Broker Dealer Annual Audit: Checklist of What you Need to Prepare

Changes to the annual audit require broker-dealers to be proactive in being prepared. Working closing with the US Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) reviews broker-dealers closely to ensure compliance with rules and regulations. Failure to comply may result in heavy fines or a disruption in business.

Owners of brokerage firms need to actively communicate the importance of following proper procedures to employees. Individuals are entrusting you with their finances. Any type of mishandling of funds or failure to follow rules damages your brokerage firm’s reputation. If you are unsure of the recent changes or need answers, contact your brokerage firm’s CPA to guide you through the requirements for the annual audit.

Basic Checklist to Prepare for Your Broker-Dealer Audit

Ensuring your brokerage firm is compliant is the main purpose of the FINRA annual broker-dealer audit. The auditor will check different aspects of your daily operations. Prior to the audit, prepare your employees. Ensure your team is following the rules and regulations in compliance with the SEC and the FINRA requirements.

The auditor will carefully examine your brokerage firm’s daily operating procedures. Having your financial statements, company’s logs, and daily monitoring records prepared is critical. The auditor checks your records to ensure the proper handling of your clients’ money. Before the audit day arrives, gather all the necessary documentation, including:

  • License: In your annual audit, the broker-dealer will check your license. Do not allow your license to lapse for any reason. An up to date license ensures your brokerage firm is aware of the industry’s changing requirements and guidelines.
  • Financial Statements and Reports: Current financial statements to provide documentation for the proper handling of investments.
  • Customer Accounts: Review the customer account records to ensure all the information is current. Having employees update addresses, telephone numbers, tax identification numbers, and personal details should be an ongoing process throughout the year to eliminate the possibility of errors.
  • Compensation Records: Provide compensation records to verify proper procedures.
  • Communication: Provide documentation of emails or letters regarding SEC or FINRA communication.
  • Complaints: The auditor will analyze your records to ensure all procedures follow fair trade practices. Provide the auditor with resolutions regarding any type of complaint. Failing to be aggressive in fixing or handling complaints may harm your brokerage firm’s ability to conduct business.
  • Employee Records: A current list of managers who handle the daily transactions of higher funded investments.

If you are uncertain about the exact records, contact your firm’s CPA. Your CPA will be able to provide you with insight. The broker-dealer audit review of the documents is from an independent source. Any errors or failure to provide the current statements or documentation will delay the auditing process. Being prepared and professional at the time of the audit is critical.

Assessing the documents for misrepresentation, the auditor will carefully examine all materials to identify risks. Keeping accurate records of your customers, employees, and daily transactions will help minimize the chances of failing the audit. Costly fines, damaged reputation, and delay in business can result from an inaccurate audit review. Keep in mind, providing more documentation and records is better than too little.  If your firm is looking for a CPA, contact Ernst Wintter & Associates.

Writing a Charter for a Nonprofit

Nonprofits play an integral role in your local community, state level, and worldwide organizations. Providing a broad spectrum of services, nonprofit organizations include charities, churches, hospitals, universities and other foundations. Writing a charter for a newly formed nonprofit is vital, as the charter explains the main purpose of forming your nonprofit organization.

The Basics of Writing a Charter for Your Nonprofit

The formation of the charter is critical for gaining tax exempt status. Using an exemption status allows your organization to save money. Failing to incorporate the necessary information into the charter may result in a delay or rejection for tax exemption status at both the state and federal level.

When forming your nonprofit’s charter, you may want to consult or hire a reputable accounting firm to ensure the proper document development. Remember the charter document outlines the structure of your organization.

  • Name of the Nonprofit: The charter document must include the legal name of your organization. The legal name should stand out among similar organizations. Using strong descriptive words will help draw members, clients, and others to your nonprofit. Generally, the nonprofit’s legal name is at the top of the charter document.
  • Location: The next step is naming the location of the nonprofit organization. You want to ensure interested parties are able to find your nonprofit organization. The location information will include the nonprofit’s business address and the county. In addition to the address, the location information should state the name and phone number for the primary contact of the nonprofit.
  • Nonprofit’s Purpose: In the charter document, you need to state the reason for forming the nonprofit organization. Inform the readers of the charter how the nonprofit organization will serve the community, members or group. For example, the nonprofit organization may be a charitable organization working with the area’s homeless or a church serving the local community. By stating the reason for the nonprofit’s formation, the readers of the charter will understand your purpose in the community.
  • Board of Directors: The charter document must include the full names and addresses of the board of directors or the initial trustees in the nonprofit organization. Along with contact information, you need to inform the readers of the nonprofit charter the position of the members of the board.
  • Statement of Earnings Clause: The charter needs to ensure any monetary earnings are not for profitable use. Trustees, the board of directors, officers, members and other interested parties will not benefit from the formation of the nonprofit organization. Employees will receive reasonable compensation. Paying invoices, distributors, vendors and other needed services are justifiable from the earnings.
  • Dissolution Statement: The last portion of the nonprofit charter should include a statement informing the readers the process for the dissolution of assets.

