2016 Not-for-Profit Risk Alert

By Doug Nickerson, CPA, CGFM, CFE, CIA | Partner | Not-for-Profit Team

The American Institute of Certified Public Accountants (AICPA) recently released this year’s Audit Risk Alert (Alert), Not-for-Profit Entities Industry Developments – 2016.   The usual audience for this Alert is auditors of financial statements of nonprofit organizations; however, board members and internal management of nonprofit organizations can gain insight from the information provided in the Alert related to recent economic, industry, technical, regulatory, and social developments and how that may impact their organizations, donors, and financial statements.  Below are some highlights of this Alert.

Economic and Industry Developments

Current Economic Indicators

The U.S. economy is considered by many to have recovered from the recent economic recession.

• Overall increase in GDP of 2.4% for 2015
• Unemployment rate of 5.0%—an improvement from the unemployment rate of 5.6% at the end of 2014.
• The annual average rate of unemployment also declined by the end of 2015, falling to 5.3% (a rate that represents approximately 7.9 million people out of work) from 6.2% in 2014.

However, the global economy has remained flat.  During 2015, the global economy was affected by moderate job growth, inclement weather, stagnate wage growth, increased interest rates, and the continuing suppression of the price of crude oil.

State of Not-for-Profit Organizations

Although the overall economic situation has been improving recently, contributions and government funding have not yet returned to their pre-recession levels.

• Approximately 1.5 million nonprofit organizations representing $2 trillion in revenue and $5 trillion in assets.
• In 2014, 25.3% (approximately 62 million people) of the U.S. adult population volunteered in excess of 8 billion volunteer hours to not-for-profit organizations.
• Current areas of concern for not-for-profit organizations include:
  • access to affordable financing;
  • increased competition for contributions;
  • ability to maintain effective internal controls with lower headcount; and
  • continued rise in delinquent or uncollectible promises to give, grants, and accounts receivable.
• Leadership succession will be an issue in the coming years as the baby boomer generation begin to retire. Not-for-profit organizations need to make succession planning a key part of their risk management assessment and program.

Sustainability

Increased concern and focus surrounding not-for-profit organization failures and bankruptcies have prompted many board members of not-for-profit organizations to reevaluate their governance structures, composition, and operating procedures, including:

• increased focus on fundraising due to shrinking of government funded programs;
• reassessment of the code of ethics and whistleblower policies;
• creating emphasis on “tone at the top” and transparency;
• increased focus on diversity of board members to broaden the perspective of the board of directors; and
• review programs and initiatives to identify those that are profitable versus unprofitable.

Measuring Program Effectiveness

Performance or impact reporting continues to be requested by donors, regulators, and ratings agencies.  Nonprofit organizations are looking at new ways to present financial and program results including:

• use of fact sheets;
• external third-party studies;
• visual illustrations displaying how programs are designed, monitored, and evaluated; and
• improved impact information included as part of a not-for-profit organization’s reporting.

Cyber Security

All business, including not-for-profit organizations, are experiencing an environment with rapid growth in data hacks and use of stolen credit cards.  There were an estimated 1 billion data records compromised in 2014, a 78% increase from 2013.   Not-for-profit organizations can mitigate the impact of a data breach and use of stolen credit cards by proactively increasing the security of certain data to include:

• ensure their crisis management plan includes plans to respond to data breeches;
• encrypting and tokenizing credit card information; and
• processing credit card information with real-time authorization and settlement procedures to prevent use of stolen credit cards.

Higher Education

For the first time since 2013, Moody’s revised its outlook for higher education from negative to stable, noting that the sector will see neither significant growth nor deterioration over the next twelve to eighteen months.  Also, Moody’s expects operating revenue for four-year institutions to increase 3% driven mainly by an increase in net tuition revenue.  In response to pressures from Congress and the public to make college more affordable, many colleges and universities have increased the availability of student aid from grants, scholarships, and fellowships.  Between 2010 and 2015, institutional aid increased 32%, from $30.2 billion to $39.8 billion. Conversely, federal loan volume declined 17%, from $74.9 billion to $62.1 billion, during that same period.  Although overall revenues are expected to increase, the increase has been offset mostly by increased grant aid available to students.

Legislative and Regulatory Developments

This section of the Alert discusses the following recent legislative and regulatory developments and the effects on nonprofit organizations in greater detail:

• Implementation of the Uniform Administrative Requirements, Cost Principals, and Audit Requirements for Federal Awards (Uniform Guidance).
• Uniform Prudent Management of Institutional Funds Act (UPMIFA) rules governing endowment funds that provide clearer guidelines on spending from endowment funds.
• The Society of Actuaries’ (SOA) release the RP-2014 base mortality tables and MP-2014 generational improvement scale, its first update of the pension plan tables in more than a decade.
• Various tax law changes affecting nonprofit organizations.

Accounting Issues and Developments

This section of the Alert discusses the following recent accounting issues and developments and the effects on not-for-profit organizations in greater detail:

• Revenue recognition
• Going concern
• Reporting on discontinued operations
• Simplifying the presentation of debt issuance costs
• Disclosures for investments in certain entities that calculate net asset value per share (or its equivalent)
• Recognition and measurement of financial assets and financial liabilities
• Disclosure of uncertain tax positions
• Consolidation requirements for nonprofit organizations
• Capital campaigns
• Recognizing services received from personnel of an affiliate
• Accounting for lease incentives and tenant allowances
• Functional expense classification
• Mergers and acquisitions – emphasis on fair value accounting
• Classification of debt supported by a liquidity facility
• Debt refinancing qualifying as an extinguishment of debt

Questions on this topic?  Contact our not-for-profit team.  We are here to help.