your income for the year. It's good to have a surplus.
You're going to need that for a number of reasons, not just to balance a budget, very often to cover our cash shortfall to maybe just cover the period of time between when you spend money and when you get reimbursed for it. If work is only with federal funds, you can generally have fairly prompt drawdowns, but that's not true with all grants. Come to New York State, sometimes these get really dragged out. You need that surplus to make cash ends meet, and then when you get to expenses, start with payroll. Payroll is your largest cost. They will help you know fairly quickly whether you are going to be able to operate within the constraints of your revenue that you started with. Payroll taxes are usually a uniform percentage of payroll. They're usually fairly consistent year to year. Do you see changes, Paula, in the payroll taxes versus payroll?
>> Not much, no. A lot of you don't have new funding coming in, so we don't see a lot of salary increases either, but this is the point at which you figure out whether or not you have any money for salary increases as you-- Your payroll is your first expense, and as you compare that back to your revenue you think "Okay, what can we do for staff?" Often there's not a lot you can do.
>> If you know things have changed, if your insurance cost is going to go up, for example, your workers' compensation insurance, just add that into the formula. Hard to survey here, but I imagine some of you are self-funding unemployment, and there is some concern if you've had to lay people off. I guess with the funding you've had this past year that hasn't been the case. I know some nonprofits have had to reduce their staff, and so if they self-funded their unemployment, that's going to come back and be fairly harsh on them. If there are any other things that changed as we said, rental rates, put them into the budget formula as well.
>> John, something I've seen a lot is centers reconsidering their space. When they move through everybody remotely they realize, "We could really manage this as a long-term policy and have people work from home a certain period of time, and if we did that, we might not need this extra block of offices. When our lease is up we may want to cut back the space that we are using in this building." You're seeing a lot of that kind of decision-making being sorted out as they are going into this next fiscal year.
>> In addition to questions that you might have, if you have any tips for budgeting, things that have worked well for you we'd love if you'd share those, and then we'll get them out to the entire group later in the day. I know everybody is working on this to some degree, and we'd appreciate your comments on that.
Cash management. This is a different topic from budgeting but this is cash management, and we've had questions about whether you can get advances. It's right in not only uniform guidance, but it's also an HHS uniform administrative requirements, and we've cited that 45 CFR section 75.305. It says that non-federal entities, you folks, must be paid in advance as long as you have written procedures and proper systems and actually do minimize the time between drawdown and distribution of funds. Those advances must be as close as administratively possible to disbursements.
Again since your payroll is your biggest cost here you probably should time you drawdowns around your payroll because that will be your major cost, but get as much as you can into that same time frame. Not rent that's going to be paid three weeks out, but things that are going to be paid fairly imminently because you really do need to minimize the amount of time between when you get the money and when you disburse it. Disbursements can include your indirect cost not just your direct but can include your indirect cost. These are not a line of credit. These are not allowable to fund other programs or just general cash shortfalls. If you do that, you will not be able to get advances.
You'll only be able to get reimbursements after the fact, after you've spent the money, and that's harsher on your cash flow. Presumably, it was already a problem which caused you to do that and your problem will be more severe and acute if you do use this as a line of credit.
>> Yes. I've seen it happen, and you're never going to dig out of that hole, for one thing. When you say, "Okay, my state money hasn't come through, I have to make payroll. I'm now three months behind at the state level, and I have to make payroll, so I'm going to draw that money down and know that I borrowed it, and I'll put it back as soon as the state money comes." That's not allowed. It's simply not allowed, so don't do it.
If that's found to be your practice, there would be some sanctions for you from ACL regarding the fact that you're using those funds inappropriately. You can say to the state, "I need you to pay this money because it's payroll" and you need to really not use your federal dollars as a way to balance it until the state money comes through, but typically, that's what it is. Typically, the state is slow in responding, and as John has said, that may even increase as a problem. You need to continue that relationship and try to move things quickly through the state as well.
>> If you're being funded under multiple grants, request either a single or a simultaneous payment. That's not as much for you as it is for the federal government. They just prefer to combine these and have fewer drawdowns. They suggest that if you're getting payment by check, that you don't request payments more frequently than monthly, although if you've got biweekly payroll, you might consider every four weeks. If you're getting electronic drawdowns, which I don't know [crosstalk].
>> Every three weeks. Everybody.
>> Everybody is now. Okay, so that monthly, or four-week time frame is out the window. You can request those more frequently. They are rather automatic. The federal HHS and other federal funders are fine with more frequent drawdowns. Again, you probably want to time them with each payroll if you're getting electronic payments. Some payroll processors like Paycheck's ADP have an option of having you combine your taxes with your payroll. As you know, if you're paying somebody $100, they don't actually get a check for $100. They get a check for $89 or something. Some Social Security came out, some federal and state taxes came out. When they prepare those checks, you've got a bill for $89 dollars times however many people are involved. Then shortly after that, you may have to write a check for the Federal Deposit and then maybe a week or two later, your state deposit.
To avoid a lot of extra drawdowns, sometimes it is better to have your payroll processor withhold the whole thing, the gross amount of the payroll, and the employer payroll taxes, and then that is reimbursable. It's not like you're prepaying it, you've paid it, or you are paying it. You're going to pay this Friday, today's Wednesday, do you drawdown, and it comes out of your bank account on Friday. That would meet the federal requirements.
Very important to keep documentation for each individual drawdown. There's going to be a lot of them over the course of the year, but this is something that most likely will be looked at if ACL comes out and does an audit. You need to have support, you need to have documentation to show that the drawdown was for very specific things that had been expended or will be expended very shortly. I think an electronic file is a much better solution there, much easier to organize it, just label it by date, and then it should be very easy to find. As we said, the other day might keep the auditors on their own turf. You can just send them what they're asking for.
>> Certainly, as you're doing that documentation, this includes payroll plus all of the checks that you're going to issue for other expenses during that same period. You're drawing down for payroll plus other expenses each time you draw. That's going to keep you very current on the things that the federal funds can be used for.
>> The next point says, be sure your capitalization threshold is $5,000. That probably should have said strongly consider using that because what that will allow you to do is to draw down the full amount of a purchase up to $5,000, but if your capitalization threshold is lower then you're going to have to use that lower threshold for capitalization.
>> They check that in your policies and procedures because it can make a difference in what you can ask reimbursement for.
>> Next slide.
>> I'm just [crosstalk].
>> Section 75, 410 addresses repayment of unallowable costs. Payments made for costs determined by HHS or another agency to be unallowable must be repaid with interest. I'm not sure what the rate is, Paula, you probably don't know that either.
>> I don't. I haven't run into it yet.
>> It's probably not a lot, but the repayment will be a burden.
>> This is a cost that you incurred that you paid for. You have to find a new source of funding to do that. It's better to not have any unallowable costs.
