Lisa Arconati

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IRS Issues Final Regulations On UBTI “Silos”

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By Marc Berger, CPA, JD, LLM

On Dec. 2, 2020 the U.S. Treasury and IRS published final regulations under Internal Revenue Code (IRC or Code) Section 512(a)(6), the provision requiring tax-exempt organizations with more than one unrelated trade or business to calculate unrelated business taxable income (UBTI) separately with respect to each trade or business. The provision, which was added to the Code by the 2017 tax law often referred to as the Tax Cuts and Jobs Act (TCJA), is known as the UBI “Silo” provision. The final regulations provide guidance on how an exempt organization determines if it has more than one unrelated trade or business and, if so, how the organization calculates UBTI under Section 512(a)(6).

The final regulations generally follow the approach taken in the proposed regulations (issued in April 2020), while making a few modifications based on comments received from tax-exempt organizations and practitioners.

Identifying Separate Unrelated Trades or Businesses

Similar to the proposed regulations, most unrelated business activities must be classified using the first two digits of the North American Industry Classification System (NAICS) code that most accurately describes the trade or business. The IRS considered one commenter’s view that the NAICS 2-digit codes be used as a safe harbor and that a facts and circumstances test be applied as the primary method of identifying separate unrelated trades or businesses. In rejecting that suggested change the IRS noted that adopting a facts and circumstances test would offer exempt organizations less certainty and likely result in inconsistency among exempt organizations conducting more than one unrelated trade or business because of differing approaches exempt organizations would take in applying such a test. It further stated that a facts and circumstances test would increase the administrative burden on the IRS which, upon examination, must perform the same fact-intensive analysis on each of the unrelated trades or businesses identified by the exempt organization.

In clarifying how an exempt organization should choose an NAICS 2-digit code, the IRS reiterated that the choice of the code must focus on the separate unrelated trade or business activity engaged in, and not the NAICS 2-digit code that describes the activities the conduct of which are substantially related to the exercise or performance of the organization’s exempt purpose or function. For example, a college or university exempt under Section 501(c)(3) cannot use the NAICS 2-digit code for educational services to identify all of its separate unrelated trades or businesses.

One area that the final regulations differed from the proposed regulations concerns the ability to change an NAICS 2-digit code once it has been selected and reported on Form 990-T. The proposed regulations generally provided that, once an organization has identified a separate unrelated trade or business using a particular NAICS 2-digit code, the organization cannot change the NAICS 2-digit code describing that separate unrelated trade or business unless two requirements are met. First, the exempt organization must show that the NAICS 2-digit code chosen was due to an unintentional error. Second, the exempt organization must show that another NAICS 2-digit code more accurately describes the unrelated trade or business. In response to numerous comments on this issue, the final regulations remove the restriction requirements for changing NAICS 2-digit code(s). Instead, the final regulations require an exempt organization that changes the identification of a separate unrelated trade or business to report the change in the taxable year of the change in accordance with forms and instructions. To report the change, the final regulations require an organization to provide certain information with respect to each separate unrelated trade or business the identification of which changes: (1) the identification of the separate unrelated trade or business in the previous taxable year, (2) the identification of the separate unrelated trade or business in the current taxable year, and (3) the reason for the change. The IRS anticipates that the instructions to the Form 990‑T will be revised to provide instructions regarding where and how changes in identification are reported.

Activities Deemed Separate Trades or Businesses

As provided under the proposed regulations, certain activities are treated as separate trades or businesses under the final regulations.

Investment Activities

The proposed regulations provided an exclusive list of an exempt organization’s investment activities that may be treated as a separate unrelated trade or business for purposes of section 512(a)(6). Under the proposed regulations, for most exempt organizations, such investment activities are limited to: (i) qualifying partnership interests; (ii) qualifying S corporation interests; and (iii) debt-financed properties. Although commenters recommended modifications to the rules regarding the individual items included in this list, no commenters objected to the treatment of these items as investment activities. The final regulations adopt this list of investment activities without change.

