WHAT ARE INTERNAL CONTROLS?
STATEMENT ON AUDITING STANDARDS NO. 115
Internal control is broadly defined as a process,
affected by an organization’s board of directors,
management and other personnel, designed to provide
reasonable assurance regarding the achievement of
objectives in the following categories:
The SAS 115 letter categorizes comments into:
deficiencies, significant deficiencies, material
weaknesses and other matters.
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Effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with applicable laws and
regulations
5 Components of Internal Control
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Control environment – the tone at the top.
Risk assessment – identification of internal and
external risks.
Control activities – policies and procedures to
ensure objectives are carried out.
Information and communication –
identification, capture and communication of
pertinent information in a form and timeframe
that enables people to carry out their
responsibilities.
Monitoring – Process that assesses the quality
of the system’s performance over time.
Deficiency in internal control – exists when the design
or operation of a control does not allow management
or employees, in the normal course of performing their
assigned functions, to prevent or detect and correct
misstatements on a timely basis.
Material weakness – is a deficiency, or combination of
deficiencies, in internal control, such that there is a
reasonable possibility that a material misstatement of
the entity’s financial statements will not be prevented,
or detected and corrected on a timely basis.
Significant deficiency – is a deficiency, or combination
of deficiencies, in internal control that is less severe
than a material weakness, yet important enough to
merit attention by those charged with governance.
Evaluation of a Deficiency
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Segregation of duties – no one person should be able
to complete a transaction.
For each transaction cycle, the system should separate
(***MUST separate):
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Initiation
Authorization ***
Recording ***
Custody ***
Reconciliation
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Audit adjustments indicate a control
deficiency.
The significance of a control deficiency
depends on the potential for a misstatement,
not on whether a misstatement actually has
occurred.
The auditor is required to consider both
qualitative and quantitative factors in
combination for various issues discovered.
MANAGEMENT’S RESPONSIBILITY
Management is responsible for the design,
implementation, and maintenance of internal control
relevant to the preparation and fair presentation of
financial statements that are fee from material
misstatement, whether due to fraud or error.
INTERMEDIATE SANCTIONS
Relates to penalties assessed on tax-exempt
organizations and individuals who participate in an
excess benefit transaction.
What are the penalties?
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The organization could potentially lose its taxexempt status. (Severe cases only.)
A 25% tax is imposed on the individual
benefitting in the excess benefit transaction.
Managers, who participate in an excess benefit
transaction (authorize), knowingly, willfully,
and without reasonable cause are liable for a
10% tax on the excess benefit not to exceed
$20,000 for ALL participating managers on
EACH transaction.
The disqualified person is also liable for a 200%
tax on the excess benefit transaction if not
corrected by a certain date.
What is an excess benefit transaction?
Any transaction in which an economic benefit is
provided by an applicable tax-exempt organization
directly or indirectly to or for the use of any disqualified
individual, and the value of the economic benefit
provided exceeds the value of the consideration
received for providing the benefit.
Who are disqualified persons?
An individual is a disqualified person if the person was
in a position to exercise substantial influence over the
affairs of the organization at any time during the fiveyear period ending on the date of the excess benefit
transaction.
Compensation Reasonableness
The value of services is the amount that would
ordinarily be paid for like services by like enterprises
under like circumstances.
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Compensation levels paid by similarly situated
organizations for functionally comparable
positions.
Availability of similar services in the geographic
area.
Current compensation surveys compiled by
independent firms.
Actual written offers from similar institutions
competing for the services of the disqualified
person.
Services performed in prior years may be
taken into account.
Must examine the entire compensation
package including wages, benefits, and
deferred compensation.
Numerous courts have held reasonableness as
a question of fact “…to be resolved…under all
the existing circumstances.”
Rebuttable Presumption
Payments are under a compensation arrangement are
presumed to be reasonable if:
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The compensation arrangement is approved in
advance by an authorized body of the
organization composed entirely of individuals
who do not have a conflict of interest.
The authorized body obtained and relied upon
appropriate data as to comparability prior to
making its determination.
The authorized body adequately documented
the basis for its determination concurrently
with making that determination.
Conflict of interest
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Applies to each transaction.
Applies to all voting members of the
authorized body, except if the voting member:
o Meets with other members only to
answer questions
o Is not present during debate and
voting on the proposed transaction
Comparability considerations
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Whether surveys were performed by
independent, reputable firms having
knowledge and expertise in the same industry
as the tax-exempt organization.
Whether compensation surveys covered the
period being examined.
The number of surveys and number of
different organizations in the survey.
Whether survey organizations were similar.
Whether positions in survey were functionally
comparable to the position.
Form 990 Policy Topics (990 Questions)
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ANNUAL officer, director, and key employee conflict
of interest statements and monitoring.
Whistleblower policy.
Document retention and destruction policy.
Process for determining executive compensation.
Whether copy of 990 was provided to the board and
description of the process for review.
Provided Courtesy of:
Logan, Thomas & Johnson, LLC
5023 W. 120th Ave., #165
Broomfield, Colorado 80020
******
Calvin Logan – 303.532.1000
Jan Thomas – 303.569.6030
Pauline Davis – 719.640.1188
Nonprofit Board
Responsibilities
Roles of the Nonprofit Board
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Determine the organization’s mission and
purpose.
Select the chief executive officer.
Support the chief executive officer and
evaluate his or her performance.
Ensure effective organizational planning.
Ensure adequate resources.
Provide proper financial oversight and
ensure proper financial controls are in
place.
Determine, monitor and strengthen the
organization’s programs and services.
Enhance the organization’s public
standing.
Ensure legal and ethical integrity and
maintain accountability.
Recruit and orient new board members
and assess board performance.