>> Right. We talked about the presidential executive order ordering grantees to buy American made and built products whenever we're using federal funds. ACL has confirmed that applies to equipment purchases, including information technology systems and other tangible personal property. That can be a little bit complicated because it may be difficult to buy IT equipment that's actually manufactured in the US, much less materials that are sourced in the US. That and other tangible property having a useful life of more than a year and a cost in excess of $5,000 or whatever your capitalization threshold.
This also applies to, as I said, to goods manufactured here, assembled here. Even if the manufacturing is done in another country, if one of your sources does their assembly here in the US or sources materials in the US, then there should be a preference for that. Not at a measurably higher price, but there should be a preference for that. Tim, we're going to change subjects pretty dramatically here. I wonder if we have any questions about this section here, especially drawdowns that usually elicit some comments.
>> Yes, we do. Gloria was wondering, John, if you could revisit your comment about how unemployment will impact centers who have laid people off.
>> My expertise doesn't go beyond the borders of New York state here, but there are two scenarios. One, in New York state you either pay an unemployment tax or you agree to self-fund unemployment. By the way, historically we encouraged a lot of people to self-fund because at least in this state if you have unemployment, New York is going to increase your rate. At the end of the day, you're going to pay for all of your unemployment and you're going to pay your share of the state's administration of the unemployment department. You're going to pay more than your actual unemployment. That's just a reality.
Self-funding for a larger organization that doesn't have a lot of turnover really was a good option. There are even companies that ensure you're self-funding to reduce your risk, but, of course, they reduce your benefit as well. If you are paying unemployment or if you are incurring unemployment but you pay it as a tax, what will happen at least in New York is your rates will be adjusted because the relationship of your unemployment to what they consider your pool of money- This is not money you can get but they account for everything you've paid in.
The relationship between what's being paid out to your employees and your pool of money diminishes, and therefore they're going to increase your rate. That's for the agencies that pay tax. If you self-insure, then basically you're supposed to reimburse for the unemployment that the state is paying out. That's the New York rule. You need to check your own state rules to see if that's different.
There has been some relief at the federal level for this because agencies initially were going to be forced to pay the entire amount of the unemployment and then later to get reimbursed because the federal was paying for a portion of this. Technically, while you would only have to reimburse the state paid unemployment, initially nonprofits were going to repay all of the unemployment and then sit and wait for a federal reimbursement.
An executive order, I believe it was, but there was legislation to change that, so you would not have to repay the federal portion and then wait for reimbursement. Still, those agencies that agreed to self-fund their unemployment and are experiencing much higher unemployment these days likely will have a much bigger bill. I don't think that this is the sales particularly because of the additional funding that we've had but it may be particularly since that question was asked.
>> Some of the fee-for-service projects were shut down during this period. The staff who were funded through those fee-for-service projects sometimes could be redirected to something that was Cares Act related and therefore could continue to be paid but some of them were laid off related to, for example, employment. VR no longer issued the people service, nobody was hiring, you didn't want to go out and hunt for jobs, and so that was closed down for a period.
>> A couple of people were concerned about the statement that they must draw down in advance. Is that really a must? Is there any ability to do that on a reimbursement basis?
>> I did say must, but I didn't say agencies must. I said the federal government must allow agencies that option. No, it is not required, but if agencies wish to draw down in advance and if they comply with the rules, then the federal agency has the must. They must allow advances.
>> Great. In light of that, then Paul is wondering, is there a limit to how far you can wait to draw down for reimbursement as long as it's for activities within the same fiscal year?
>> I'm not aware of any.
>> Yes. The only thing would be that they do ask you to finish your payment for this year's expenses. You incur the expense now, but sometimes your bill doesn't come until later. That needs to be completed before you do your last report on those funds, which is typically 30 to 45 days after the end of the fiscal year.
>> Great. Paul is wondering process-wise, then, they would determine their drawdown amount of direct part C costs and then simply multiply that by the indirect cost rate and then add that on top for the full drawdown request. Is that right?
>> I believe that is legitimate, Tim. The rule says that you're able to draw down the indirect cost. I think it would be impractical to go through item by item and do that, but to be perfectly honest, I'm not sure. I could see where you could conceivably violate the prompt payment rules there. Paula, have you seen anything?
>> Of course, this is going to stretch my accounting so make sure that I'm saying this right. Usually, when you're preparing your drawdown, you're preparing it based on the checks that you issue and which part of it are the federal part. When you write the check, you're determining what's direct, what's indirect, what goes to part C, what goes to part B. You're allocating that specific expense, and then you draw down the federal portion of that expense. It does include the indirect for the federal portion as well as the direct, if there's within that expense both the direct and indirect costs. If all of the costs are indirect, it's still allocated.
What you're doing as you pay the expense is deciding on that allocation and you include that. It's in there. Does that make sense now?
>> Yes, but there really is a practical problem with that Paula. Maybe we have to reach out to ACL and get some feedback from them on that because-- Let's just take an example, you buy a case of paper for your copier and a portion of that is going to be chargeable to the federal fund. It's really going to be difficult to micromanage that. I can look at the rule about that, but I don't think it addressed how you get the indirect.
>> I don't think it does.
>> It sure would be easier if we could just use the rate, but I think we better not make that as a statement until we get some feedback on that.
>> Gloria has just got a clarification on something you mentioned around a spreadsheet for all of the items that you paid for that add up to the drawdown. I don't remember your specific comment. Do you know what she's talking about there?
>> All I'm saying is that if you're doing a drawdown and the drawdown includes, let's say payroll and payroll taxes, your monthly rent and your insurance bill, then you need to document them. They need to be summarized in some format. A spreadsheet is a great way to do it, Excel or something of that nature, followed by the actual invoices, the payroll report, et cetera. Scan all of that, save it as an electronic file where you have a folder for drawdowns and you label them by the date of the drawdown. That's what I was suggesting. I hope that answers the question.
>> Okay, great. Thanks. Paul's wondering, Paula, what would be the specific process for reporting or repaying unallowable costs if something were found to be unallowable. How does that happen?
>> It's a really tough situation. I'm working with a center now that has a payback, and ACL has asked them how are they going to pay for it? Their response is, "That money was spent and we have no reserves. We can't pay for it." Which is not an allowable response. We haven't seen yet what action will result if they can't pay but they are being asked, "How are you going to do it?" You can probably put a payment plan in place if you have some income from some other sources, but you can't use your federal grants to pay it back. You can't borrow against that. It is a tough situation. You just don't want to be in that situation if you can avoid it at all.
Some situations it happens because of what we're going to talk about next, which is fraud. Somebody defrauded them, and you're supposed to pay it back while from what you know, there are no reserves and there's no money and you can't use any of the grant money. You can't tell your donors, "Oh, please help us pay back what somebody stole from us." Maybe you can, but it's hard to do.
>> There is that insurance issue again.
>> Then if you've got good directors and officers and liability insurance, you may very well be insured against some of those things. That may be how you pay it back. That's right.
