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.
About the Survey Results
Purpose The 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.
Methodology The 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, CPA Partner Partner Not-For-Profit and Education Not-For-Profit and Education Industry Practice Leader Industry Practice kelly.frank@cohnreznick.com john.alfonso@cohnreznick.com
A CohnReznick Report
1
Figure 1: Which of the following categories best describes your MISSION? Unknown, Unclassified
Respondent Profile 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
International, Foreign Affairs Environment and/or Animals Mutual/Membership Benefit Public, Societal Benefit Arts, Culture, and Humanities Religious Health Human Services Education
compare this data to not-for-profits 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.
0% CohnReznick Survey
5%
10%
15%
20%
25%
30%
35%
National Center for Charitable Statistics (registered organizations)
Figure 2: Which of the following best describes your type of ORGANIZATION? Hospital Private Foundation
13.6 million The number of people that work for a not-for-profit organization.1
Religious Organization Professional Association Industry Association Healthcare (other than hospitals) Independent School College or University
Another area of focus was the description
Social Service Agency Public Charity
of the organization. We were again able to compare the data to that of the NCCS
0% CohnReznick Survey
10%
20%
30%
40%
50%
60%
National Center for Charitable Statistics (registered organizations)
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
Figure 3: What POSITION in your organization do you currently hold? Board Member President
in that the majority, about 44%, holds the title of Chief Financial Officer (CFO) (see
8%
Controller
Figure 3). In our experience, the CFO is
4%
13%
usually the primary management liaison
44%
to a board for audit committee and financial governance matters.
15%
Executive Director 1
2
Static Brain Research Institute: http://www.statisticbrain.com
2014 Not-for-Profit Governance Survey Results
Chief Financial Officer
16% Chief Executive Officer
In our experience, the CFO tends to take on a “gatekeeper� role for audit committee and financial governance matters.
A CohnReznick Report
3
Figure 4: What is the date of your last FISCAL YEAR END? 160 140 120 100 80
Most respondents reported that they are on
60
a June or December fiscal year close. This is
40
consistent with information we obtained from
20
our clients and contacts.
June 30
On the topic of annual budgets, most of the
Dec. 31
Sept. 30
March 31
Based on answers from 90% of total respondents.
respondent organizations, 44%, were in the “under $10 million� revenue category. As a comparison, NCCS data show information for
Figure 5: What was your annual BUDGET?
not-for-profits registered with the IRS by level of
50%
revenue reported for the time period ending
45%
December 31, 2013 compared to the same
40%
period in 2012. The data reflect that not-for-profits
35%
between $100,000 and $100,000,000 saw on
30%
average a 2% increase in revenue. Not-for-profits
25%
with more than $100 million in total annual
20%
revenue saw an increase of 5% overall.2
15% 10% 5% <$10,000,000
$10,000,000$50,000,000
$50,000,000$100,000,000
>$100,000,000
Figure 6: What was the change in total REVENUE for the last fiscal year?
100 80 60 40 20
DECREASE > than 5% 1% - 5% 2
4
National Center for Charitable Statistics: http://nccs.urban.org
2014 Not-for-Profit Governance Survey Results
INCREASE > than 5% 1% - 5%
Measures number of responses. Respondents were able to select all that apply.
Figure 7: How confident are you in your organization’s GOVERNANCE practices?
1% 1% 14%
47%
Governance 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.
37%
1.45 million Very Confident Fairly Confident Somewhat Confident Not Very Confident Not Confident
Figure 8: What SIZE is your board? 90 80 70
The number of registered not-for-profit organizations filing forms 990, 990EZ, 990N, or 990PF in the past two years (December 2012) according to NCCS
When we asked respondents about their level of confidence in their organizations’ governance policies, 47% responded that they were confident overall. However, we have seen a recent upward shift in this area as many not-for-profits have been adjusting their governance procedures over the last few years. Sixteen percent of respondents stated that they are either “somewhat confident” or “not confident” in their governance practices. With the emergence of several significant new laws in the not-for-profit industry, notably the Nonprofit Revitalization Act in New York, not-for-profit governance is becoming a more critical topic for directors and managers of
60 50 40 30 20 10 1-5
5-10 10-15 15-20 20+ Number of Board Members
not-for-profit organizations.
Measures number of responses. Respondents were able to select all that apply.
A CohnReznick Report
5
We are seeing a trend in recent years toward smaller boards.
