cohnreznick 2014 not-for-profit governance survey report

2014 Not-for-Profit Governance Survey Results

A CohnReznick LLP Report MAY 2014

According to the National Center for Charitable Statistics (NCCS), there are more than 1.4 million not-for-profit organizations registered in the U.S. This includes almost one million public charities, over 96,000 private foundations, and more than 360,000 other types of not-for-profit organizations, including chambers of commerce, fraternal organizations, and civic leagues.

A CohnReznick Report 1

PurposeThe members of CohnReznick’s Not-for-Profit and Education Industry Practice specialize in working closely with the boards and management of not-for-profit organizations to assist them in developing and implementing best-practices for their critical financial and operational functions. Now more than ever, our clients are asking us questions about policies and procedures relating to audit committee governance and risk detection and minimization strategies.

Based on the nature of those questions and the ever-increasing interest in stewardship and transparency on the part of donors, regulators, and watchdogs, CohnReznick has conducted our first ever Not-for-Profit Governance Survey and we are happy to share the results with you.

MethodologyThe online survey was sent to not-for-profit organization contacts across the country during an eight-week period in the fall of 2013. The survey included 27 questions related to governance-related issues for not-for-profit organizations.

Representatives from 260 organizations responded to the survey. The respondents included presidents, CEOs, CFOs, controllers, executive directors, and board members of organizations with annual budgets ranging from the local to national. Respondents are, as reflected in this report, from across the sub-segments of the not-for-profit industry.

Our thanks goes to all of the respondents for taking the time to share their collective knowledge. We hope that, as we did, you will gain some new insights that can be valuable to your not-for-profit organization.

Thank you,

Kelly Frank, CPA John Alfonso, CPAPartner PartnerNot-For-Profit and Education Not-For-Profit and Education Industry Practice Leader Industry [email protected] [email protected]

About the Survey Results

2014 Not-for-Profi t Governance Survey Results2

To begin the survey, we asked respondents about the missions of their organizations. As you can see in Figure 1, we were then able to compare this data to not-for-profi ts nationally using the National Center for Charitable Statistics (NCCS) database. In many cases, our sample of respondents paralleled the percentages of the overall population according to NCCS.

Another area of focus was the description of the organization. We were again able to compare the data to that of the NCCS database to show a comparison (see Figure 2).

When we asked respondents for information on their position within the organization, we again received the expected response in that the majority, about 44%, holds the title of Chief Financial Offi cer (CFO) (see Figure 3). In our experience, the CFO is usually the primary management liaison to a board for audit committee and fi nancial governance matters.

RespondentProfi le

Figure 1: Which of the following categories best describes your MISSION?

Figure 3: What POSITION in your organization do you currently hold?

Figure 2: Which of the following best describes your type of ORGANIZATION?

The number of people that work for a not-for-profi t organization.1

13.6 million

35%30%25%20%15%10%5%0%

Education

Human Services

Health

Religious

Arts, Culture,and Humanities

Public, SocietalBenefit

Mutual/MembershipBenefit

Environmentand/or Animals

International,Foreign Affairs

Unknown,Unclassified

CohnReznick Survey National Center for Charitable Statistics(registered organizations)

60%50%40%30%20%10%0%

Public Charity

Social ServiceAgency

Collegeor University

IndependentSchool

Healthcare (otherthan hospitals)

Industry Association

ProfessionalAssociation

ReligiousOrganization

Private Foundation

Hospital

CohnReznick Survey National Center for Charitable Statistics(registered organizations)

8%

44%

16%

15%

13%

4%

Controller

PresidentBoard Member

ExecutiveDirector

Chief FinancialOfficer

Chief ExecutiveOfficer

1Static Brain Research Institute: http://www.statisticbrain.com


In our experience, the CFO tends to take on a “gatekeeper” role for audit committee and fi nancial governance matters.


Figure 4: What is the date of your last FISCAL YEAR END?

Figure 5: What was your annual BUDGET?

Figure 6: What was the change in total REVENUE for the last fi scal year?

2National Center for Charitable Statistics: http://nccs.urban.org

June 30 Dec. 31 Sept. 30 March 31

160

140

120

100

80

60

40

20

Based on answers from 90% of total respondents.

<$10,000,000 $10,000,000-$50,000,000

$50,000,000-$100,000,000

>$100,000,000

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

Most respondents reported that they are on a June or December fi scal year close. This is consistent with information we obtained from our clients and contacts.

