[michaelwyland]

Kate:

Thanks for your thoughts and recommendations – they’re very much on point. Tomorrow, I’m headed to one of their service addresses to go through boxes of archived records, some of which, I’m told, are payroll records from 20-30 years ago! Time to check with legal counsel for updated records retention/destruction guidelines *and* call the shredding company and arrange for a pickup after looking at the 20 boxes or so of records!

Just one indicator that it’ll take a while to wind down the corporation — they haven’t yet filed their 2020 IRS Form 990 (the extension is still active) and we have accounting records to validate before attempting a 2022 Form 990. Will we need to file a 2023 Form 990? Not yet known, but probably likely.

Just one complication among many relating to your sage advice. We had to find a way to keep health insurance active for employees after their termination dates (through the end of 2022). It was a laudable choice by the board to support employees, but an intricate dance with the insurance company.

[michaelwyland]

Kate:

Your story is an example of a provocative statement I make in training sessions. If you want to damage a nonprofit (especially a religious congregation), there’s nothing more effective than a windfall donation!

There are those who say that sudden wealth doesn’t change one’s character, but it reveals one’s character.

I’m also reminded of the Mark Twain observation that it’s the *lack of* money that’s the root of all evil.

I agree that referring to the nonprofit’s current strategic plan (with special emphasis on mission, vision, and values) is essential. I also recommend that the funds be held for several months to a year while the shock of the gift wears off and decisions about using the money can be made after deliberation by members and leaders (and often after consulting external stakeholders).

[michaelwyland]

I agree with the “it depends” school of thought on reserves planning. Three months is, to me, an irreducible minimum of operating reserves. My local United Way chapter mandates a *maximum* of three months in reserves, and many agencies find this to be a burden because other funding sources are: 1) retrospective in nature (i.e., foundations or government reimbursing for services rendered); and 2) irregular and/or occasional (e.g., semiannual) in making payments to nonprofits.

My opinion is that 6-12 months of operating reserves is the “neighborhood” most nonprofits should be living in, depending on other circumstances – like major funder restrictions.

Some nonprofits go so far as to establish related entities (other nonprofits or even for-profits) to hold assets so they are not counted towards what a funder might consider reasonable matching funds for a project or program. There are even examples of nonprofits using related entities to appear to reduce organizational overhead and report higher shares of budget allocated to program expense. NOTE: I am not necessarily advocating this practice; I’m simply noting that it exists.

[michaelwyland]

I paid attention to the new Single Audit (also known as an A-133 audit) initiative by OMB when it was first introduced. Here’s a resource page from the Council of Nonprofits on the basics: https://www.councilofnonprofits.org/nonprofit-audit-guide/federal-law-audit-requirements

One key issue that played out in my community is that a nonprofit subject to a required single audit must have, as a component of the audit, an auditor’s evaluation of whether each program under the audit is being run according to federal guidelines. NOTE: this is about program elements, not finance.

Example: A local nonprofit in my home community had a successful financial audit but failed the program evaluation, resulting in an investigation and determination by the Office of the Inspector General (OIG) of the US Department of Justice. The OIG report required the nonprofit to make programmatic changes in order for the program to come back into programmatic compliance with specific grant and general federal requirements. The OIG investigation, I believe, was triggered by the nonprofit’s auditors noting exceptions to programmatic practice. There was never an allegation of misappropriation, embezzlement, or similar deficiencies in the expenditure or accounting of federal funds.

As for Kathi’s question, I would assume that a single audit would be more expensive that a financial audit, if only because reporting on a review of federal program elements is added to the auditor’s work. In the example I cited, the nonprofit reported total accounting expenses of $8,036 on a budget of about $838,000. There’s no way to know what is and is not included in that figure.

Audit costs vary based on a variety of factors, including the extent to which the client nonprofit participates in filling out the non-financial portions of the 990 (assuming that filling out the 990 is part of the audit engagement). The client can, to an extent, negotiate the extent of their work effort in the audit process, thereby influencing the fees charged.