Articles by Carolyn Sechler, CPA
Let's face it, the way America does business is changing. The way the world does business is changing. Consequently, our profession must be in the forefront of this change in order to continue to succeed. We've all seen the "over the counter" software packages for tax returns, the latest databases and countless other accounting systems available to consumers and businesses. Where is our opportunity to support the do-it-yourselfer?
The information age lends itself to the hungry minds of our clients, and threatens to displace a CPA or accounting professional's role in the marketplace with easily accessed tools both on the Internet and in software. We need to find a way to keep our expertise just that, expertise. We still need to be the source of information for our clients and we need to become a foundation for total solutions.
Electronic commerce is not new. Companies and individuals that have been conducting business on the Internet for several years continue to be met with mixed feelings about the comfort-level of electronic transactions.
The AICPA has created "CPA Web Trust" to both reassure the consumer and to create another service which a CPA can offer his/her clients. The stripped down description of the process is as follows:
a website using a method of data transmission (credit card, personal information, etc.) is reviewed by a CPA, security and internal controls are reviewed and all is measured against standards spelled out by the AICPA. If the site meets certain criteria for security and credibility, then it is given a Web Trust "seal of approval."
"The CPA WebTrust criteria examines three broad principles:
As with all new methods of evaluation, we have to look at the perceived value of the endorsement, the liability involved and the amount of actual business it will generate in the future.
What is the value of the endorsement? According to the AICPA, "the CPA WebTrust assurance service is the latest initiative undertaken by the AICPA and is designed to build consumer trust and confidence in electronic commerce by monitoring and evaluating Web business practices through the hundreds of thousands of AICPA member CPAs and their equivalents around the world."
Their research indicates that having a WebTrust logo on the site (assuming it wasn't copied from an authorized site and simply pasted into an unauthorized site by an unscrupulous site owner) will give the consumer more confidence about purchasing the goods and services on-line, making it more likely that the site will generate income for the owner.
But will it really? As noted above, what about the ability of anyone to "snitch" a graphic from any website and paste it into his own web page? There are limited ways to monitor this (VeriSign "spiders") this. A lofty endorsement can be quickly reduced to a meaningless captured graphic. Unfortunately, this may happen even more frequently as the WebTrust endorsement becomes a coveted business tool.
What is the liability? Given the rigid parameters the WebTrust requires for a true endorsement, the liability should be minimal. Reviewing business practice is normally a matter of judging standards and procedures. The Internet is 'a whole `nother ball game.' How can anyone guarantee that the company represented on-line will fulfill orders on time, not steal credit card numbers, or give away personal information? While it is true that that can be said of any company, but giving one's "WebTrust seal of approval" for the entire world to see, opens up more risk for the CPA.
What if a person "illegally" used the WebTrust logo on his website to lure potential customers, and actually bilked thousands, if not millions of dollars from trusting consumers? The user can claim that he/she only purchased through this website because it displayed the "seal of approval" from a CPA, when in fact, no such endorsement was given. While I am certainly not trained as a lawyer, I wonder, could the CPA or WebTrust itself be sued for damages and loss?
What power does the reviewing body or the CPA have over the actual HTML code of the website? Are you given the login and password to amend the site? Do you really want that power? If you have the login and password, you are now open to more liability - you now have access to the confidential information coming in to the site. Even though you would not use any of this for your advantage, the question of accessibility will always remain.
In interviewing a firm in Pennsylvania, ("Cyberseal") I learned that their choice was to distance themselves from the development of the site and only perform this assurance service. In fact, this is all there practice's entire niche. Joshua Twersky, CPA and president of Cyberseal feels this is an excellent service which will give he and his firm a competitive advantage in the marketplace. In asking what some of the weaknesses might be, besides the graphic pilfering that could occur, he feels it needs to be made clear this is not a 'plug and play' kind of service. The firm that pursues this should have a strong foundation in both technology in general, e-commerce and the Internet in specific.