>> Thanks, Paula. A quick clarification from Dory. The capitalization limit is per item, correct?
>> Yes.
>> Yes.
>> I believe that's true. Okay, thanks. Going back a few questions now, Susan asked when we were talking about drawdown rules, she said, "I thought there was a three-day rule for drawing down funds and spending them. Has that changed?"
>> There was never really a three-day rule, but IRS said that sometimes because there's a rule that you have to pay interest if it's longer than that period. Not that we're getting any interest on this money that we draw down anyway. Isn't that right, John? It was never really a rule.
>> No, the rule is as soon as administratively possible. I think that got interpreted to mean three days. I think that really was more or less saying, "We don't mean this month, we mean right away."
>> Quickly.
>> Barbara was wondering about that executive order you mentioned, John. Was that for federal grants or all grants? I imagine it could only be for federal grants, right?
>> It is only for federal grants.
>> Thanks. Paul is asking about his question about indirect costs. He said, "Mathematically, what would the difference be then if it's an indirect rate? What would be the difference between adding it at the end or adding some specific expenses?"
>> I'm sorry, this is within the context of drawdowns?
>> Yes, adding that indirect rate to your drawdown request.
>> Intuitively, I feel exactly the same way, but as I said before I don't think we have that in black and white. I will take another look at that section, but Paula and I have both spent some time with that section. I don't think it gives us a clear answer about how we compute the indirect. It just seems logistically a lot easier to use a rate. Yes, that's how I feel too, but I don't know that.
>> It seems to make sense, because why else would you need a rate? Otherwise, you're allocating directly. Yes, it seems to make sense, but we would like to clarify it. Do the same thing though. Choose a methodology and do it, and we'll let you know later if you should shift it. [laughs] Oh, that's terrible, [laughs] but we need an answer first.
>> All right. Last question that I see anyway, comes from Sally, who going back to this buy American executive order. She said, "Is it even possible to find laptops made in the US since I've never found any?"
>> Oh, then you don't have a problem. If you can't find a good quality laptop made in the US then that requirement doesn't apply. There has to be a preference for items manufactured in the US. Then the intention of it is certainly good, but as a practical item here, I agree, it's difficult, maybe impossible. [chuckles]
>> Great. One new comment and one new question before we get back to this. Annette mentioned talking about the unemployment insurance, she was just highlighting what you were saying, John, about the importance of knowing your state rules. She said, "In Minnesota, for instance, CILs are not allowed to self-fund unemployment. Good to keep in mind. Good disclaimer for everything we're talking about. There could be different rules in your state that you need to be aware of. Cheryl says, "Is income from contracts that we have such as the Home Care Commission, the Work Incentive Network, are they treated the same as part B and part C funds?"
>> For what? Treated the same.
>> In terms of federal requirements applying?
>> I assume this is essentially a program income question. Cheryl, if you want to let us know, but I'm assuming she's saying if they have income from contracts would that be treated the same as program income from part B and part C?
>> Very possibly not. If that income isn't being developed with federal funds, if that's a totally separate program that's been self-sustaining, then probably not. If that's the question, but we may need clarification.
>> A lot of those kinds of contracts are performed by staff who are paid under the federal grants, in which case that would be program income, but we'll talk about program income some more this afternoon.
>> Great.
>> Is that right, John? It would be income if the work is performed [crosstalk]
>> Yes.
>> Cheryl added allowable and unallowable costs?
>> Well, what's allowable and not allowable on a contract is based on the contract. It wouldn't be treated the same as far as-- It may be but it may not be. What did they say?
>> Again, if it's a separate program then it's not subject to the general federal requirements. If it is part of a federal program, because, as you say, part of the costs were being paid with federal funds, then all of those federal rules about allowability and the grant terms about allowability would apply.
>> Cheryl, different Cheryl was a little confused about our discussion around adding the indirect cost rate to the drawdown request. She said she's not yet funded. I don't know if that means, Cheryl, that you're opening a new center for independent living or something else. In order to determine your entire drawdown request, you'd have to add the indirect. You need to know what your indirect is on top of your direct cost. Let us know if you have any further questions about that. That are all the questions that we had. Thanks for making time to go through those you all, I'll let you all get back to it.
>> Great. I'm glad we took a little stop there because that is an important topic with a lot of key questions for people. We did talk about the internal control system that's found in COSO, found in the Federal Green Book which is internal controls for federal agencies. We're saying slightly differently here, but it's really the same as what we looked at yesterday. The internal control structure is the best defense against all types of fraud. It starts with setting a proper tone at the top. Management does things with integrity. They follow their own policies. They have somebody independently review their charges. They hire properly. They do background checks. They train properly. They check in with employees to make sure that they've got the support they need in terms of training, mentoring, et cetera, in terms of their tools. That's setting a proper tone at the top.
We talked about assessing risks, what could go wrong. We talked about developing proper policies and procedures, and then training staff in those policies and procedures. That's a really key one. We see some organizations that do develop these policies that maybe they do a little bit of a lazy job and use what we've provided. Hopefully, they've really customized it, but also very importantly, they need to share it with the people that are impacted by it. They should document those trainings, how they got done. Was there a Zoom call? Was there a meeting? What other means were used to get this information out to everybody? Then finally that monitoring, periodically checking back to make sure that controls are appropriate based on what we're doing today, and are they actually working?
The Association for Certified Fraud Examiners, this is the organization that assesses fraud in our nation. They actually provide a report to the nation every year about fraud. We've quoted some of their stuff earlier but they talk about behavioral red flags including a wheeler-dealer attitude. I suppose you could close your eyes and think of somebody [chuckles] like that. Hopefully, not your controller. Reluctance to share duties. On the surface that appears to be somebody who's very willing to do everything that needs to be done, but really somebody who's not willing to share or let people in, that should be a bit of a red flag.
>> I would even put that one at the top of my list, because when a center is working in hindsight, they say, "Well, we had this in place. The policy was in place, but he said, "I'll take care of that and I was just so relieved to have it taken care of that I'd let him do it, and there were no more checks and balances.
>> Yes, and usually, these people are very smart and competent too, and they're good at articulating that they've got everything under control. It really can deceive you. They can be defensive. If you try to get involved, they can be defensive.
>> [inaudible]
[laughter]
>> Then there are just circumstances. The first two things are characteristics and the last few things are the circumstances, they're in family problems, maybe financial problems, maybe somebody going through a divorce, and that always involves financial problems. Addictions and maybe not necessarily the person, but a spouse or a family member. Somebody getting too close to vendors, these are all behavioral red flags. By the way, this group is the group that trains people like us. We're not fraud examiners, but some firms like ours do this and these folks will train you in proper techniques. It's based on what they've found when there were frauds. These were the characteristics they observed.
>> Did you want to talk about that another minute? [chuckles] I'm sorry, I jumped in.
>> No, that's okay.