On the topic of annual budgets, most of the respondent organizations, 44%, were in the “under $10 million” revenue category. As a comparison, NCCS data show information for not-for-profi ts registered with the IRS by level of revenue reported for the time period ending December 31, 2013 compared to the same period in 2012. The data refl ect that not-for-profi ts between $100,000 and $100,000,000 saw on average a 2% increase in revenue. Not-for-profi ts with more than $100 million in total annual revenue saw an increase of 5% overall.2

> than 5%DECREASE INCREASE

1% - 5% > than 5% 1% - 5%

100

80

60

40

20

Measures number of responses. Respondents were able to select all that apply.


We chose governance as the focal point for this survey as it is a constant topic of concern for our clients. Donors, regulators, and watchdogs seem more interested than ever in good stewardship, accountability, and transparency.

When we asked respondents about their level of confi dence in their organizations’ governance policies, 47% responded that they were confi dent overall. However, we have seen a recent upward shift in this area as many not-for-profi ts have been adjusting their governance procedures over the last few years.

Sixteen percent of respondents stated that they are either “somewhat confi dent” or “not confi dent” in their governance practices. With the emergence of several signifi cant new laws in the not-for-profi t industry, notably the Nonprofi t Revitalization Act in New York, not-for-profi t governance is becoming a more critical topic for directors and managers of not-for-profi t organizations.

Figure 7: How confi dent are you in your organization’s GOVERNANCE practices?

Figure 8: What SIZE is your board?

1-5 5-10 10-15 15-20 20+

90

80

70

60

50

40

30

20

10

Number of Board Members


47%

37%

14%

1% 1%

Very ConfidentFairly ConfidentSomewhat ConfidentNot Very ConfidentNot Confident

Figure 6: What was the change in total REVENUE for the last fi scal year?

The number of registered not-for-profi t organizations fi ling forms 990, 990EZ, 990N, or 990PF in the past two years (December 2012) according to NCCS

1.45 million

Governance


We are seeing a trend in recent years toward smaller boards.


Figure 9: Do any of your annual board meetings contain an EDUCATIONAL component?

Figure 10: Which of the following EDUCATIONAL topics were covered during your board meetings?

Financial

Strategic Planning

Governance

Industry Trends

Technology

Regulation

Risk Management

Ratios/Metrics

Tax


0 20 40 60 80 100 120 140

68%

YES

32%NO

The Board

Based on our experience with clients and boards with which our partners currently volunteer, we are seeing a trend in recent years toward smaller boards. (See more about this below.)

Not surprisingly, we were encouraged to see that 68% of the organizations surveyed include an educational component to their board meetings and place a strong emphasis on fi nancial, strategic planning, and governance.

What doesCohnReznick think?Thousands of books, articles, seminars, and blogposts have been written on the topic of buildinga strong board of directors for not-for-profi ts. Maintaining a small board makes an organization more nimble, streamlines the decision making process, cuts down on the time needed to make programmatic changes, makes it easier to redirect dollars where needed, and cuts down on the reaction time needed to assess risks and developcontingencies. We do want to be clear that we’re not suggesting organizations simply cut the board, the goal is to appoint the right people. Be sure that you have a good nominating committee in place to vet candidates and needs in order to match the qualifi cations to serve the needs of the organization. Diversity is key.


Audit CommitteesThe survey revealed that a large group, 42%, stated that they do not have an audit committee that’s separate and apart from a fi nance committee. While 33% mentioned that their fi nance committee also serves as the organization’s audit committee, we found that 9% stated that they don’t have any audit committee in place. Not-for-profi ts without an audit committee should be aware that, while many states do not require an audit committee to date, certain states require the full board or a committee consisting of independent board members to take on certain audit committee responsibilities. These responsibilities include meeting with auditors prior to, and at the end of, an audit; monitoring and approving potential confl icts; and monitoring whistleblower complaints. Not-for-profi ts should take appropriate action to ensure they are in compliance with the regulatory requirements of the states they areregistered in and understand the roles and responsibilities of an audit committee.

Of the 58% of organizations that responded that they do have an audit committee for their organization, the majority said that their committees contain between four and six professionals. It was also noted that most of these audit committees, 70%, meet quarterly or semi-annually.

58%

9%

33%

Yes, we have an audit comittee and a separate finance comittee

No, our finance committee serves as our audit committee

No, we do not have an audit committee

1-3 4-6 6+

70%

60%

50%

40%

30%

20%

10%

Number of board members

54%

35%

11%

Figure 11: Does your board have an AUDIT COMMITTEE?