6
2014 Not-for-Profit Governance Survey Results
The Board
Figure 9: Do any of your annual board meetings contain an EDUCATIONAL component?
Based on our experience with clients and
YES
boards with which our partners currently
NO
68%
volunteer, we are seeing a trend in recent years toward smaller boards. (See more
32%
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
Figure 10: Which of the following EDUCATIONAL topics were covered during your board meetings?
emphasis on financial, strategic planning, and governance.
Financial Strategic Planning Governance Industry Trends Technology Risk Management
What does CohnReznick think? Thousands of books, articles, seminars, and blog posts have been written on the topic of building a strong board of directors for not-for-profits. 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 develop contingencies. We do want to be clear that weâ&#x20AC;&#x2122;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 qualifications to serve the needs of the organization. Diversity is key.
Regulation Ratios/Metrics Tax 0
20
40
60
80
100
120
140
Measures number of responses. Respondents were able to select all that apply.
A CohnReznick Report
7
Audit Committees The survey revealed that a large group, 42%, stated that they do not have an audit committee thatâ&#x20AC;&#x2122;s separate and apart from a finance committee. While 33% mentioned that their finance committee also serves as the organizationâ&#x20AC;&#x2122;s audit committee, we found that 9% stated that they donâ&#x20AC;&#x2122;t have any audit committee in place. Not-for-profits 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 conflicts; and monitoring whistleblower complaints. Not-for-profits should take appropriate action to ensure they are in compliance with the regulatory requirements of the states they are registered 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.
Figure 11: Does your board have an AUDIT COMMITTEE?
9%
33%
58%
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
Figure 12: What is the SIZE of your audit committee?
70% 60% 50%
54%
40% 30%
35%
20% 10%
11% 1-3
8
2014 Not-for-Profit Governance Survey Results
4-6 6+ Number of board members
Figure 13: How often does your audit committee MEET?
12% 35%
18%
35%
Semi-Annually
Quarterly
Annually
Monthly
Figure 14: Do you have a FINANCIAL EXPERT on your audit committee?
YES
88%
NO
7%
NOT SURE
5%
Figure 15: Does your audit committee have a CHARTER?
YES
52%
NO
34% NOT SURE
14%
Eighty-eight percent of the organizations with audit committees stated that these committees include a financial expert. This was an encouraging response because, among other things, audit committees are usually charged with overseeing the financial accounting process and reviewing the results of the independent auditor, all of which require a meaningful level of financial 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-forprofit organizations should have a charter as the charter can act as a set of broad guidelines that will assist the committee in fulfilling its oversight responsibilities and we encourage every not-for-profit to review the American Institute of Certified Public Accountantsâ&#x20AC;&#x2122; (AICPA) Not-for-Profit 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 does CohnReznick think? We believe audit committees with more than six professionals can become difficult to manage. Due to the number of significant stewardship responsibilities that audit committees are required to assume, we believe that they should meet no less than quarterly and have clearly defined tasks in their agendas. In addition, these meetings should include a financial expert that is informed about not-for-profit accounting and reporting issues.
A CohnReznick Report
9
Figure 16: Does your organization have a WRITTEN whistleblower policy?
7%
Whistleblowers
11%
We were pleased to see 82% of responding organizations have a whistleblower policy in place. For the remaining 18% who reported
82%
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
Yes
on individual state regulations. Many states
No intention of developing it
require a whistleblower policy.
No, but plan to develop it in the next 12 months
Not-for-profit organizations should also be aware that the implementation of a whistleblower “hotline” has been recommended by the IRS for adoption by all not-for-profits. This hotline
Figure 17: Does your organization have a whistleblower HOTLINE?
protects the board and demonstrates its commitment to best practices.
7% 27%
66%
What does CohnReznick think? We strongly encourage all not-for-profit 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 Certified 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-profit organizations, at approximately $120,000.4
10
2014 Not-for-Profit Governance Survey Results
Yes No intention of implementing it No, but plan to implement it in the next 12 months
3 Association of Certified Fraud Examiners (ACFE), 2012 Report to the Nations on Occupational Fraud and Abuse, Austin, TX; ACFE, 2012, p. 14
Association of Certified Fraud Examiners (ACFE), 2012 Report to the Nations on Occupational Fraud and Abuse, Austin, TX; ACFE, 2012, p. 4
4,5
Most cases of fraud were committed by individuals who were first-time offenders with clean employment histories.5
A CohnReznick Report
11
Asset misappropriation was by far the most common type of fraud, encompassing 87% of the cases reported. (NCCS Survey)6
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
Figure 18: Does your organization have a whistleblower complaint RESOLUTION PROCESS?
included a list below of the eight software firms that respondents said they were working with.