>> The only other thing that I would mention is sometimes you think, well, wow, where did they get the money to do that? Whatever it is, buy a boat, take a vacation because you know what they're paying. You think, "Oh man, their spouse must make a whole lot of money because they're doing X, Y, Z." Sometimes if they're living beyond what you think their means is, you'll see a little of that. Cheryl could in her comments reluctance to share duties or allow volunteers, et cetera.
I know one time I was doing an interim assignment at a center. I brought in an accountant from another center to help the new person, and found out almost right away that there were problems that person wasn't going to tell anybody about because she had it under control, and he was getting some of the funds from that. Anytime they push back and say, "I don't want that person helping me. I don't need that person's help." It's a good sign that there might be a problem.
>> It just means you have to have an open-mindedness to the possibility of a problem, you don't want to be accusatory. I know I've shared this in prior years, but I remember being a very young auditor. One of the things we would do would be to compare the signature on the W4 form to the signature on the check and this is one of my first jobs, and I'm comparing them and I see a few of them that don't look anything like the signature on the W4. I made a big deal of it to my manager and I thought I had uncovered some big fraud. We actually brought a few of the workers on, it was late in the day because they started their shift at 3:00 PM, and showed them the checks and said, "Did you actually get this check? Did you actually sign that? They started laughing. What it was, was that they'd get their check on Friday and they'd go right across the street to this bar-restaurant and spend maybe a little bit of cash in their wallet and after a few beers sign over their check and cash that at the bar too, and their signature just wasn't very good at that point in time.
It just was a lesson to me very early in my career that you need to have a questioning attitude. You need to have an open mind to the possibility of fraud, even from the nicest, smartest people in your organization but you'd never want to be accusatory. You always want to do a little bit of digging before you embarrass yourself or somebody else.
>> Most of the time, what the center will say or what the staff at the center will say after that fraud has been discovered is it seems so nice. We thought we were such good friends. They seem to really care about our mission, so they seem like nice people. Don't assume that nice people can't
be doing some of these other things, these are red flags that make me want to double-check, take another look. Okay. Dory says that attitude was a magnet. That we only do it with an attitude.
>> All right. Now we're going to do an abrupt change here and talk about understanding your organization's financial statements and we're going to throw in here a couple of changes that are coming up that will be a big deal for some of you. Fortunately, because of COVID-19, they got pushed out a little bit so they were going to be rather imminent. You'll have a little bit more time, but we'll talk about those.
Your general, your financial statements, if you have audited financial statements or reviewed financial statements, you'll either have your auditor's opinion or report, if it's a review, a balance sheet or statement of financial position, they're the same thing. An income statement or statement of activities, a statement of cash flows, usually a statement of functional expenses, sometimes that can be part of the activity statement, and then finally, your notes to financial statements.
Sadly, the notes to financial statements have gotten longer and longer. I just reviewed a set for a board that I serve and the notes that interpreted those statements were two and a half times as long as the statements themselves, and some, really difficult to read. Not happy about that. I don't think our profession is doing a terrific job at anything other than writing footnotes for ourselves. Sorry to have to say that, but-- All right, next slide. The auditor's report is addressed to the board. It stated when the audit was completed and accepted by management and then very near the front of this thing, as I said, you're going to have the accountants report, whatever it is.
There's a little bit of introductory information and then the heading opinion. You should see, "In our opinion, the financial statements described above are fairly presented in all material respects." That's good. That's what we call an "unmodified", we used to call it an "unqualified" opinion, but a few board members around the country asked, "Why is it unqualified? What do we have to do to make it qualified?" No, you don't want that. It's "unmodified." It didn't need to be changed because of uncertainties and so that's what we mean by an unmodified opinion.
It doesn't need to be changed because of contingencies or a lawsuit that could have an impact on the organization. It usually can fit on a page. Sometimes, it'll leak on to a second page a little bit. Never on two pages here, but it's going to, and your slide says, "Fiscal year or calendar year 2020 and later." That's not true. That got pushed off the calendar year and 2021 and the fiscal year is 2022, so for your September 30, you'll see this change with your September 30, 2022 financial reports. That's always down the road.
The auditor's report is going to be expanded greatly. It'll be, maybe, four pages. It's going to talk more about what we do. It's going to start right at the very top with our opinion. Right now, there's an introductory paragraph that explains what the opinion is based on, basically, what we did, and then the opinion. Now, we're going to start right out with the opinion, and that's good. You probably won't have to read too much after that if the opinion is unmodified, but you are going to see in that going forward a lot more about our responsibilities as auditors and management's responsibility for the financial statements, so look for that, but down the road.
>> I just wanted to mention too, you notice that the audit is addressed to the board, and if you have good practices within your organization, the board should be involved in every step of this audit. Some of you even have an audit committee that might meet with the auditor and might review the financial statements at some point but the board needs to make the decision and the board should see the auditor should report to.
Now, this was not a center, but there was a little non-profit that I knew about not too far from where I lived in Kansas. The executive director just kept not getting the audit to the board because it was not good, because he was doing some things he shouldn't be doing. The auditor really, I felt like was stuck for a little while and then finally said, "Who's your board chair?" I took him directly to the board chair because couldn't get through to the board. The board should be actively involved in this from choosing the auditor, to hearing the audit report, to looking at the management response to the report. That this is their report, it's part of their board function.
>> That's really a requirement, not just the best practice. That's really a requirement for all of you. It's a requirement for all of us too. Actually, the board can appoint an audit committee and task them with this responsibility or the board can do it themselves, but it needs to be all board members who are independent. That means if the executive director or the CEO serves on the board, they're not part of this process. That's what's supposed to happen. I will say that's not what always happens, but that's [crosstalk]
>> That is important quality control for you that the board does this. If you have a board that doesn't want to, you got to make them. [laughs]
>> Right. One of the financial statements is the statement of activities or the income statement. This is for a period of time. Usually, your fiscal year, certainly your audit, it's going to be covering your most recent fiscal year. It will show the contributions and grants you have received, I should say, earned and the income you have earned and then expenses broken down between program, management in general and fundraising.
Income earned and income collected aren't the same. Some amounts get paid in advance, some amounts are earned, but not yet collected. There are new rules that are in effect now that say government grants should be classified as conditional contributions. Now, again, that's a bit of a term of art but what a conditional contribution means is that it's a contribution, we're not giving something of value in return. There was a lot of debate about whether if we carry on this program, are we doing something in return for the government?
The ultimate decision was the citizens of our community is not the same as the government, so the only time we're really performing a service for the government is when we're doing something directly for them. We're working on some of their internal systems, their policies, things like that but if we are serving people in the community then we don't have what we call an exchange transaction. This is now a contribution. It's a conditional contribution because if we don't complete this task, as you know, we don't get the money.