Figure 12: What is the SIZE of your audit committee?


Eighty-eight percent of the organizations with audit committees stated that these committees include a fi nancial expert. This was an encouraging response because, among other things, audit committees are usually charged with overseeing the fi nancial accounting process and reviewing the results of the independent auditor, all of which require a meaningful level of fi nancial literacy.

Does your audit committee have a charter? The survey revealed that only 52% of the organizations stated that they have a charter. We believe audit committees of all not-for-profi t organizations should have a charter as the charter can act as a set of broad guidelines that will assist the committee in fulfi lling its oversight responsibilities and we encourage every not-for-profi t to review the American Institute of Certifi ed Public Accountants’ (AICPA) Not-for-Profi t Audit Committee Toolkit which is available from the AICPA at no charge. In addition, to improve effectiveness, we recommend that each meeting should include a formal agenda, which outlines the various tasks set forth for each meeting.

What doesCohnReznick think?We believe audit committees with more than sixprofessionals can become diffi cult to manage.Due to the number of signifi cant stewardship responsibilities that audit committees are required to assume, we believe that they should meet no less than quarterly and have clearly defi ned tasks in their agendas. In addition, these meetings should include a fi nancial expert that is informed about not-for-profi t accounting and reporting issues.

Semi-Annually Quarterly

Annually Monthly

35%

35%

12%

18%

88%

YES

7% 5%NO NOT SURE

52%

YES

34%

14%

NO

NOT SURE

Figure 13: How often does your audit committee MEET?

Figure 14: Do you have a FINANCIAL EXPERT on your audit committee?

Figure 15: Does your audit committee have a CHARTER?


We were pleased to see 82% of responding organizations have a whistleblower policy in place. For the remaining 18% who reported that they did not intend to develop a policy, or had no plans to develop one over the next 12 months, it is important to check on individual state regulations. Many states require a whistleblower policy.

Not-for-profi t organizations should also be aware that the implementation of a whistleblower “hotline” has been recommended by the IRS for adoption by all not-for-profi ts. This hotline protects the board and demonstrates its commitment to best practices.

Whistleblowers

What doesCohnReznick think?We strongly encourage all not-for-profi t leaders to develop a whistleblower policy and system to encourage the anonymous reporting of complaints and minimize the risk of frauds going undetected. According to the 2012 Report to the Nations on Occupational Fraud and Abuse by the Association of Certifi ed Fraud Examiners over 43% of the detected fraud cases, that were part of the study, were brought to light through a tip.3 In addition, a typical organization loses 5% of its annual revenues to fraud with a median loss, for not-for-profi t organizations, at approximately $120,000.4

Figure 16: Does your organization have a WRITTENwhistleblower policy?

Figure 17: Does your organization have a whistleblower HOTLINE?

82%

7%

11%

Yes

No intention of developing it

No, but plan to develop it in the next 12 months

66%

7%

27%

Yes

No intention of implementing it

No, but plan to implement it in the next 12 months

3Association of Certifi ed Fraud Examiners (ACFE), 2012 Report to the Nations on Occupational Fraud and Abuse, Austin, TX; ACFE, 2012, p. 144,5Association of Certifi ed Fraud Examiners (ACFE), 2012 Report to the Nations on Occupational Fraud and Abuse, Austin, TX; ACFE, 2012, p. 4


Most cases of fraud were committed by individuals who were fi rst-time offenders with clean employment histories.5


When asked if their organization has a whistleblower complaint resolution process, we found that 65% of respondents stated that they do have a process in place. However, only 11% said that they used an outside service to record and monitor complaints. We have included a list below of the eight software fi rms that respondents said they were working with.

• EthicsPoint • Integralink • Lighthouse• Campus Conduct Hotline• Global Compliance• ListenUp • Navex Global• ReportIt

(We do not endorse any of these fi rms, but this listing is intended as reference.)

The last question in this section refers back to the individual or committee that fi rst receives whistleblower hotline complaints. Respondents were given the option of multiple choices to indicate that more than one individual or team were notifi ed. Twenty-one percent of respondents indicated more than one individual receives the complaints and 8% indicated three or more. Responses were fairly even with the president/CEO receiving the complaints 31% of the time, human resources department at 28%, and someone other than the audit committee or in-house counsel receiving the complaints 22% of the time.

Figure 18: Does your organization have a whistleblower complaint RESOLUTION PROCESS?

Figure 19: Who within your organization is the fi rst to receive whistleblower hotline COMPLAINTS?

