Defining a Nonprofit Organization

While nonprofits have a wide range of objectives, their general charter is to accumulate and distribute funds to address specific social objectives and to improve society in some notable way.  Government approval is required to be designated a nonprofit and thereby enjoy tax benefits that profit-seeking organizations do not.  In return, the nonprofit must abide by regulations that disallow the use assets for non-related purposes. To that end, nonprofit responsibilities include the creation of a board of governance to oversee and maintain compliance.

Audit Committee Responsibilities

Though nonprofit organizations do not have the same responsibility to shareholders as profit-driven corporations, these certainly have an obligation to maintain accurate and detailed financial reporting. Supported by funds from donors and foundations, plus the government from a tax-exempt perspective, accounting and audit procedures must comply with the organization’s charter and applicable tax laws.

An Audit Committee is commissioned by the Board of Directors of the nonprofit to monitor, review and oversee the nonprofit responsibilities to create and maintain accurate accounting and audit processes. The charter of responsibilities should be clear to all, so that the Committee may execute their duties without interference. At least one member of the Committee should be well-versed in accounting principles or, alternatively, a consultant should be budgeted for and hired to ensure that accounting procedures and fund disbursement are managed properly. And systematic check and balance processes should be created to eliminate improper or fraudulent handling of the nonprofit’s assets.

Effective Nonprofit Audit Committees fulfill nonprofit responsibilities by:

  • continually improving the financial system with well-defined procedures and reporting.
  • creating deterrents to mismanagement and fraud .
  • establishing effective audit processes, both internal and external.

Securing an Auditor

The Audit Committee is responsible for hiring an auditor to summarize the financial process. Charged with the oversight responsibility, the Audit Committee must make available all records for the auditor to perform effectively. Ongoing communication with the auditor is important to ensure that apparent obstacles that may be hindering the audit process are removed.

Reviewing the Audit Report

When the audit is completed and the report submitted, the Audit Committee will meet with the auditor to review the findings and ensure the nonprofit responsibilities are being met.  Ideally everything is in order. But if irregularities and variances should exist, these will be brought to light for discussion of futher investigation and resolution. Some discrepancies may require changes in procedure and stronger check and balance. Serious problems might result in employee dismissal, legal prosecution and a substantial revamping of the bookkeeping procedures.

Presenting to the Board of Directors

The Audit Committee will assemble a summary with specific conclusions and recommendations for presentation to the Board of Directors.  During this presentation, the Audit Committee will:

  1. Provide a summary of the audit.
  2. Summarize the current financial situation.
  3. Review variations or discrepancies discovered.
  4. Recommend solutions for resolving any mishandling issues.
  5. Make recommendations to strengthen overall financial management.
  6. Provide an assessment of the auditor and the audit process.

With Board approval, the Audit Committee will proceed to immediately resolve mismanagement issues.

Importance of the Audit Committee Function

Effective Audit Committees are vital to the life the organization and meeting nonprofit responsibilities.  Poor oversight may compromise the integrity of the organization and eventually jeopardize the future of the endeavor.

Contact Ernst Wintter & Associates LLP today to see how we can help you through the process of a nonprofit audit.

Full Scope or Limited Scope Audit – Which One and Why?

When planning for an audit of your 401(k) or other retirement plan, you might question if a full scope audit or limited scope audit should be conducted.  It is important to determine if your plan requires an audit, and know your options. Failure to comply with audit requirements can lead to a host of long-term complications for your business.

Is an Audit Required for My Company’s Retirement Plan?

Retirement plans are subject to U.S. Department of Labor and IRS regulations. For the protection of investors, these agencies ensure that they are appropriately managed. Generally, qualified benefit plans with 100 or more eligible participants, as of the first day of a plan year, require an audit. Each employee who is eligible to contribute to the plan is treated as an eligible participant, whether they contribute or not. Retirees and separated participantsalong with the beneficiaries of deceased participants who are receiving benefits, or are entitled to receive benefits, are also treated as eligible participants.

The regulations surrounding 401(k) audits are strict and complex. Non-compliance can lead to expensive fines and litigation. Trusting an experienced auditor to advise you throughout the audit process is essential to avoiding complications.

Full vs. Limited Scope Audit – Which is right for me?