It's just like any other contribution that says, "Well, I'll give you $100,000 if you raise matching funds." We don't record that as a contribution until we get the matching funds, or, "You'll get this money if you approve adding a daycare. Do in fact that a daycare within your agency." That's a conditional contribution. Minor things like, "Give us a report at the end of the year," aren't a condition. That's simply a requirement. Now, governmental grants are conditional contributions.
That means we'll record them as we've done all of the things to earn those contributions. They still may be called the government grants. They don't need to be called contributions, but it's just important to know that government grants are now classified as contributions. There are also some other changes that you will see in the statement of activities. This one is in place right now. We have to analyze how income is earned.
From the time I went to school, we talked about the matching principle, but now we've got a different way of looking at all of our income sources, won't affect most of your agencies in any significant way, but if you have a fundraising event. For example, let's say there's a golf outing and somebody pays $100 to participate in this and the cost of the golf outing is actually $30, then we've actually got two parts to that transaction. We've got a contribution of $70 and we've got an exchange transaction or a payment for a golf outing of $30.
If they don't have conditions contributions are recorded as soon as we have a firm commitment, but an exchange transaction happens when the event actually occurs. The contribution part of these tickets, the $70 part of it would be recorded right away. The $30 part of it would be recorded when the event happens. I have to say any of these special rules that add complexity, like this only apply if they are material to your financial statements.
If an auditor suggests that you need to follow this treatment you are always allowed to say, "Are these transactions material to our financial statements?" The auditors have materiality thresholds that are calculated. That helps us determine what we look at, and it helps us decide whether we need to make adjustments so these rules won't apply. I think based on the fact that this isn't a major part of your funding and when it is a part of your funding, it's probably not huge dollars. It may not be material, but just wanting to be aware that you're going to be hearing about these new rules and don't let anybody overcomplicated on it.
I thought there was going to be another thing on Lisa's here. Maybe that's down a little bit, Paula. The balance statement of financial position is as of a moment in time, it's midnight, December 31st the last day of your fiscal year, presumably September 30th for a lot of you, it will show your assets, your liabilities, and your equity, the net assets, as of that point in time. We're now using the terms, net assets with donor restrictions, and net assets without donor restrictions. You probably know the old terms temporarily unrestricted, temporarily restricted, permanently restricted.
That created a lot of confusion because you folks get federal monies, and there are all restrictions, but those weren't the types of restrictions we were talking about. We were always talking about donor restrictions now just to add complexity to complexity or we're creating government grants as contributions. At any rate, we'll now have a net assets with donor restrictions and net assets without. Under the with donor restrictions, it's okay to break them down further into temporarily restrictions and permanent restrictions or endowment type funds if that applies to you.
The assets well, they include things like cash investments, property and equipment amounts owed to your organization and similar amounts and liabilities will be accounts payable, unpaid loan balances, and income that's received, but not earned yet. Starting with 2021 there will be some big changes here. I'm sorry, let me make that's 2022 now, Paula. We got some fairly recent changes.
Starting with calendar 2022 there will be a big change because as I said, the accounting gods have decided that when you lease a building you don't just have a monthly event. You have an asset, which is a right to lose, a right to use assets, and an obligation to make payments for the full amount of the lease. If it's 10 years, we're going to record that entire right to use asset and that entire obligation on the balance sheet. Again, that's a couple years down the road, it won't impact your income at all. It will impact your balance sheet a lot for some of you, for many of you.
The only thing you need to be thoughtful about is, will this possibly impact any bank loan covenants, if you have bank loans because sometimes covenants require a certain relationship between debt and equity, and this will increase, inflate these numbers. Just be aware of that, but it just got postponed so we've got an extra year. The statement of cash flow interprets how that income statement or statement of activities compares to the increase or decrease in cash. It's natural to think if we had income, we have more cash but that is never the case, or almost never the case. The statement of cash flow explains what caused cash to go up or down for the year.
In the past, we've always started with that income statement or statement of activities and reconcile that by saying, well, depreciation was an expense, but depreciation doesn't use any cash so we're going to add that depreciation back in. Some of our income is not yet paid to us, it's in our receivables and some of our expenses we haven't paid out yet so that didn't use any cash. We do those reconciliations. That's still happening, that's still a possibility but the new rules now allow us to use what's called the direct method.
I think we may be a little slow, us in the accounting community, a little slow to adopt that because nobody likes change except the baby with dirty diapers, but a lot of folks are saying it's easier to do once you get used to it. It makes more sense too instead of reconciling to say, cash received from government grants, cash received from contributions, cash paid to or on behalf of employees, cash paid for rent, and other occupancy costs. Some of you will see a change in that. I think it'll be a welcome change, but it probably will take a few years. It's here now, it's optional now, but it's not a requirement right now.
The statement of functional expenses breaks down expenses by their natural classifications, payroll, payroll taxes and benefits, occupancy and supplies, and then also by function, as we talked about early. Your programs and then your management in general and fundraising if you have a fundraising initiative. Then your footnotes. Footnotes explanations, as we said are often longer than the financial statements but they do contain some very important information. It's worth at least going through that.
They will describe the net assets with all the restrictions, they will describe your policy for capitalizing the equipment, they'll probably provide more details about your total equipment, buildings, and other fixed assets and the depreciation. They will provide details of your liabilities from lines of credit, even if you're not using them, it will record your lines of credit. If you have loans outstanding, it will break them down between the amounts that are due within the next year and the amounts that are due over a period of time, same with the lease commitments. It will show your lease commitments for a period of years. They're worth looking at, in spite of the fact that they are difficult to read.
In addition to what you should look for in the financial statements themselves, you should consider how long it takes you to depth financial statements. Now, we'll take some of the blame as auditors because we can't do all audits at the same time. We just had a wonderful organization, there was a former client request a proposal from us in our busiest time of year and we're very sad to have to decline to propose on that but that's just a reality for. Some of the delays are going to be just because it takes us time to get through all of our audits.
If a scheduled audit doesn't get completed as scheduled or within a reasonable time if you've gone beyond the middle of the next year and financial statements aren't available something is wrong and you should be questioning that. Maybe a bookkeeper needs help, maybe a bookkeeper needs some more training, maybe the systems that create your financial statements are inefficient. Maybe there's an urgency just to get information into your system and then requires a lot of analysis after the fact, that's not a good idea. It's really, really worth taking the time upfront to get information into your system properly so you can get financial statements out quickly.
>> You're saying, John, that when the financial statements when the auditors can't get it done, it's often because of how we put the information in their hands?
>> What you put the information in their hands but what I'm saying is sometimes you'll record an item and not break it down properly, not allocated properly, not break it down between grants, not breaking down between program versus management in general or indirect. Then we go in after the fact and analyze it and break it down properly but that takes a lot of time to do it.
>> Often it doesn't get done, people who do delay it often don't get it done so doing it when you write the check is always my recommendation because you get too far behind.