Let's take a look at the actual business it will generate for your Firm. You now have another service to offer your clients! Great! What do you charge them? Is it a one-time shot, and will he go somewhere else when his quarterly review is due if you "flunked" him the first time? What are the chances that he makes the changes you recommend you give your seal of approval, and he immediately reverts his site to its original content, knowing he will not be reviewed until 90 days hence? Chances are slim, but still possible that someone could want the endorsement that much - then again, he could just steal the logo and be done with it.
On a more positive note, if one is to proceed and support the development of this service in the belief that there will be added value for the customer, then it is time to jump in and participate in making this product clean, effective and bullet-proof. Training must be more than adequate and on-going. The WebTrust site must serve to create community among the CPA pioneers that have taken this leap. (In trying to contact a number of the CPAs listed on the site I received either no response or an indication that the address was incorrect or no longer valid-- how does this speak of credibility.)
Legitimate companies will appreciate the process and the endorsement. While electronic commerce is not new, is still is not embraced by even a minority of the businesses online. The AICPA hopes that using WebTrust will attract more businesses to doing on-line transactions.
Should your firm offer these services? Consider all the above concerns before deciding to send one of your top-notch techno-CPAs to the training.
Will offering the service bring your firm into the 21st century? Will NOT offering the service hinder the way you do business? Is the risk really worth it? Perhaps, but only if you understand that like any new service you will have to be a committed contributor to it's ongoing refinement, improvement and promotion to the consumer.
By Carolyn S. Sechler, CPA
If you are not yet familiar with the fascinating details of Financial Accounting Standards Board provisions, this might be a great time to familiarize yourself with FASB 117, FINANCIAL STATEMENTS OF NOT-FOR PROFIT ORGANIZATIONS. These are the "rules" we CPA's must follow in the preparation and presentation of your financial statements.
FASB 117 was issued in June 1993 and had an effective date for fiscal years beginning after December 15, 1994. For those not-for profit organizations that have less than $5 Million in total assets (what you own) and less than $1 Million in annual expenses, the effective date was delayed until fiscal years beginning after December 15, 1995. Therefore, all Organizations are now supposed to be in compliance with this provision.
This FASB now requires a complete set of financial statements to include:
These are the precise titles you should be seeing on your current financial statements. Balance Sheet and Income Statement are not appropriate. There are also many new terms you may find in the body of these "new" financial statements and related disclosures you may find unfamiliar.
In this month's scintillating installment we will review the Statement of Financial Position (a not-for -profit form of Balance Sheet). Basically this statement must include the amounts of each of the following classes of assets, based on the existence or absence of donor-imposed restrictions:
Whoa, you might say. What the heck is NET ASSETS? Simply put, this is the net result of subtracting what you owe (your liabilities) from what you own (your assets). In the for-profit entity this is commonly referred to as "equity."
Another way to look at this measure is that it shows you what would remain after all obligations were serviced if you had to wind the organization down as of the date of the financial statement. There you go, clearer than mud, right?
This portion of the provision serves to categorize the components of this measure of your "equity" and clearly present to the reader of the financial statement, what is available vs. restricted for future operations.
Either the Statement of Financial Position or the notes must provide information on liquidity, financial flexibility (i.e. restrictions) and interrelationship of assets and liabilities. The information should be aggregated into reasonably homogeneous groups. Cash or other assets that are received with donor-imposed restrictions should not be classified with cash or other assets that are unrestricted and therefore available for current use.
Information about the nature and amount of different types of permanent and temporary restrictions must be included in the financial statement disclosures. These disclosures must distinguish between permanent restrictions of holdings of assets which must be used for a specific purpose, preserved or not sold and assets donated with the provision that they be invested to provide a permanent source of income (permanent endowment).
Board designated endowments of unrestricted assets need to be classified with unrestricted net assets but disclosed either in the body of the financial statement or in the notes as board designated. For instance, the board may decide that portfolio earnings be used for replacement of equipment thereby designating these funds for a particular purpose.
In becoming well versed in the components within FASB117, your comprehension of your financial statements will increase. In addition, you will find them to be a much more valuable management tool.