24%

11%

65%

Yes, we record and monitor complaints

No

Yes, we use an outside service to record and monitor complaints

President/CEO31%

Human ResourcesDepartment28%

Other22%

Audit Committee12%

In-house Counsel7%

Measures number of responses.

Asset misappropriation was by far the most common type of fraud, encompassing 87% of the cases reported. (NCCS Survey)6

6Association of Certifi ed Fraud Examiners (ACFE). 2012 Report to the Nation on Occupational Fraud and Abuse, Austin, TX; ACFE, 2012, p. 4


Some of the more popular answers as to who first receives the whistleblower hotline complaints included:

• Board Members • Chief Financial Officer • Chairperson• College Assembly • Compliance Officer • Chief Operating Officer• Executive Director • Internal Auditor • Quality & Compliance Officer

While this is not an easy problem to solve in many organizations, CohnReznick typically recommends setting up an anonymous independent hotline or web portal that directs complaint reports to assigned responders. This assists in alleviating the stress of a one-on-one interaction as well as the fear of retaliation. Assigning multiple individuals to receive these complaints can also minimize the possibility that the person responsible for the complaints happens to be the person who is committing the fraud. Another major issue that we see is that, while whistleblower information, hotlines, and policies may be in place, they are not necessarily well-publicized. We recommend publishing this information on your intranet site, external websites, and in your offices to make the information easy to find. A well-publicized hotline is a great way to encourage the filing of whistleblower complaints and discourages fraud due to ease of potential reporting.

What does CohnReznick think?


Confl ict of Interest PolicyWhen asked if their organizations had a policy related to confl ict of interest, respondents answered with a resounding “yes.” Ninety-four percent noted that they have such a policy in place―this percentage is in line with the results that CohnReznick expected.

When identifying confl icts of interest, we found that 77% of the respondent organizations have an annual disclosure statement in place. We recommend that not-for-profi ts without robust confl icts of interest disclosure statements review the AICPA’s Not-for-Profi t Audit Toolkit to fi nd an example of such a statement that they could use as a basis for developing their own. We suggest having your trusted advisors, including general counsel and audit and tax professionals, review the policy to be certain that you have asked the right questions. While we do see organizations obtaining annual confl icts of interest disclosure forms, they are primarily received only from members of the board, 53%, and senior management, 27%. We suggest broadening this approach to include other employees and vendors to ensure that all confl icts will be identifi ed, disclosed, and remedied, if necessary, in a timely manner.

In Figure 23 on the following page we noticed that when reviewing the individuals who oversee confl ict of interest policies, it was evident that the president/CEO takes on the brunt of the responsibility at 46%. However, as organizations were able to make multiple choices, we found that of those

Figure 20: Do you have a written CONFLICT OF INTERESTpolicy?

Figure 21: Does your organization use an annual disclosure statement to identify CONFLICTS OF INTEREST?

Figure 22: Please identify the PARTIES from whom you obtain annual confl ict of interest disclosure statements.

94%

YES

6%NO

77%

YES

23%NO

Members ofthe Board

53%

Senior Management27%

All Employees15%

All of the Above3%

Vendors2%

Respondents were able to select all that apply.


Figure 23: Who OVERSEES compliance with the organization’s confl ict of interest policy?

Figure 24: Have you ever conducted an ENTERPRISE RISK MANAGEMENT ASSESSMENT?

President/CEO

Audit Comittee

In-house Counsel

Chief Financial Officer

Executive Committee

Board of Directors

Compliance Department

Governance Committee


0 20 40 60 80 100 120

71%

NO

29%YES

who responded, 33%, gave more than one answer and 5% gave three or more. Of the answers that were checked, audit committees and in-house counsel came in second and third place with 30% and 14%, respectively.

We are glad to see that the confl icts of interest policies are getting attention at the highest levels, which shows that organizations understand the weight of the topic.

For the fi nal question in the survey we reviewed a topic that we felt was gaining a lot of traction in the not-for-profi t industry: enterprise risk management (ERM). ERM is an integrated approach to addressing all forms of risk across the organization. Implemented correctly, it leads to informed decision-making and helps enhance and preserve value. While we plan to use this as a more in-depth topic for future surveys, we were not surprised to fi nd that only 29% have conducted an ERM assessment.

We are seeing renewed interest in ERM, largely as a result of headline-making frauds that have occurred in recent years. This is an area that organizations should review in order to determine if there is a current need for an assessment. While this can be a daunting topic to many, we believe most not-for-profi ts would benefi t from designing and implementing an ERM process that is scalable to their needs.