Similar to the proposed regulations, the final regulations permit the aggregation of qualifying partnership interests (QPIs) into one separate unrelated trade or business in order to reduce the administrative burden of obtaining information from the partnership regarding its underlying trade or business activities where its percentage interest level indicates that the exempt organization does not significantly participate in the partnership. QPIs are generally defined as partnership interests that meet one of two tests: (1) A de minimis test, which the exempt organization satisfies if it holds directly or indirectly no more than 2% of the profits interest and no more than 2% of the capital interest of the partnership; or (2) A participation test (formerly known as the “control test” under the proposed regulations), which the exempt organization satisfies if it holds directly or indirectly no more than 20% of the capital interest and does not “significantly participate in” (formerly “control”) the partnership.

As modified by the final regulations, an exempt organization significantly participates in a partnership if:

  • The exempt organization, by itself, may require the partnership to perform, or prevent the partnership from performing (other than through a unanimous voting requirement or through minority consent rights), any act that significantly affects the operations of the partnership;
  • Any of the exempt organization’s officers, directors, trustees, or employees have rights to participate in the management of the partnership at any time;
  • Any of the organization’s officers, directors, trustees, or employees have rights to conduct the partnership’s business at any time; or
  • The organization, by itself, has the power to appoint or remove any of the partnership’s officers or employees or a majority of directors.

Similar to the proposed regulations, the final regulations require the interests of certain supporting organizations and controlled entities to be combined with those of the of the exempt organization in determining whether the organization’s interest crosses the participation test’s 20% threshold. One difference, however, is that the final regulations do not require an organization to combine the interests of a Type III supporting organization unless that supporting organization is the organization’s parent.

In making the determination whether an exempt organization’s interest in a partnership meets one of the two tests to be a QPI, the final regulations follow the rule in the proposed regulations that an exempt organization’s percentage interest is determined by averaging the organization’s percentage interest at the beginning of the partnership’s tax year with its percentage interest at the end of that same partnership tax year. The final regulations, however, now provide a grace period when a change in an organization’s percentage interest is due entirely to the actions of other partners. The grace period permits a partnership interest that fails to meet the requirements of either test because of an increase in the current year’s percentage interest may be treated as meeting the requirements of the de minimis test or the participation test that it met in the prior year for the taxable year of the change if: (1) the partnership interest met the requirements of the de minimis test or the participation test in the organization’s prior taxable year without application of the grace period; (2) the increase in percentage interest is due to the actions of one or more partners other than the exempt organization; and (3) in the case where a partnership interest met the participation test in the prior taxable year, the interest of the partner or partners that caused the increase in the current year was not one that was combined with the exempt organization’s interest as described in the preceding paragraph in either the prior or current year.

With respect to qualifying S corporation interests (QSIs), the final regulations clarify that the exempt organization can rely on the Schedule K-1 (Form 1120-S) that it received from the S corporation if the form lists information sufficient to determine the organization’s percentage of stock ownership for the year. For example, a Schedule K-1 that reports “zero” as the organization’s percentage interest in the S corporation is not sufficient to determine the organization’s percentage of stock ownership for the year. The IRS is considering whether revision of Schedule K-1 is needed to provide the information necessary to determine whether an S corporation interest is a QSI.

With respect to debt-financed income, several commenters suggested that this income should be reportable using an NAICS 2-digit code instead of as an investment activity. The final regulations rejected this suggestion and adopted the proposed regulations treatment as a separate investment activity.

Finally, the transition rule included in both IRS Notice 2018-67 and the proposed regulations, which permitted an organization to treat any partnership interest acquired prior to Aug. 21, 2018 as a single trade or business activity, will lapse as of the first day of the organization’s taxable year following the issuance of final regulations. Despite receiving several comments asking the Treasury Department and the IRS to adopt the transition rule as a grandfather rule, it was not so adopted in the final regulations.

Payments from Controlled Entities

Similar to the proposed regulations, all “specified payments” (i.e., interest, rents, royalties and annuity payments per Code Sec. 512(b)(13)) received by a controlling tax-exempt organization from an entity it controls (i.e., more than 50 percent controlled by the organization) are treated as gross income from a separate unrelated trade or business. Moreover, if a controlling organization receives specified payments from two different controlled entities, the payments from each controlled entity would be treated as a separate unrelated trade or business.