>> Usually, if they don't get completed on time can be that people don't want to give you the financial statements but I would say way more often there's usually an inefficiency. The accounting system is more complex than it needs to be and almost always results in unnecessary work and I will say if you've got a complex accounting system and you can't get things out timely then who are you complicating it for because the board isn't getting timely information. When they do get it, it's going to have more detail but is that any good? Timely information is really a big deal and, Paula, as an insider, if you're not getting timely financial statements that's a problem, right?
>> Absolutely and I had the opportunity to do several interim executive directorships. I could really tell the difference almost within a couple of days between people who had efficient systems and people who had complicated systems and not that you can uncomplicate simply but it is worth the effort to uncomplicate and keep a system that you can maintain, rather than having so complex.
Sometimes I asked people for their chart of accounts because they print out a chart of accounts or send me an email and chartered accounts from their QuickBooks program, I can almost tell right away where the problem is because they're adding accounts and they're making it more complicated than they need to instead of doing it simpler. Maybe before we're done we'll talk a little more about that. You can tell almost right away and it almost never gets resolved until you just back up and simplify everything even before. You can't ever catch up if you're going back to clarify your transactions later.
>> Simplify accounting enhance allocation, that's my mantra. A financial statement audit may be required by your state charities bureau based on revenue or asset size, we have thresholds in New York that that change periodically. Your board or your bylaws may require annual audits these are just general financial statement audits. When this is the case, audit costs are included in your general and administrative expenses and can be reimbursed as an indirect and I don't think there's any debate.
I think there were some questions about that, Paula, over the years because there was a rule that said, if an audit isn't required you can't reimburse it for federal funds but that was a compliance audit they weren't talking about financial statement audits.
>> Absolutely, and we recommend that you do a financial statement audit even small centers are going to benefit from that. The board is going to have much clearer information and you're going to have a good sense of it as well. Is it costly? Well, there is a cost attached. Is it worth that money? I think absolutely. It gives you another view, especially some of you who are brand new, and you come into things that you don't completely know all the details yet. Your brand new either executive directors or finance managers, having an audit that looks at that past year, and gives you some of that information is going to be valuable to you.
Then there's the single audit. The single audit is as John said, a compliance audit, and it's only required if you expend more than $750,000 worth of federal funds. With the CARES Act, some of you are going to hit that threshold who have been doing tasks. Be sure that you're looking at that issue in this fiscal year. Did you spend $750,000 or more in a year that's ending now? You need to know that because you're required to have that single audit if you did, and then next year as well because your CARES Act funds span two years. That may also throw some of you up into that category.
Now, 61% of you said you have a compliance audit now. I'm not sure if that was completely understood about what kind of audit we were talking about here, but we're talking about this single audit that also looks at the requirements for federal grant funds.
>> Just to add to that, the rule is that the single audit has to be paid for if you're over that threshold, and won't be paid for if you're under that threshold. The only exception, I don't see this happening, but if a federal agency requires a single audit, a single agency, they have to pay for that audit. They're really pretty much prohibited from requiring it if you're under the dollar limit. Some of the other reports, I'm not sure what you see in these, Paula. It's certainly budget comparisons are common. We talked about that earlier.
>> Your aging reports are interesting because if there has been a past problem of getting money from one of your funding sources, your accounts receivable aging report is going to tell you who owes you money and hasn't paid it yet. If you have a lot of different grant sources, some of which are behind in their payment, this is information that's useful to you. You can look back and see how far behind they are. You can run it for current, 30 days, 60 days, 90 days. It'll give you an idea then how long it's really taking.
That is a tool that you can use to know whether or not it's worth sticking with that vendor. If they've always got you out there at 90 days, and you're trying to manage cash flow that doesn't work well, this is going to give you good information. Accounts payable aging is going to tell you whether or not you're able to pay the bills on time. If you have bills that come in that you owe and you don't have the cash to pay it or whatever, then that's going to tell you that. I know those are not as common at reports, but sometimes they're the tool you want.
That's the way it is with any of these reports, huh, John. There are some tools, and whatever you're looking at in your organization, you want to ask about and have the tool that best helps you get that information. There's a lot more available for you than they usually print out. I don't think it's really useful to just do a balance sheet. Maybe that's helpful to some folks. It just doesn't have enough information for you to manage things financially. As an executive director, I'm much more interested in the budget versus actual, and the other reports that the circumstances that I am in the balance sheet specifically. It's not a bad thing.
>> Paula, have you seen a dashboard reports?
>> I have seen some, and I think that some of them were really good. I haven't seen what the new QuickBooks presents as dashboard reports. The challenge to centers often is that they are not accessible formats. If you've got anyone on your board who requires an accessible format and you're looking at a bunch of charts, you're going to have to do some describing because it doesn't do that automatically for you that I've found. Although maybe I hope some of you can find that it does but I haven't seen that.
That's the challenge, sometimes with dashboard reports is access, but for most people, if they can get a picture of it, they grasp some of these concepts a little bit more quickly and they can see a chart that shows things going up or down, they can see a pie graph that shows how your income is split out, or how your expenses are split out, those are helpful sometimes in communicating with your board and sometimes other stakeholders as well are interested in those dashboard reports. Have you seen the ones that QuickBooks can generate yet?
>> I haven't, Paula. I read an article about it, but I haven't seen the actual reports. I do think that these will become easier. There's been a lot of talk about dashboard reports. I know many boards include members who aren't financially-oriented and it really is helpful to look at some of the key things. Part of a dashboard report is financial, that's usually just the one page. It might show, cash on hand, cash on hand a month ago, and then maybe one year ago. It might show your receivables and your payables, again with comparisons for the prior month so you can easily spot trends.
It might also have some notes that our county grant got approved this month and notes about hiring or that somebody is going to be on maternity leave, starting in November. Just very concise things like that will have an impact on the organization, but--
>> Highlights are key points.
>> Yes.
>> If any of you have experience with having QuickBooks and you want to mention that in the chat, we'll be glad to know more about what you just think of the dashboard equipments.
>> Also, if anybody has any good examples of a dashboard report you'd be willing to share, those tell us what the most important items you put on those dashboards, we'd love to know that. There's an organization called BoardSource and they have a lot of resources for boards, but they also have a lot of publications and one of those is preparing nonprofit dashboard reports. It's one of their books that you can purchase from BoardSource.
Okay. On to annual filing. I'm sure you all know that normally, when we're not in a COVID-19 year, you have a 990, or 990-EZ initially do four and a half months after your year in. That would have been May for calendar year-end filers got extended till June or July, I think July 15th. You can always extend these and they actually end up when they're extended are due in the middle of the month prior to your fiscal year on month. If your year-end is September 30th and you extend the 990, it would be due August 15th. That would be the latest possible due date. Probably not a great idea.
You may also have a filing with your Charities Bureau, and you may also need to register and file with other Charities Bureaus if you file or if you solicit in other states.