Limited Scope Audits

To qualify for a limited scope audit, an insurance carrier or bank must act as the trustee or custodian for the plan. This entity must be state or federally chartered and regulated, supervised and subject to examination. The trustee must also certify to the accuracy and completeness of any investment information.

A limited scope audit works well for some. They usually come along with lower fees and fewer areas subject to audit testing. It’s important to note that the accounting firm that is charged with performing a limited scope audit cannot give an unqualified opinion on the plan’s financial statements. An unqualified opinion is an independent auditor’s report that your financials are fair and accurately presented. Reports that accompany limited scope audits are referred to as a Disclaimer of Opinion.

Full Scope Audits

In a full scope audit, audit work is performed on the plan’s investments. Procedures include sending confirmations to the custodian, trustee or insurance company to verify ownership of investments, along with the valuation of investments, investment transactions and investment income.

The accounting firm performing the full scope audit, will provide an independent auditor’s opinion on the plan’s financial statements.

The independent auditors’ report, financial statements and required schedules are filed with the Department of Labor. This is due on the last day of the 7th calendar month after the end of the plan year, unless an extension is requested.

It is vital for small to mid-size businesses to plan for the appropriate full or limited scope audit of their 401(k) plan. Contact Ernst Wintter & Associates at <a href=”tel:9259332626″>(925) 933-2626</a> to discuss your audit questions and determine which option is best suited for the unique needs of your business. 

Why Does My Small Business Need to Keep All These Accounting Records?

Running a small business is a big task.  Between the everyday tasks at the core of your company and keeping your staff and customers happy, you may be compelled to expunge files to make space.  Before you opt to get rid of your small business accounting records, take note of these reasons for keeping your files in shape and on hand.

  • Audits.  The Internal Revenue Service is a powerful entity with the ability to request years of records if an audit is initiated.  Payroll records should be kept for at least four years, and a tax audit can go back as far as six years.  In general, it is helpful to keep records for at least seven years before expunging them to ensure that you cover any potentially needs, should an audit be scheduled.
  • Monitoring Progress.  You can’t know where you’re going until you know where you’ve been.  Keeping track of your small business accounting records will afford you the ability to paint an accurate picture of your company’s progress.  By documenting your income statements, balance sheets, and sales records, you’ll be able to better understand which items are selling, how much inventory you’re storing unnecessarily, and how you can improve your overall business functions.
  • Preparing for Credit Needs.  As your company grows, you may find yourself in need of additional funds to help with the expansion of your business.  Well-kept small business accounting records can mean the difference between wanting a loan and obtaining one.  Properly kept small business accounting records, including balance sheets, income statements, and payroll documents can provide you with the leeway you need to grow your business for the long term.  On the other hand, poorly kept or inadequate documentation could potentially lose a loan that could have meant big things for your business.
  • Employee Inquiries.  Whether you’re talking about present or past employees, anyone who has worked for you in most forms or fashions can generally request information at any time.  It’s important to remember that your small business accounting records don’t solely include financial statements that could be audited by outside inquirers.  You may be required to present information relative to employee benefits, including details about benefit plans, contributions, payments, and other imperative details.  It’s vital that your small business accounting records are healthy enough to withstand any inquiry so your staff can answer any necessary questions at a moment’s notice.

Small business accounting records needs to be kept tidy to ensure the health of the companies they encompass.  Between local, state, and federal regulations, the housekeeping of these records is not only ideal, but it’s essential.  It can also be tough to do if you’re operating a company that’s stretched in resources as it is.

If you need help keeping your small business accounting records in order, contact our team at Ernst Wintter & Associates, and let’s talk about how we can help.

Tax Implications of Selling Your Home

The process of buying or selling a home is often mind-boggling. Misinformation about the tax implications of real estate sales abound and it is easy to get overwhelmed by these complex transactions.

Whether a seller is responsible for paying taxes on the sale of a home and the amount of those taxes depends on how long they’ve lived in the home. In many cases, homeowners can pocket up to $250,000, or $500,000 if filing jointly with a spouse, tax-free. The IRS has specific guidelines outlining this exemption and exactly who qualifies.

Exclusion of Taxes for Real Estate Transactions

For those homeowners receiving larger amounts from the sale of their main home may qualify to exclude up to $250,000 of that gain from their income when filing their tax return. This can be extended up to $500,000 when the return is filed jointly with a spouse.