Upon writing the charter for your nonprofit organization, the document requires the signature of a witness. The nonprofit charter is an important document for your organization. Forming the nonprofit charter to meet specific criteria may require the assistance from a tax professional to ensure exemption status.

At Ernst Wintter & Associates, our professional staff can assist your nonprofit in making sure it has the appropriate documentation in place, specifically when it comes to a charter and declaring nonprofit status.  Call or email us today to schedule a meeting with our Certified Public Accountants and ensure your nonprofit is on the right track.

How Addressing Open Audit Issues Can Help Increase Your Audit Rating

Increasing your audit rating by addressing open audit issues is an effective strategy for your organization. An open audit allows the audit committee to focus on the various aspects of the business and set priorities to ensure continuous success. As a manager or preparer of the audit process, you will need to show the audit committee the rationale behind your choices.

Increasing Your Audit Rating by Focusing on Open Audit Issues

Businesses have different ways to record and document daily performance. Increasing your audit rating requires an effective audit management system. Begin by addressing open audit issues. When meeting with you audit committee, provide them with all the necessary materials. If you leave out information, the findings will not be accurate.

Exact Representation of the Issues

Provide accurate findings in an audit report. An exact representation helps to calculate risks. If you provide the wrong or overstated details, the full business picture is not accurate. Overrated or understated audit ratings may greatly affect the business in the upcoming fiscal cycle.

  • Provide detailed information on current risk assessments
  • Show current trends affecting your business
  • Use automated software to help develop accurate report documents

If an audit committee spends more time going over suspected issues, the committee may decrease your rating or continue to debate the existing rating. Providing clear findings of the audit issues will help the committee to track trends. Basing appropriate actions to address the open issues from the trends will help move the company forward.

Provide Documentation

Showing and providing the committee with accurate documentation for your findings ensures the credability of your organization. By focusing on your records, reports and generated findings, you may increase your audit rating.

  • Always provide reports with up to date information
  • Provide graphs and statistics for the visual use during the meeting
  • Provide links to other materials that support your findings and trends

Failing to provide the right documentation at the audit meeting will decrease your internal audit quality. The result may negatively affect your audit rating.

Resolutions

With any form of issue or problem within a business, the focus must be on finding an effective solution. Addressing open issues will move the audit committee away from the problem to the resolution. Understanding all aspects of the audit report will allow the committee to move away from a rating debate.

  • Reassess your current audit rating system. Is the type of system still a recommended choice for your organization? Has your company outgrown the current method?
  • Focus on current issues. How are the current issues affecting the daily running of the business?
  • Develop effective communication methods to convince the audit committee the nature of your findings. Are the results being represented correctly in the meeting?
  • Assess risk factors and implement control options. What are the next available moves to increase the current audit rating?

Audit management is an effective strategy for increasing your audit rating. You will need to provide quality audit findings to ensure your organization is operating at the desired level of performance.  At Ernst Wintter & Associates, we are committed to offering businesses accurate and detailed audits.  If you are looking for tips on how to gather the appropriate documentation or finding an effective solution to a problem that has arisen, contact us today at  info@winttercpa.com.

Private Foundations and Public Charities – What’s the Difference?

Operating with a specific goal or mission is the main purpose of a nonprofit organization. Functioning as a nonprofit, your organization must continue to further your goals without any profit or gain to benefit shareholders or board members. Any forms of access funds must cycle back into the organization to continue with the mission.

Structuring a business to fall under the 501(c)(3) organization allows you to obtain federal income tax exemption. During daily operations, the federal exempt status is a way to save your organization money. Using the nonprofit arrangement allows you to obtain other various tax credits and benefits to continue to operate at lower costs.

Yearly changes to the tax system mean you must stay current to maximize the benefits for your nonprofit. Consulting with a reputable CPA firm or tax accountant should be a priority. As a leader in your nonprofit organization, you want the best results. Further classification for a 501(c)(3) organization will place your nonprofit into the private foundation or public charity category. Each will have specific tax implications.

Private Foundations or Public Charities

The main differences between a private foundation and a public charity are the amount of public involvement and the nature of the work.