Certain Amounts from Controlled Foreign Corporations (CFCs)

Similar to the proposed regulations, amounts included in UBTI under Section 512(b)(17) are treated as income derived from a single separate unrelated trade or business.

Other Items of Note

Allocation of Expenses – Pending the publication of further guidance in a separate notice of proposed rulemaking, the final regulations continue to provide that an exempt organization with more than one unrelated trade or business must allocate deductions between separate unrelated trades or businesses using the reasonable basis standard described in Treas. Reg. Section 1.512(a)-1(c).

Net Operating Losses (NOLs) – Under Section 512(a)(6), NOLs arising in a tax year beginning before Jan. 1, 2018 (“pre‑2018 NOLs”) may be taken against aggregate or total UBTI, while NOLs arising in a tax year beginning after Dec. 31, 2017 (“post‑2017 NOLs”) may only be taken against UBTI from the same trade or business from which the post-2017 NOL arose. The final regulations require an organization with both pre-2018 NOLs and post-2017 NOLs to first deduct its pre-2018 NOLs from its total UBTI before deducting any post-2017 NOLs from the UBTI of the separate trade or business that gave rise to the NOL. The final regulations further provide that if a trade or business is terminated, sold, exchanged or disposed of, any NOLs remaining after offsetting any gain on the sale or disposition are suspended. Suspended NOLs may only be used if the previous business is later resumed or if a new business using the same NAICS 2-digit code is commenced or acquired. For this purpose, a business is considered “terminated” if the appropriate identification of the business changes from one NAICS code to a different NAICS code.

Charitable Contributions – Under Section 512(b)(10), tax-exempt corporations can take charitable contribution deductions under Section 170 up to 10% of UBTI (tax-exempt trusts look to Section 512(b)(11) for its percentage limitations). The final regulations provide that in applying these percentage limitations, exempt organizations would use total UBTI computed pursuant to Section 512(a)(6) and would not allocate the charitable contribution deduction among silos.

Public Support Tests – The final regulations address the fact that the calculation of public support on Form 990, Schedule A could be negatively impacted by the treatment of UBTI under the new silo rules. To address this issue, the final regulations allow exempt organizations to calculate public support tests using either UBTI as computed under Section 512(a)(6) or UBI calculated in the aggregate, whichever is least administratively burdensome or provides the highest ratio for the organization.

Subpart F and Global Intangible Low-Taxed Income – Similar to the proposed regulations, the final regulations clarify that inclusions of Subpart F income under Section 951(a)(1)(A) and global intangible low-taxed income (GILTI) under Section 951A(a) are treated in the same manner as dividends for purposes of Section 512(b)(1).

The final regulations are applicable to tax years beginning on or after Dec. 2, 2020 (date of publication in the Federal Register). For virtually all exempt organizations this means their 2021 tax years. Organizations should consult with their tax advisors to ensure the identification of any and all of their separate unrelated trades or businesses, especially those organizations with significant investment activities.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

Provider Relief Funds – Reporting and Audit Requirements

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By Carla DeMartini, CPA, Chad Krcil, FHFMA, CHFP, and Venson Wallin, CPA, CGMA, CFE, CHC, FHFMA, CHFP, HCISPP

When Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, it established the Provider Relief Fund (PRF) to support American families, workers and healthcare providers in the battle against COVID-19.

Through the CARES Act and supplemental funding from the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act, the U.S. Department of Health and Human Services (HHS) is in the process of distributing $178 billion to hospitals and healthcare providers on the front lines of the coronavirus response and relief efforts. Qualified providers of healthcare, services and support may receive PRF payments for healthcare-related expenses or lost revenue due to COVID-19. While these distributions do not need to be repaid to the U.S. government, assuming providers comply with the terms and conditions established by HHS, these funds come with unique compliance, reporting and audit requirements that recipients must adhere to once they attest to the receipt of these funds.

Reporting Requirements

On Jan. 15, 2021, HHS released updated guidance on the PRF reporting requirements. Below, we outline what has changed since their last communication on Nov. 2, 2020. This amended guidance is in response to the CRRSA Act, which was passed in December 2020 and added $3 billion to the PRF (increasing the total funding from $175 billion to $178 billion) along with new language regarding reporting requirements.