To qualify for this tax break, homeowners must meet both the ownership test and the use test, which is determined by the IRS. This means that eligibility requires that a homeowner has used a home as their main home for at least two of the five years leading up to its date of sale. The ownership and use test can be based on different two-year periods; however, both of the tests must be met during the five-year period ending on the date of the sale.

Exceptions to the Exclusion

For those selling properties such as vacation homes, investment homes or rental properties, these exclusions generally do not apply. These transactions are typically subject to taxes on the entire income gained in the sale.

Homeowners who have sold another home within the five-year period, and were eligible for the exclusion, will generally not be eligible for a second exclusion. The IRS requires that the sale of a home be reported on a tax return, even if it is excluded. Sales with a gain over $250,000 (or $500,000 for a married couple) are subject to capital gains tax.

Certain special situations allow homeowners to suspend the five-year test period. For example, some active duty military personnel and their spouses may elect to extend the period up to 10 years.

The Benefits of Working with a Financial Professional

The tax implications of a real estate transaction can be complex. This is why many homeowners trust the counsel of a reliable professional when selling their homes. Relying on the expertise of an experienced financial professional will help you to make wise decisions regarding the sale of your home.

At Ernst Wintter & Associates we understand the financial intricacies of selling your property. We will be with you each step of the way to help you understand the process and the scope of any tax ramifications. Learn more by contacting our accounting experts today.

Nonprofit Audit Types

The word “audit” often has negative connotations. However, for many nonprofits, an annual audit is standard practice. Though the IRS does not require audits of all nonprofit organizations, other government agencies do. What is just as important for organizations that rely heavily on donations is that many private foundations and independent donors will not consider supporting organizations that are not audited on an annual basis. In the nonprofit world, conducting an annual audit has, for the most part, become a best practice.

Though few states have laws requiring an independent audit for smaller organizations, once a contribution threshold has been exceeded, it becomes mandatory. Most nonprofit audits are performed under Generally Accepted Auditing Standards (GAAS). When an organization receives over $500,000 in federal awards, a compliance audit performed under the Generally Accepted Government Auditing Standards (GAGAS), often referred to as “Yellow Book” standards is required. These standards focus heavily on aspect of internal controls.

The GAAS Audit Process

During an independent audit, using the GAAS standards, a trained auditor will review an organization and its environment, and test account balances such as payables, revenues, expenses and cash. Fraud risk and internal controls will also be considered.

Once an audit is complete, the organization will receive an opinion on the statements, along with a letter explaining them, if any internal control deficiencies are found. Auditors will also suggest ways that your organization can improve and give appropriate procedure to follow.

Agreed –Upon Procedures Engagement

An alternative to the GAAS audit is the performance of an Agreed-Upon Procedures Engagement (AUP).  During this process, an auditor carries out procedures of an audit nature that are agreed upon by the auditor, the organization and any appropriate third parties. Once a report is received, an option is not issued; rather, the recipients may form their own conclusions.

Audit Alternatives

Not all organizations need an audit, but still seek the input of an independent accounting firm. Alternatives do exist that can save time and expense, while ensuring that an organization is being managed efficiently and is prepared for future audits.

One option for nonprofits is a review, where an organization’s financial statements are analyzed to ensure that they meet expected results. A second option is compilation, where financial statements are not analyzed but are reviewed to ensure that they are prepared in a format consistent with Generally Accepted Accounting Principles.

When preparing for a nonprofit audit and determining which option is most appropriate for your organization, it’s helpful to seek the advice of an accounting firm with specific experience with nonprofit audits. At Ernst Wintter & Associates, we work closely with nonprofit organizations to help them reach their highest potential. Contact us to learn more about the nonprofit audit process.

Employee Benefit Plan Audit Requirements

An employee benefit plan audit is subject to rules based on the Employee Retirement Income Security Act of 1974 (ERISA). This law was passed to protect the interests of employees with retirement plans such as 401k plans. ERISA rules for an employee benefit plan audit include reporting information to the Department of Labor and the Internal Revenue Service in accordance with generally accepted auditing standards (GAAS). All plan participants must be given access to this information on an annual basis. Here are other requirements administrators must follow for an employee benefit plan audit.