1. Private Foundations

Generally managed by an individual, trustees or board of directors, a private foundation supports or maintains other forms of nonprofit organizations including religious, educational, and community support facilities. The funds to operate a private foundation often come from individuals or corporate sources.

Transforming the funds into gifts or grants allows the private foundation to help others. Specific guidelines or requirements may be part of the gift-giving contribution to an individual or charity. For example, a scholarship from a private foundation may require a specific field of study prior to awarding.

Using the private foundation status allows you to obtain more control over your nonprofit organization. Since the goal is to help other nonprofit organizations, private foundations can operate with minimal overhead.

2. Public Charities

Public charities create the largest amount of 501(c)(3) nonprofit organizations. Being a public charity, the nonprofit organization has more interaction with the public. The interactions help the nonprofit in many ways. Mainly, the public charity receives the majority of revenue from the general public to help further the mission. Making the public charity category more attractive to newly formed nonprofit organizations. Other sources of funds come from private organizations or governmental grants.

Along with reaching a larger source of revenue from the general public, a public charity has many benefits over private foundations. A public charity is able to receive higher donations from individuals due to the increased giving limits. Receiving public charity status also allows your nonprofit organization to receive funds from other public charities and private foundations.

Simplifying the complexities of private foundations and public charities, a CPA firm can help you with tax regulations, guidelines, and other legal requirements.  If you are unsure which category your nonprofit falls into, contact the CPAs at Ernst Wintter & Associates for assistance.

Why a Cost Allocation Plan is Important for Nonprofits

Developing a cost allocation plan for a nonprofit organization can be a tricky process. Understanding how a cost allocation plan (CAP) works is critical to responsible financial management and reporting; however, not all nonprofit organizations realize its importance. How costs are allocated affects the public view of your nonprofit and can greatly impact your ability to receive funding.

What is a Cost Allocation Plan?

Simply put, a cost allocation plan is the method used for allocating expenses that are not directly tied to a particular activity. It is your plan for allocating expenses that benefit more than one activity. When donors look at your financial reporting, they expect to see a clear picture of how their funds are being spent. In fact, formally allocating costs is required by governmental agencies and most major funders.

A cost allocation plan allows your nonprofit to communicate the true costs of providing certain services. For example, when your monthly electric bill for $800 arrives, rather than coding it simply as “utilities,” you would divide it out between the different functional areas that actually utilized that electricity. If your administrative office was responsible for approximately 20% of its use and your program center utilized 80%, it would be divided as follows:

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The Importance of Cost Allocation

When done accurately and consistently, allocating costs will provide a true picture of what your different programs and activities cost. How you allocate your costs will also determine the percentage of management, program and fundraising costs that will be reflected on your IRS Form 990 and other financial reports. This is important because these forms are utilized by potential donors to ensure that your organization is using its funds wisely. Especially when it comes to government funding, how funds are allocated will determine what costs are reimbursable. When a large percentage of costs are allocated to fundraising efforts, many funders will not consider your organization’s request for a donation. Why? Donors tend to give when their dollars go directly to mission critical programs and services.

When it comes to allocating costs, one of the largest expenses and most complicated of those requiring allocation is payroll. Some staff positions are easily categorized, but some positions, particularly those in the management or administrative realm can actually be divided based on the nature of a job and how much time and effort is devoted to a particular activity.

No matter the size or nature of your nonprofit organization, creating a cost allocation plan is a must. By determining how your funds are utilized, you can better communicate the value of your work, the importance of donor giving and how together you are making positive changes in the community.

At Ernst Wintter & Associates, our nonprofit audit services will give you peace of mind and help you decide how to best utilize your financial resources. If you have any questions about our nonprofit services, one of our CPAs would be happy to speak with you at (925) 933-2626 or, email us at info@winttercpa.com.

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This post originally appeared at Ernst Wintter & Associates LLP.

Nonprofit’s Guide to Giving Gifts

During the holiday season, thoughts turn to gift giving. Many employers choose this joyous season to recognize and celebrate with their employees. While sharing gifts in the workplace is common, nonprofit leaders must take care during the holiday season to ensure that they are following tax law and will not run into complications during an audit of nonprofits.

The Complications of Giving Gift Cards

Gift cards that are gifted to a non-profit organization are usually used to buy food or other supplies for a charitable purpose, however, some organizations have been known to give these cards to employees as gifts or bonuses. What these organizations may not realize is that gifts, including gift cards given to employees, are generally considered to be taxable compensation.