Enterprise Risk Management

2014 Not-for-Profit Governance Survey Results16

ConclusionThe 4.9% rise in charitable giving in 2013 is the largest gain since 2008. According to Forbes, charitable giving rose 4.9% in 2013―its largest gain since 2008.7 This rise indicates a renewed attention for not-for-profit organizations, which can also lead to renewed scrutiny. As we found in this, our first not-for-profit governance survey, less than 50% of boards noted that they are “very confident” in their organization’s governance practices. With the addition of new laws and regulations surrounding the industry, this lack of confidence can give rise to much larger issues that should be addressed quickly and without hesitation. Knowledge of the intricacies of regulations and the effects that it will have on the governance practices of not-for-profit organizations is crucial to the success of affected organizations. It is therefore strongly suggested that organizations work with their trusted advisors to ensure that all areas of compliance are reviewed and accounted for.

We again thank all of the organizations who participated in the 2014 Not-for-Profit Governance Survey and look forward to your comments and suggestions for future endeavors.

7www.forbes.com, Charitable Giving Grew 4.9% In 2013 As Online Donations Picked Up, 2/5/14


In the public eye, a not-for-profit organization is defined by its mission. But in light of rising operational costs, more scrupulous compliance requirements, and declining grant and pledge opportunities, fulfilling that mission has become increasingly difficult. To be successful, not-for-profit organizations and educational institutions must improve the efficiency of their operations while implementing financial reporting and accountability processes that bolster member, donor, and regulatory confidence.

As one of the leading accounting, tax, and advisory firms in the United States, CohnReznick has a dedicated Not-for-Profit and Education Industry Practice that works closely with the boards, management, and financial leaders of not-for-profit and educational organizations. In addition to providing them with an array of tax and accounting services, we also help them identify workflow inefficiencies, implement stringent internal controls, leverage technology and IT infrastructure, and more effectively manage capital and planned giving campaigns.

Value PropositionCohnReznick serves many of the most respected not-for-profit organizations and educational institutions in the United States. These include our own industry’s professional organization, the American Institute of Certified Public Accountants (AICPA), with nearly 400,000 member CPAs. We provide value to these organizations through our deep technical knowledge, the high quality of our work product, and the specific capabilities we have in serving not-for-profits with global reach. Our client experience includes:

• Not-for-profit housing developers: With extensive experience in the affordable housing real estate industry, we help not-for-profit housing developers sustain their operations by identifying new partnership opportunities and funding sources. These include a variety of tax credit programs and programs available through the U.S. Department of Housing and Urban Development (HUD).

• Associations: We work with professional and trade associations to identify alternate revenue sources, integrate technology to enhance operational efficiency, recruit financial personnel, and develop new strategies to provide value to their members.

• Foundations: Foundations play a critical role in the not-for-profit environment. We help them navigate the complex regulatory changes affecting them; implement practices to improve corporate governance, accountability, and standards for giving; and balance financial and philanthropic objectives.

• Social service and charitable agencies: We help these entities leverage their governance and internal controls to improve organizational efficiency, assess proposals for supporting community and educational programs, and develop strategic plans to strengthen long-term viability.

• Educational institutions: We work with independent schools, colleges and universities, and other institutions to give them the tools they need to refine their endowment and enrollment processes, improve their budget and management systems, enhance accreditation procedures, and better manage and maintain campus facilities.

• Religious and cultural organizations: We help these organizations develop strategic plans to best meet their humanitarian goals and objectives, maximize real estate assets, strengthen cash flow management, and create planned giving strategies.

About CohnReznickWith origins dating back to 1919, CohnReznick LLP is the 10th largest accounting, tax, and advisory firm in the United States, combining the resources and technical expertise of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. CohnReznick serves a large number of diverse industries and offers specialized services for Fortune 1000 companies, owner-managed firms, international enterprises, government agencies, not-for-profit organizations, and other key market sectors.

Headquartered in New York, NY, CohnReznick serves its clients with more than 280 partners, 2,500 employees, and 26 offices. The Firm is a member of Nexia International, a global network of independent accountancy, tax, and business advisors. For more information, visit www.cohnreznick.com.

About CohnReznick’s Not-for-Profit and Education Industry Practice

2014 Not-for-Profit Governance Survey Results18

1212 Avenue of the Americas New York, NY 10036 212-297-0400

www.cohnreznick.comCohnReznick is an independent memberof Nexia International

CohnReznick LLP © 2014This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you and anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters.

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