Small vs. Large Employee Benefit Plans

Usually only small employee business plans are allowed to waive the audit, which is up to the employer. More substantial plans with over one hundred eligible participants at the start of the plan year must generate an audit as a section of the required 5500 annual return form. Eligible participants, which are not to be confused with active plan participants, are defined as all individuals, whether active or not, that meet the eligibility requirements of participating in a qualified cash or deferred plan. Many administrators have misunderstood this wording to mean they are allowed to waive the audit as a small plan. This mistake can lead to huge monetary penalties from the Department of Labor, which is why experienced professionals must conduct a quality employee benefit plan audit.

Determining Audit Type

You must determine between a full or limited scope employee benefit plan audit for a 401k. A Full Scope Audit is necessary when the certification is unavailable for the portfolio’s custodian, who only holds a Type I SAS 70 report. In this scenario the auditor must test the custodian’s investments, which can take substantially more work. A Limited Scope Audit, on the other hand, in which the custodian holds a Type II SAS 70 report, only requires the auditor to test the participant data. The one exception to the large employee benefit plan audit is the “80-120 Participant Rule,” in which the Form 5500 annual report can be filed the same way as the previous year if the plan includes 80 to 120 participants at the start of the plan year. In other words, the option to waive the audit is possible if there were no audit the previous year.

How to Proceed

Contact Ernst Wintter & Associates for your 401k plan needs. They are Certified Public Accountants that provide audit services for employee benefit plans, as well as the securities industry and nonprofit organizations, which meet compliance standards of the DOL and IRS. The firm has been in business for over 25 years with expertise in small to midsize business employee benefit plan audit services and has a wealth of knowledge and experience to share about auditing and taxes.

401k Audit – Is Your Company Prepared?

If you currently sponsor a 401k plan for your employees, you should be aware of the accounting and audit responsibilities that are an essential part of the program. Commitment to this retirement program demonstrates your focus on employee welfare and retention, but it also requires a strong strategic approach to be successful. Performing an annual 401k audit for reporting purposes is a crucial part of the program.

Employing an Independent Auditing Firm

Larger companies usually have a staff of CPAs and an accounting firm on retainer to ensure that the company’s 401k program is kept in compliance and that the associated Form 5500s are filed properly. They perform an annual 401k audit to keep the company’s plan organized and using best practices.

Smaller and medium-sized companies usually can’t afford to hire a full-time qualified staff to conduct their own 401k audits. Working with a highly qualified independent accounting firm to perform a 401k audit is critical to ensure best practices and avoid expensive, time-consuming activity to comply with IRS standards. A properly audited plan is essential to avoid IRS fines and penalties, and will save you time over the long run.

Preparing for an Independent 401k Audit 

Your independent auditors should be highly experienced and knowledgeable about all IRS and Department of Labor regulations related to 401k programs. Since these individuals will be delving into the inner elements of your business, you should adequately prepare in order to make their job easier. Time is money. Ensuring a speedy process saves you money in paying less of their time and also minimizes disruption to your office’s day-to-day activities.

Suggested preparation steps:

  1. Interview and select an independent auditing firm with substantial experience with 401k audit compliance.
  2. Organize a group of key personnel with detailed knowledge of the plan documentation for their area of responsibility. One person should chair the group and set the expectations and guidelines.
  3. Committee should organize 401k audit documentation according to a consistent format for each department or subset of the company.
  4. Provide a Summary Plan Description.
  5. Provide a list of participants with their current status.
  6. Create a Summary of Asset Records.
  7. Do the numbers add up? A calculation of total salary paid in the prior year against the sum of participant contributions and withdrawals to ensure that the balances are accurate.
  8. Eligibility: are all participants eligible according to your plan guidelines? Are all program loans in compliance?
  9. Provide copies of Forms 5500 from the previous three years.
  10. Provide a copy of the Fiduciary Liability Policy.

Talk With Ernst Wintter & Associates About Your 401k Program Audit

Once you have determined that your company needs an audit, contact Ernst Wintter & Associates. Our mission is to make the process as painless as possible and to relieve you of any fear of an IRS or Department of Labor audit. Our CPAs in Walnut Creek will discuss all aspects of the audit and ensure that the process is performed efficiently with minimal disruption to your normal daily routine. Call us today for all of your accounting needs.