Local Education Foundation Outreach

Auditing and Accounting

FORMATION OF A LOCAL FOUNDATION

  1. Obtain a copy of the Oklahoma law pertaining to school foundations and study it. (70 O.S. 1981, section 16-111, House Bill 1380, 1989)

    A. Exemption status as 501 (c) (3) is required for district to accept funds. Loss of status will cause foundation to cease to function under the statutes.

    B. Who may be the beneficiaries is restricted.

    C. Local Board may accept or reject benefits.

    D. Financial records are open to the public.

    E. No employee of the district may be a voting member. Additionally, the number of ex officio members must be less than the number of voting members.

    F. Financial records must be made available to the school district auditors and such records are open to public inspection.
  2. Locate an attorney and accountant who are knowledgeable in non-profit organizations and 501 (c) (3) organizations in particular.
  3. Have attorney draft the articles of incorporation, bylaws, and handle filings with the Secretary of state and IRS for federal identification number.
  4. Hold the organizational meeting to approve the bylaws and elect the board of trustees and officers.
  5. Have the attorney or accountant file for exemption status with the Internal Revenue Services as a 501 (c) (3) organization.

    A. This requires filing a form 1023 which is quite extensive. Within this filing is required a three year operating budget. It must be submitted with the original application for exemption or the exemption or the exemption will be denied.

    B. Notification of temporary exemption (advance ruling) will be received from the Internal Revenue Service. It should be maintained within a permanent file. The Form 1023, advance ruling, and form 990 must be presented upon request of any party.

    C. After the advance ruling period, additional information will be required by the IRS to obtain a permanent exemption status. This should also be maintained within a permanent file.

SET-UP OF THE ACCOUNTING SYSTEM

  1. Ask the accountant to draft a chart of accounts, set up a general ledger and journals, and draft a format of a set of financial statements.
  2. Establish a budget and allocation (if any) of the expected contributions and expenditures for at least the first year, considering amounts that can be currently expendable as well as those for permanent endowment purposes.
  3. Ask the accountant to assist in establishing controls over donor records from the point of donation through financial statement presentation and tax preparation.

    A. Consider whether the foundation will accept restricted contributions from donors and develop a system to track the restriction through the use for restricted purposes.

    B. Consider whether the foundation will accept non-cash contributions and how they will be valued and recorded in the system.

    C. Consider what policies the board will establish concerning receipt of negotiable instruments such as stocks or bonds.

    D. Consider the level of accounting knowledge and the time available of the individuals that will be receiving the contributions and/or recording the contributions.
  4. Locate an individual within the community knowledgeable in non-profit organization accounting to implement the controls over records and perform the routine bookkeeping and financial reporting to the board.
  5. Locate the accountant you wish to audit the financial statements of the foundation and prepare the tax return. Request he/she approve your plans prior to implementation. (If the accountant is not a member of the board, he/she may both assist in establishing controls and perform the audit)
  6. Contact the accountant regularly for any changes or new conditions that develop during the year.

THE AUDIT PROCESS

  1. At the outset of the audit, the auditor will ask you to sign a standard engagement letter which explains what an audit is and is not, the auditor's responsibilities and the foundation manager's responsibilities, the cost of the audit and any other services that may be performed. Generally the audit will not proceed until the signed engagement letter is received by the auditor.
  2. The auditor will request a number of items be available to him during the audit, including but not limited to:

    a. Board minutes for the full year and to the date of audit completion.

    b. Bank statements for the year including the validated deposit slips and canceled checks for the year.

    c. Investments records for the full year including purchases, sales, gains, losses, interest and dividends.

    d. Contribution records including receipts for the year, donor documentation, appraisals or stock market quotations for non-cash contributions, and any other records created outside the accounting function such as publicity records or newsletters.

    e. Invoices for expenses and program expenses for the year.

    f. Budgeted revenues and expenditures records for the current year.

    g. Fund raiser records such as dinner tickets, etc.
  3. During the audit, the auditor will ask you to sign confirmation going to bankers, investment brokers, contributors and others as a means of establishing the existence of various assets or occurrence of various transactions. The auditor will direct the recipient to respond directly to the auditor.
  4. During the audit, the auditor will consider the internal control structure in order to determine the auditing procedures necessary for the purpose of expressing an opinion on the financial statements. This may consist of asking questions, flow charting the systems, writing narratives, completing a checklist, or utilizing some other methods of documenting how the structure is designed to operate. Additionally, the auditor will walk-through or test the systems to determine if they are operating as they are designed.
  5. Close to the conclusion of the audit, the auditor will ask you to make certain written representations to him about the financial statements and related matter. Additionally, the auditor will request you to contact your attorney and ask him to respond directly to the auditor concerning any current litigation or any unasserted claims of which the attorney had knowledge.
  6. At the conclusion of the audit, the suitor will issue the audit report which is the auditor's opinion concerning the fair presentation of the financial statements. Additionally, he may issue an internal control structure letter if he noted matters involving the internal control structure design or its operation that he considers to be reportable conditions under standards established by the American Institute of Certified Public Accountants.
  7. At your request, the auditor may present the audit report and internal control structure letter to the board.

TYPICAL ACCOUNTING/AUDITING/TAX PROBLEMS

  1. Inability to provide the detail required on contributions received for the Internal Revenue Service Form 990. They require reporting of the name, address, date, method of valuation, and amount of each "significant" contribution.
  2. Inability to classify expenses by their intended function as well as their natural category. (i.e. Program, fund raising, management and general as well as office supplies, stationery, postage, etc.)
  3. Inadequate documentation of the expenses paid satisfying a restricted contribution.
  4. Inability to determine that all contributions received were recorded.
  5. Inadequate board of trustees minutes substantiating board policies. This happen with various issues including allocations of monies to specified expenditures and how various amounts of unrestricted contributions will be utilized for current operations or endowment.
  6. Endangering exemption status by engaging in disallowed transactions or activities.
  7. Inaccurate reporting of special fund raising events such as dinners, cocktail parties, entertainment events.
  8. Inadequate physical control over non-cash contributions such as stocks, bonds, property and equipment. This generally occurs because the system of recording non-cash gifts or in-kind contributions is different from the system recording cash contributions. One system can generally be designed to accommodate both types of gifts.
  9. Inability to substantiate how an activity generating monies accomplishes the exempt function of the entity.
  10. Incomplete, inaccurate, or late filing of the annual form 990 with the Internal Revenue Service.
  11. Endangering exemption status by failing the at least 1/3 public support and no more than 1/3 investment income tests. This test is generally failed when a significant percentage of contributions are made by disqualified persons. The second test is generally failed in later years of the foundation when endowment balances are high and there is less contributions revenue.
  12. Inadequate required disclosure of contributions amount for fund raisers involving benefits received by the donor (i.e. fund raising dinners, etc.).