Sarbanes-Oxley Too Difficult for Small Nonprofits

A recent report by the nonpartisan Urban Institute determined that although the Sarbanes-Oxley Act of 2002 requires publicly traded companies to have an independent audit committee, many small nonprofit organizations would have a difficult time meeting the requirement if it were extended to also include nonprofits. The Urban Institute is a nonpartisan economic and social policy research organization which reports on current topics for public consideration. 

A survey by the Urban Institute National Survey of Nonprofit Governance consisting of over 5,000 nonprofit organizations yielded interesting results regarding independent audit committees. According to the survey, only twenty percent of nonprofits currently have an independent audit committee. This range includes fifteen percent of nonprofits with less than $100,000 in annual expenses to fifty-eight percent of nonprofits with more than $40 million in annual expenses. The survey also shows that of the nonprofits without an independent audit committee, fifty-one percent said it would be “somewhat or very difficult to create one.”

Among the nonprofits with paid staff on their audit committee, forty percent said it would be a challenge to fall into compliance with a law prohibiting their participation on an independent audit committee. The survey also shows that forty-six percent of nonprofits which have shared members on their audit and finance committees said it would be difficult to comply with a separate membership law for the two panels. To quote the authors of the report, Francie Ostrower and Marla J. Bobowick, “Our findings strongly confirm the importance of acknowledging the potentially different impact, cost and value of applying provisions to nonprofits of different size, as some laws and proposals already are, by excluding organizations below a certain size.”

Sarbanes-Oxley was originally intended to prevent public companies from improper practices, such as what happened with Enron; however it also had great effect on the nonprofit community as well. Since Sarbanes-Oxley was introduced, many nonprofits have begun to reexamine their own practices. Fifty-four percent of nonprofits which already had an audit committee in place changed their committees after the 2002 passing of the law.

 OPM Cost Standards Issued September 1, 2006

The purpose of this article is to explore another of the many topics addressed under the new Uniform Cost Accounting Standards, which must be used in determining the cost of work performed by organizations under State awards. This article, concerning cost allocations, is Part II in a series of articles covering the subject. In our last newsletter we addressed employee bonuses and incentive compensation.

Cost allocation plans need to detail in writing the methods and procedures used to allocate costs. These standards recognize that there are different methodologies available for allocating costs but these costs must be distributed reasonably and in an equitable fashion.

Once adopted, the plan must be used consistently, be retained on file for audit and made available to state agencies upon request. The plan must be reviewed on an annual basis and updated as necessary to reflect any changes in allocation methodology.

Significant changes in the allocation methodology require the approval of the Board of Directors. Justification for changes must be documented and supported by actual cost data.

The standards recognize three types of cost: Direct Costs that can be specifically identified with a particular program or activity of the organization, Allocable Direct Costs are joint costs that are allocable to two or more programs or activities, and Administrative and General Costs are costs incurred for common or joint objectives and cannot be readily identified with a particular final cost objective.

These cost standards go on to state that administrative and general costs are defined as those costs that have been “incurred for the overall executive and administrative offices of the organization or other expenses of a given nature that do not relate solely to any major cost objective of the organization. They are costs that by their nature are administrative in support of the overall organization.”

Costs to be allocated are collected in a Cost Allocation Pool (CAP). There may be more than one CAP used, but the specific methodology used to allocate every pool must be documented. Allocation methodologies we have seen in use have included: square footage occupied used to allocate occupancy costs, salaries used to allocate benefits, direct program costs to allocate administrative and general costs, etc.

These new cost standards must be used by organizations to determine costs allocated to state awards. A state award is defined as a “fully executed purchase of service contract, grant, cooperative agreement, cost reimbursement contract, or other contracts for the purchase of health or human services between a state agency and an organization.”

If you have any questions concerning your cost allocation plan or anything contained in these standards, please feel free to contact your Anquillare, Ruocco, Traester and Company representative or James E. Traester LLC, CPA, Partner.

 More Federal Oversight of State Medicaid Needed

A recent report by the Department of Health and Human Services’ Office of the Inspector General suggested that there was a high need for the federal government to oversee more of State Medicaid audits to ensure that eligibility requirements are being properly met. Under the current Medicaid program, states are required to determine eligibility and benefit levels to make certain that no errors are made. Errors in the auditing system usually result in overpayment for clients’ medical services and are often very costly, time consuming and difficult to uncover.

The federal oversight required by the Medicaid program includes, but is not limited to, quality control and monitoring states’ performances using Medicaid eligibility requirements. The report goes on to suggest that there needs to be much more federal oversight to ensure these errors in eligibility are not made.

Eleven states were the recipients of disclaimers or qualified reports from independent auditors on compliance with the Medicaid program requirements. The finding of these disclaimers or qualifications was a result of noncompliance with the eligibility requirements set forth. Unfortunately, there is limited follow-up on the corrective action plans according to the report, which also stated that it is unable to determine if the audit findings of CMS Medicaid program oversight were even considered at all. 

In an effort towards improvement, the addition of 100 federal personnel focused on Medicaid financial management with the intention of further adding more personnel in the future. The OIG recommends identifying clear-cut responsibilities as well as a way of closely monitoring their efforts.  

The Office of the Inspector General has some recommendations with the hopes of improving internal controls and federal oversight. Some of the recommendations made for the agency include:

• Making sure to judge all jurisdictions consistently in regard to individual State operations;
• Wherever feasible, separate the financial management aspects from the program’s administrative duties;
• Possibly coordinating regional and headquarter program offices in hopes of directing focus towards Medicaid financial administration and oversight activities;
• Improve internal control to oversee that eligibility requirements are being met as well as other single audit issues;
• Improve procedures to better monitor states’ activities and to enforce compliance and uniformity in regards to financial management;
• Increase communication between individual States and CMS federal and regional offices in an effort to carry out Medicaid program goals.

 IRS Announces 2007 Standard Mileage Rate

Recently, the Internal Revenue Service (IRS) revised the standard mileage rate for operating an automobile for business, charitable, medical, or moving purposes. Beginning January 1, 2007, the standard mileage rates for the use of a car, van, pickup, or panel truck will be:

• 48.5 cents per mile for business miles driven
• 20 cents per mile for medical or moving purposes
• 14 cents per mile for service to a charitable organization

The new rate for business miles is higher than the 44.5 cents per mile rate used for most of 2006 which is due to rapidly rising fuel prices and in most places gas exceeding $3 a gallon. The medical mileage rate is an increase over 2006’s 18 cents while mileage for charitable organizations remained the same, at 14 cents per mile, which is set by statute.