Not all gifts are considered taxable. Birthday, sympathy and holiday gifts with a low market value like flowers, books or food baskets are not required to be taxed. Holiday parties, group meals or celebratory get-togethers are also excluded. Basically, any cash, even if it’s a very small amount, or cash-equivalent like a gift certificate is taxable, according to Federal law.

Gifts to Volunteers

Further complicating the matter is the fact that many non-profit organizations also utilize volunteers. The policies surrounding volunteers are also scrutinized closely during an audit of nonprofits. Once a gift card or cash is given to a volunteer, no matter how nominal, on behalf of the organization, they are now considered an employee or independent contractor, with all of the requirements that employing an individual requires. This also means the required withholding of income and Social Security taxes.

What You May Gift to Volunteers and Employees

All of these regulations may leave you saying “bah-humbug,” but it is important that you abide by all applicable tax laws. Some benefits or gifts may be considered de minimis such as:

  • Holiday gifts, other than cash or gift card equivalents, with a low fair market value.
    • Such as an ornament or mug, etc.
  • Occasional parties or picnics for staff and their guests.
    • Such as a holiday luncheon.
  • Occasional coffee, doughnuts, or soft drinks.
  • Flowers or fruit for special circumstances.
  • Occasional tickets for theater or sporting events.
    • Such as a discounted movie ticket as a token of appreciation.

Whether an item or service is de minimis depends on all the facts and circumstances. It is important to remember that a key factor in determining if a gift is de minimis is its frequency and value.  During an audit of nonprofits, compliance will be thoroughly reviewed. Your board of directors, donors and even government entities are looking at your nonprofit organization closely to make sure that you are compliant with State and Federal laws and being a good steward of the funds you’ve received.

If you have concerns or questions about nonprofit gift giving or giving gifts to staff and volunteers, contact one of our CPAs at (925) 933-2626 or email us at info@winttercpa.com. We would be happy to speak with you.

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This blog post originally appeared at Ernst Wintter & Associates LLP.

Nonprofit Audit Requirements for California

When it comes to defining the term “audit,” it has several meanings. While it can mean Internal Review, External Management, or Contract Monitoring, many individuals think immediately of an IRS review. In reality, however, a financial audit most often refers to an independent review of a business or an organization’s financial books.

This is normally conducted on an annual basis, and it’s simply a part of reliable checks-and-balances to ensure everything is in order. Today, we will explore the California nonprofit audit requirements and all it entails.

Audit Requirements for Non-Profit Organizations in California

It should not surprise you that a good number of non-profit organizations in California are not aware that they’re required by law to submit an annual financial statement audit. According to California’s Nonprofit Integrity Act of 2004, Non-profit organizations that are registered with the state’s attorney general and have annual gross revenue of at least $2 million must have an Independent Audit of their annual financial statements.

If your organization is a charitable corporation, unincorporated association, or a charitable trust, then you are subject to the California nonprofit audit requirement. However, this requirement exempts organizations that are not required to file annual reports with the attorney general. They include:

  • Cemeteries
  • Educational institutions
  • Hospitals
  • Religious organizations

Additional Requirements

Other requirements for California nonprofit audit includes the following:

  • The audits must be carried out by an independent, certified accountant if your organization’s revenue is over $2 million. It is worth noting that there are certain exceptions for some government grants.
  • The audited financial statements should be made available to not only the attorney general, but also the public for inspection.
  • The audit must be carried out in line with the generally accepted accounting principles  – GAAP
  • It must be finalized within nine months of the financial year end.

Furthermore, you are required to create and maintain an independent audit committee, which should be separate from the other financial committees that may exist in your organization. You need to also ensure that the Audit Committee excludes staff members; not even the C.E.O, the treasurer or the chief financial officer should be in the committee. It can, however, include individuals who are not members of the board. It is worth noting that the Audit Committee advises the board of directors on employing and firing the auditor. It can also negotiate the auditor’s fee. Forming an audit committee may be an intimidating idea, buy you have no other way out.

Conclusion

An independent audit is an examination of your financial statements and accounting records by an independent auditor – usually, a certified professional accountant (CPA) hired and paid by your non-profit. The auditor will conduct an independent investigation to examine the accuracy of your accounting records as well as internal records.

Once done, the auditor will issue a report stating whether, in his professional judgment, your year-end financial statements and accounting records fairly represent your organization’s financial position with regard to generally accepted accounting principles – GAAP. The auditor report, which is in letter form, is normally attached to the front of the financial statements. With a clean bill of health from the auditor, the world will know that you are keeping your financial books in a responsible manner.

Contact Ernst Wintter & Associates LLP today to find out how we can help.