>> I don't know how many of you use direct mail anymore from fundraising or for some of your campaigns, but if you use direct mail and you've made address changes, you may not even know that you're doing this out of state. Because somebody moved, their address changed, somebody entered it into the system, but you're not tracking that. You do want to check if you're doing any kind of mail solicitation, are you soliciting funds in other states? You might be. There are other ways you might do it too, but that's an obvious one that sometimes you can't track unless you take the time.
>> If you have a website and people find you and make a contribution that's not soliciting, even if it's a very large amount, but what typically happens is, once you've received a contribution, you will reach out to them directly in the future and that is soliciting contributions. Once you get into that, at least with some degree of frequency, it's not as dependent on the dollar amounts, but it's dependent on the level of activity, you need to check that State's rules. There are centralized places where you can look at the different rules but just be aware that that's becoming a bigger deal.
The State Charities officials came up with a set of rules for what you're doing online, but even though they came up with them, they don't all follow them. They're sort of the general guidelines. They're called the Charleston principles if you want to look them up, but they're not bound by those rules, they are a starting point. Okay. We decided to put this one in because we're seeing more penalty notices. Sometimes they're right, sometimes they're wrong. More often than anything else, they are based on a late-filed 990, it just didn't make it in time for whatever reason.
What do you do? Do you pay it, do you protest it? We have had extremely good success having these abated but you need to explain the circumstances that caused this to happen and then also to explain what you have done to change things so this won't occur in the future. You need to do this in a written request for abatement. There are certain penalties by the way. If it's your first-time penalty you get a buyout, not the late filing penalty with the 990. It doesn't fall into that category. I believe if you've made a late payroll tax deposit, there's an automatic, I think it's a 5% penalty for that. That can be a pretty big number.
If you haven't had penalties for other things, even if you did in prior years and it's been more than a few years or even if you've got a notice and you were able to get it abated, you're still considered a first time offender, if you will. For some penalties, you can just automatically get them wiped out based on its being your first penalty. As I said, that's not true of the 990 penalty, but if you don't have a history of late filing, if you can explain the circumstances, you had some turnover with the people who prepared this and with the liaison person in your organization, haven't done in the past, we've got a new process in place so it won't happen again.
I'm going to give you a 95% chance of getting out of that penalty so don't just pay it. Anybody has any questions on that please let me know. By the way, this is true even if a decent amount of time passes. This is true even if you've paid it. You can still go back if you go back to your office and say, "You know that penalty we paid in May, [inaudible] said we should be able to get out of it." You can go back and tell them you want your money back.
>> Absolutely.
>> Do you know how IRS selects nonprofits for audit and if you do get selected, would you like to know what they're going to ask and what they're going to look at? I know you probably don't know the answer to the first one. That's pretty well-guarded but the second one I know the answer is going to be, "Yes, of course, we'd want to know." The audit selection process depends on a couple things. Sometimes it's based on a referral. A referral means that somebody, potentially an individual will indicate that a nonprofit isn't doing things properly, but a referral can also come from a community.
We've got this nonprofit in our community, they're claiming real property tax exemption. We think they're a cult and not a legitimate nonprofit and so they refer it to IRS. The IRS may or may not pick that up. I had a bookkeeper that got very frustrated with their nonprofit organization. She packed up all of the records, she mailed them to IRS and said, "These folks aren't doing things properly," of course, the IRS mailed them right back and did not initiate an audit. I shouldn't say, "Of course, they didn't initiate an audit, but they did initiate an audit." A referral doesn't always generate an audit. These days, IRS is working very, very hard on a couple things.
First of all, they're taking data from your 990. Some of the questions are really your answers to them are really good indicators of your compliance with that. Do you have a Conflict of Interest Policy? Do you have a Whistleblower Protection Policy? You start getting a couple no's in there and then it's going to IRS system is going to turn a little bit yellowish-red, I guess, like your sunsets out there, Paula and then maybe a few other items. Maybe the description of your activities isn't very complete, maybe the return itself isn't very complete.
All of these things are going to get you a higher score and that's the direction they're going now is looking at indicators of non-compliance, of misunderstanding of potential activities that are not nonprofit activities. These are how IRS is going to select organizations for audit. Very often in the nonprofit world, especially, you're going to get questions about certain things, and it'll just be a list of very specific things you need to answer. From that, they'll determine whether there will be a field audit.
One of the things they always pay attention to, we're going to talk about this a little bit later, is your employee versus independent contractor criteria. When you do get up to a field audit, it's going to start out with a few pages of questions and they're not going to mail these to you, they're not going to give these to you in advance, but you can find those questions. There is a TEGE, that stands for Tax Exempt and Governmental Entities Audit Guide for nonprofits, and if you get selected for audit, you can look at the Audit Guide, it will tell you how auditors are instructed to audit nonprofits.
We're not going to get into that now because these are pretty rare, but they do happen occasionally. I would say they're well, less than one in a hundred. I don't know if we have anybody in this group that has had an audit in the recent past but that's how to be prepared for it. Is to know what they're going to ask and be prepared to answer those questions.
>> The foundation of this is do your 990 carefully.
>> Right.
>> Make sure it's accurate, make sure it's complete, don't just assign it to somebody else to fill out the form for you. I always recommend that you also present it to your board at the time that you're submitting it because some of the questions have to do with the board so it's transparency. Your 990 is public information so it may also be something that later on somebody's going to look up so you want to make sure that your answers show that you're a very competent organization because who knows that another auditor from another funder may look first at your 990 before they come on site. Possibility.
>> They're going to look at your website too, by the way. They're going to look at any links that you have, potentially to commercial organizations that may have provided some support and also whether there are any links to political candidates, maybe somebody who has gotten some funds for your organization. You need to be very careful with that. IRS for a couple years seemed confused about what to do with websites, but they've come down to say they're going to treat these exactly like they would treat another direct connection.
An electronic connection to a commercial organization, an electronic connection to a political candidate are going to be an issue.
>> Your nonprofit status is at stake. The IRS is looking at your ability to be a 501c3 part of what they're looking at.
>> Some of the other filings, there are payroll tax filings and payments. I think probably most of you use outside service bureaus or a system like paychecks and other softwares will prepare payroll in house. It might be interesting to do a survey, but I don't think we'll do that right now. Significant penalties for late deposit of payroll taxes and the organization and the individuals who are responsible, can be a fine here. Usually, the organization pays us, but if the organization is behind in payroll taxes because they don't have any money, this can actually affect individuals who are considered responsible for making those payments. You need to be very, very careful.
>> I've seen a couple of instances. One was fraud, and the person who was stealing the money. The other one was cash flow and the person was just waiting to pay the bill and they had the money, but when these payments were not made and in the case of the person who stole the money, they were redirected. The only way that you as an executive director are going to know that that's happening is if someone, other than your accountant is picking up the mail, and we go back to our internal controls and we have separation of duties going on, but if someone else is picking up the mail, they're going to see that IRS notice.