Please note this is a summary of information and additional detail and guidance can be found in the reporting and auditing FAQ section of HHS.gov.

  • On Jan. 15, 2021, HHS announced a delay in reporting of the PRF. HHS has not yet communicated further details on the deadline for this reporting. Recipients of PRF payments greater than $10,000 may register to report on their use of funds as of Dec. 31, 2020 starting Jan. 15, 2021. Healthcare providers should go into the portal, register and establish an account now so that when the portal is open for reporting, they are prepared to fulfil their reporting requirements.
  • Recipients who have not used all of the funds by Dec. 31, 2020, have from January 1 – June 30, 2021 to use the remaining funds. Healthcare organizations will have to submit a second report before July 31, 2021 on how funds were utilized for that six-month period.
  • The new guidelines further define the reporting entity and how to report if there is a parent company with subsidiaries for both General and Targeted Distributions:
  • Parent organizations with multiple Taxpayer Identification Numbers (TINs) that received General Distributions or TINS that received them from parent organizations can report the usage of these funds even if the parent was not the entity that completed the attestation.
  • While a Targeted Distribution may now be transferred from the receiving subsidiary to another subsidiary by the parent organization, the original subsidiary receiving the Targeted Distribution must report any of the Targeted Distribution it received that was transferred.

    The new guidance does state that distribution of Transferred Targeted Distributions will likely fall under increased scrutiny through an audit by the Health Resources and Services Administration (HRSA).

  • The calculation of lost revenue has been modified by HHS through this new guidance. Lost revenue is calculated for the full year and can be calculated using one of the following methods:

    Difference between 2019 and 2020 actual patient care revenue. The revenue must be submitted by patient care mix and by quarter for the 2019 year.

    Difference between 2020 budgeted and 2020 actual patient care revenue. The budget must have been established and approved prior to Mar. 26, 2020. This budget, as well as an attestation from the CEO or chief financial officer that it was submitted and approved prior to Mar. 26, 2020, will have to be submitted.

    Reasonable method of estimating revenue. An explanation of the methodology, why it is reasonable and how the lost revenue was caused by coronavirus and not another source will need to be submitted.

  • Recipients with unexpended PRF funds in full after the end of calendar year 2020, have an additional six months to utilize remaining funds for expenses or lost revenue attributable to coronavirus in an amount not to exceed the difference between:

    2019 quarter one to quarter two and 2021 quarter one to quarter two actual revenue,

    2020 quarter one to quarter two budgeted revenue and 2021 quarter one to quarter two actual revenue.

Audit and Compliance Requirements

Based on current information from HHS, provider relief funds are also subject to audit if more than $750,000 has been expended during an entity’s fiscal year.

Over the next two years, many entities, which have received PRF exceeding the $750,000 threshold, may require an audit for the first time. For nonprofit, for-profit and government entities, this would result in a Single Audit under the Office of Management and Budget’s (OMB) Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance). A program-specific audit option may also be available under 2 Code of Federal Regulations (CFR) 200 Subpart F Section 200.501(c), if an auditee expends federal awards under only one federal program (excluding Research and Development). HHS has also noted that for-profit entities that received these funds have a third option, which would be a financial audit under Generally Accepted Government Auditing Standards (GAGAS) also referred to as the Yellow Book. There is still pending guidance from HHS around this third option in the areas of expenditures versus receipts, disclosures and timing of the report. However, what is fairly certain is that this type of audit would be conducted under Section AU-C 805, Special Considerations- Audits of Single Financial Statements and Specific Elements, Accounts or items of a Financial Statement, and will require the inclusion of a Statement of Costs and Lost Revenues in relation to any HHS federal awards.

Additionally, there may be some confusion and uncertainty among recipients who require a Single or program-specific audit for the first time. These auditees may be unfamiliar with audit expectations and preparations that need to take place in order to respond to federal compliance requirements. Determination of what should be reported on the schedule of expenditures of federal awards (the SEFA) may be challenging at first, especially since federal guidance surrounding the PRF has been continuously evolving.