This exercise can also enhance your relationship with your professional advisor. Everybody wins! The more we understand about the "rules of the game" and goals of the organization, the better we can support one another as members of the team.
Hopefully this summary has given you food for thought and identified some questions for you to ask your practitioner. In future articles I will cover the remaining components of the financial statements. Feel free to contact me if I may assist you in clarifying any of this material.
Also, let me know if there are subjects you would like to see addressed to better support you in this specialized area of leadership and management of exempt organizations.
"Oh, donít bother me," said the duchess, "I never could abide figures." Lewis Carroll, Alice in Wonderland
In my previous article we were having a scintillating discussion on rules impacting the presentation of your financial statements. As promised, I will continue this discussion and help you be more astute readers of these accounts of your previous yearís financial history.
I received a number of comments on my previous column relative to actual applicability of these rules to 501(c)(6) organizations. These standards, while primarily directed to (c)(3) Organizations, are strongly recommended to (c)(6) and the like. They allow one to present more clearly the activity of the organization.
Statement of Activity.
This statement shows all the organizationís FINANCIAL activity FROM THE BEGINNING TO THE END OF THE YEAR. The TITLE of this statement can be any of the following, including:
The title is less important than that this statement present all relevant activity for the period.
There should be two sections. One showing revenue and expenses while the other shows .. you guessed it.. changes in net assets.Net assets are the components of your equity section. Formerly fund balance accounts.
It is usually suggested that these two sections be shown as a combined statement in that changes in net assets usually presents few transactions.
Our next item is Statement of Functional \Expenses
As you know, Associations and Professional Societies can exist only so long as their membership believes that the services being rendered justify the dues and other payments being made. Since the members must see benefit for their money, the Association has an even greater need to communicate itís financial activity with clarity.
Functional reporting is a most effective way of communication since it requires the leadership (Board) to identify the programs of the Association and their related costs. While this is not required, once again, of (c)(6) organizations, perhaps you can see the value to yours.
SFAS 117 actually allows the detail of these expenses to be presented in the footnotes. However, it is recommended these details be shown in the primary statements where the reader can really see them and thereby more readily comprehend the workings of the organization . . . and their money! Statement of cash flow is relatively new to many organizations. It shows where the organization received and spent their money. These activities will be presented in three categories:
For profit businesses have been required to present this financial statement for a years under sfas 95 "Statement of cash flows." This is where guidance is provided in preparation of this statement.
There are two basic methods for preparing this statement: the indirect and direct methods. Basically, the indirect method starts with the excess of revenue over expenses and reconciles this number to operating cash flows. While the recommended method, direct, reports operating cash receipts and cash disbursements, directly adding them to arrive at operating cash flows. The direct method appears to be more easily understood by the reader of the financial statements.
Financial statement disclosures
These are the footnotes to your financial statements. They present information that is not readily apparent from reading the numbers. For instance, the form of exemption which applies to you (c6, c3, etc.). The explanation behind the restriction on funds, if any. Tax liability which may have been incurred.
When you have a moment, go back and re-read your "footnotes" and make sure they (1) clarify information about your organization (2) still apply, and (3) that there is nothing else you feel should be included here. Your accountant can provide you plenty of guidance on the pros and cons of including particular information and the appropriate wording.
You and your professional advisor and the readers of these statements are best served when you work together on this document to produce the best, most accurate account of the previous yearís activity.
Method of accounting
Many small and medium non profit organizations use the cash basis or some modification internally. Another of the requirements on the presentation of these financial statements is that the accrual method be used. This does not mean that one has to change their internal method of bookkeeping, only that a conversion calculation be made before presenting this information in the form of financial statements.
The last word . . .
SFAS 117 emphasizes the value of reporting on the organization as a whole with clarity and appropriateness and no longer mandates the traditional use of fund accounting. The goal, appears to be to provide greater understanding to the reader of these financial statements.
In a future article, we will conclude this discussion by covering considerations relative to the manner in which to disclose information about related or feeder corporations in these financial statements. As always if there are any questions or advice, feel free to contact me.