That's going to end up on your desk if the person who created the problem gets that mail, they're going to hide that problem, by redirecting that and that's going to make your penalties ratchet up, even higher, so just a tip.
>> You've probably heard a lot of people complaining, after their tax returns last year that there was supposed to be these big tax breaks, but they owed more money. Part of what happened there was the withholding tax rule has changed. The withholding rules changed to match the tax change, and one of the things is we could no longer claim ourselves as dependants on our tax returns, but if people didn't change their W4 forms, they were still saying I've got two or three or four dependents.
IRS came out with a new W4 form and it wasn't very well documented at first. It really was very confusing, they upgraded it, came out with some new instructions for it, and we've got a link to those right now. Still, there's still more work on the part of the person filling it out than there used to be with the old forms, but hopefully, this will help them get it right. It might be a good time when you go back to make sure everybody has an updated W4 form and their withholding is correct for their current situation.
Then while we're talking about that, and we've talked about policies a lot, we didn't specifically ask about your personnel policy, but this is one of the most important policies to keep up to date. I forget what the numbers were, but I think it was in the 90% range of litigation against nonprofits is employee-related. Having a good personnel policy, which very clearly explains what the rules of engagement are, which include a whistleblower protection policy, conflict of interest policy, and all of the latest rules, paid family leave act, et cetera, even things related to coronavirus should be in your personnel policy. Take a look at it. See when it was last updated it. If it's more, I don't know, what do you say more than a year old, Paula, or--?
>> Yes, I think things have changed so rapidly. I've looked at it, that's more than a year. State regulations and laws impact personnel, probably bigger than any other areas. So you're going to want someone who knows your state laws, but I recommend that you finds someone like that and have them review your policies and procedures. Sometimes that's a service that you can add on to your payroll processor. A thing that they'll actually do reviews for your personnel policies and procedures. Sometimes you want to get a personnel attorney and engage that attorney separately. That is a very big area of weakness and there isn't just one way to do it. It's so different state to state that you really do want to make sure that someone who knows your state's personnel lies with you in those.
>> Okay, some other filings, state sales tax, I think for most of you, if you've registered for sales tax exemption, purchases for your agency are going to be exempt from sales tax, and you're really not selling too much, but just keep in mind that sales tax only applies to your purchases, not to your sales. Is there any of that, Paula, at all, or--?
>> Well, not very much that I'm aware of, but it can work both ways. You can have to charge sales tax if you are selling some products, so you may need to find that out and find out whether or not you have to collect and remit that sales tax. I can't think of circumstances where you all are in that retail business at all. I'm not sure what that will be. The only collection sales are usually charity auctions and they don't apply here.
>> Right, they're generally exempt, at least, our state. They're exempt.
>> Would this be a good time for questions again? We've only got a few minutes left. I don't know. Do we want to do that, Tim? Or do we want to--
>> I would love to, I would love to afford a break.
>> It's a good place to end the topics.
>> Let's see we can fit some of these in a lot of them have to do with the single audit and I think they'll be relatively quick. A couple people asking, and I think you covered this after they submitted. Let's just review it quickly. John, a couple of people asking about using federal funds to pay for an audit. Can you use federal funds to pay for a standard audit? Can you use federal funds to pay for a single audit?
>> The answer is yes and yes. Keeping in mind that the regular financial statement audit wouldn't be a part of your indirect, it would be administrative cost. The federal would pay their ratable share of it based on your cost allocation policy. Then the single audit also true of the single audit.
>> Paul is wondering if you have a single audit, if you find that you need the single audit, that would be in place of your regular financial statement audit, right? You wouldn't need both?
>> Well, you actually so, so the single audit, starts with a regular financial statement audit, so it incorporates it. You really are getting both. That's not one or the other, the single audit, encompasses a financial statement audit.
>> Yes, good way to put it. Okay. Thanks. Okay. Hilda is asking what's the best way to present a budget by calendar year or by fiscal year? It's difficult to project an annual budget if you have multiple grant program periods.
>> Well, Paula, I'd love you to let you take that in my opinion.
>> You can weigh in as well, but you just have to stop time and do a budget. It doesn't matter what period of time you use, following your fiscal year makes the most sense, but you are going to have to estimate whatever it is that you don't know about yet. Those of you who are starting your fiscal year in a week or so, are going to be guessing at some of the funds that don't start until January that are coming from the county or from, you have some that all like part of the years is assured and then you've got a quarter that's not assured that's against to 30th, you just has to estimate it and plug it in it.
The budget is an estimate and it's okay. You don't have to wait for information in order to put it in. Just do it. [chuckles] What's your opinion, John.
>> I agree with that. Fiscal year makes an awful lot more sense. I mean there's really only a couple of purposes for a budget is just, is this going to work? That's the first objective, the big picture, and then it's to get comparisons to see how we're doing during the year. For that reason, I think it should be on a fiscal year basis.
>> Great. Timmy is asking, let's think about, CARES Act money again for a minute. When talking about CARES Act funds for grantees that received over 750,000, what do we do if part of that CARES Act fund, will not be spent until next year?
>> You only count what you actually spend this year to determine that threshold.
>> If you didn't draw it down this year, you don't need to count it towards your 750,000. You'll count it next year when you draw it down.
>> Whatever you draw down counts, and if you don't reach 750,000, you're not required this year.
>> Great. All federal funds received, not just--
>> Right.
>> Paul is wondering if posting a solicitation on your website would count as soliciting other States since anybody could access your website.
>> Yes. Again, we said no to that, and I think that's a pretty universally accepted principle, but what I also said is if somebody responds to that and the next year you reach out to them with an email or a letter or a phone call, then that is solicitation.
>> All right. Lisa is wondering about the payroll tax holiday. Is that opt in, opt out? Is it simply deferred or will it be forgiven? Can we revisit that?
>> Okay. This is something, Paul and I talked about yesterday and we were going to catch it a little later in the program anyways. I think what we're talking about here is the relief from payroll taxes that applies for September 1st, I believe through December 30th, it only applies to employee taxes, but employers are the ones that would make this adjustment. Then it needs to be repaid in full from January 1st to April 30th. No, it's not something that's going to be forgiven, at least not as far as we know at this point in time.
I haven't heard any indication of that, and it's going to be very harsh to pile that responsibility on top of your regular payroll taxes that employees have to pay. There's a risk for employers that if an employee leaves, or just refuses to pay it, that the employer could be responsible for it. Our firm we've been recommending that this not be done unless it's truly a dire, dangerous cash flow situation.
>> Okay, great. Well, I've got a couple more, but I want to be fair to everyone's schedule. Why don't we, maybe take a couple minutes after the break to begin our three o'clock session with those questions.
>> Perfect.
>> That's fine.
>> Well with that, you all, thanks again. This has gone really well this morning. We will pick this up at three o'clock Eastern. Enjoy your break. We will see you in two hours. Take care.