11%
• EthicsPoint • Integralink • Lighthouse • Campus Conduct Hotline • Global Compliance
65%
24%
• ListenUp • Navex Global • ReportIt (We do not endorse any of these firms, but this listing is intended as reference.)
Yes, we record and monitor complaints No
The last question in this section refers back to
Yes, we use an outside service to record and monitor complaints
the individual or committee that first receives whistleblower hotline complaints. Respondents were given the option of multiple choices to indicate that more than one individual or team
Figure 19: Who within your organization is the first to receive whistleblower hotline COMPLAINTS?
were notified. 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.
31%
President/CEO
28%
Human Resources Department
22% 12% 7%
Other Audit Committee In-house Counsel
Measures number of responses.
6 Association of Certified Fraud Examiners (ACFE). 2012 Report to the Nation on Occupational Fraud and Abuse, Austin, TX; ACFE, 2012, p. 4
12
2014 Not-for-Profit Governance Survey Results
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
What does CohnReznick think? 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.
A CohnReznick Report
13
Figure 20: Do you have a written CONFLICT OF INTEREST policy?
YES
Conflict of Interest Policy
94%
When asked if their organizations had a policy related to conflict of interest, respondents
NO
answered with a resounding “yes.” Ninety-four
6%
percent noted that they have such a policy in place―this percentage is in line with the results that CohnReznick expected. When identifying conflicts of interest, we found that 77% of the respondent organizations have
Figure 21: Does your organization use an annual disclosure statement to identify CONFLICTS OF INTEREST?
an annual disclosure statement in place. We
YES
recommend that not-for-profits without robust conflicts of interest disclosure statements review
77%
the AICPA’s Not-for-Profit Audit Toolkit to find an example of such a statement that they could use
NO
23%
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 conflicts 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 conflicts will be identified, 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 conflict 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
14
2014 Not-for-Profit Governance Survey Results
Figure 22: Please identify the PARTIES from whom you obtain annual conflict of interest disclosure statements.
Members of the Board
53% 27% 15% 3% 2%
Senior Management All Employees All of the Above Vendors
Respondents were able to select all that apply.
who responded, 33%, gave more than one
Figure 23: Who OVERSEES compliance with the organizationâ&#x20AC;&#x2122;s conďŹ&#x201A;ict of interest policy?
answer and 5% gave three or more. Of the answers that were checked, audit committees and in-house counsel came in second and third
President/CEO
place with 30% and 14%, respectively.
Audit Comittee
We are glad to see that the conflicts of interest
In-house Counsel
policies are getting attention at the highest levels,
Chief Financial Officer
which shows that organizations understand the
Executive Committee
weight of the topic.
Board of Directors Compliance Department Governance Committee 0
20
40
60
80
100
120
Measures number of responses. Respondents were able to select all that apply.
Enterprise Risk Management For the final question in the survey we reviewed a topic that we felt was gaining a lot of traction in the not-for-profit industry: enterprise risk management (ERM). ERM is an integrated
Figure 24: Have you ever conducted an ENTERPRISE RISK MANAGEMENT ASSESSMENT?
approach to addressing all forms of risk across the organization. Implemented correctly, it leads to informed decision-making and helps enhance
NO YES
29%
71%
and preserve value. While we plan to use this as a more in-depth topic for future surveys, we were not surprised to find 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-profits would benefit from designing and implementing an ERM process that is scalable to their needs.
A CohnReznick Report
15
Conclusion The 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.
7 www.forbes.com, Charitable Giving Grew 4.9% In 2013 As Online Donations Picked Up, 2/5/14
16
2014 Not-for-Profit Governance Survey Results
About CohnReznick’s Not-for-Profit and Education Industry Practice 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 Proposition CohnReznick 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 CohnReznick With 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.
A CohnReznick Report
17
1212 Avenue of the Americas New York, NY 10036 212-297-0400 www.cohnreznick.com
CohnReznick is an independent member of Nexia International
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. CohnReznick LLP Š 2014 This 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.
18
2014 Not-for-Profit Governance Survey Results