There are some timing nuances and questions on what amounts (i.e., expenditures and lost revenues) should be reported for PRF (CFDA 93.498) on the SEFA by recipients for fiscal year-ends prior to Dec. 31, 2020. The “Other Information” section in the PRF section of the OMB Compliance Supplement Addendum (Addendum) issued on Dec. 22, 2020 addresses this by stating that “PRF expenditures and lost revenue will not be included on SEFAs until Dec. 30, 2020 year-ends and later.” Rather, for fiscal years ended earlier than Dec. 30, 2020, recipients will report the 2020 93.498 expenditures and lost revenue in the 2021 audit. Keep in mind that this timing provision only affects the PRF program and is not applicable to other COVID-19 funding that healthcare entities may have received such as CFDA 93.461, COVID-19 Testing for the Uninsured or CFDA 93.697, COVID-19 Testing for Rural Health Clinics. For fiscal years ended Dec. 30, 2020 and later, the amounts reported on the SEFA (expenditures and lost revenue) should match the amounts submitted in the calendar year-end reporting required to be made directly to the HHS portal.

The deadline for the submission of the Single Audit reporting package to the Federal Audit Clearinghouse (FAC) is within the earlier of 30 calendar days after the single audit report’s issuance, or nine months after year end. However, per OMB Memo M-21-20 issued Mar. 19, 2021 an extension has been provided  that permits recipients and subrecipients that have not filed their single audit as of Mar. 19, 2021 that have fiscal year ends through June 30, 2021, to delay the completion and submission of the single audit reporting package to six months beyond the normal due date.  There is no requirement for individual recipients and subrecipients to seek approval for the extension, but recipients and subrecipients should maintain documentation of the reason for the delayed filing.

Next Steps for PRF Recipients

In the wake of this new guidance, PRF recipients should take the following steps:

  • Register in the HHS portal and establish an account as soon as possible.
  • Revisit lost revenue calculations to determine if current methodology is appropriate or if an updated methodology would be more appropriate under the new guidance.
  • Understand the ability to transfer General and Targeted distributions and the impact on reporting of these funds.
  • Develop reporting procedures for lost revenue and increased expense for reporting in the HHS portal.
  • Confirm whether your organization is subject to the single audit. For preparation tips, visit BDO’s Single Audit FAQ.
  • Review audit and compliance requirements that pertain to your organization.
  • For additional information about PRF compliance, audit and reporting requirements and answers to common operations, download BDO’s PRF FAQ.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

Using Data to Create An Infrastructure Of Success

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By Matthew Becker, CPA

In today’s digital economy, every business is driven by data, and nonprofit organizations are no exception. For too long, many nonprofit organizations have lacked the incentive to innovate due to chronic underfunding or insufficient resources as a result of the starvation cycle. Additionally, the COVID-19 pandemic disrupted the way all organizations work and brought with it a clarion call for nonprofits to redouble their commitment to innovative strategy. While the heart of any good strategy begins with data, investing in and leveraging effective data analytics can lead to improvements across multiple areas of performance including the revenue cycle, spending and planning, donor habit knowledge, and improved definition of organizational success.

To build an inimitable data strategy, it is crucial to first look within and ask what you already know about your organization before collecting data to ensure meaningful insight and actionable analytics. Data can be collected from a vast array of sources and the internet of things (IoT) has transformed the way we access and use data. Nonprofits must be able to leverage data from various sources to create an infrastructure of success both internally and externally.

For example, actionable data analytics can rapidly identify donor spending habits from data collected via donations through a paper check, website, wire transfer, and mobile device. This allows you to tailor a marketing campaign during the most effective time periods for donations. Further analysis can determine the effectiveness of these campaigns allowing for additional refinements, which may also increase revenues from donations.

It is important to note that a robust data governance framework is a vital bulwark for data-driven impact. As outlined in more detail in our Comprehensive Guide to Data Governance, adopting a foundation of governance, risk and compliance is needed to springboard data strategy.

Once relevant organizational data has been inventoried, each organization must ask itself critical questions to develop an effective data impact strategy:

  • Can your current technology provide for the integrity of your data? If not, consider a cloud-based solution with a lower total cost of ownership.
  • Do you have a clear definition of what success looks like and what data is used to measure that? If not, consider application/data mapping to identify your organization’s relevant and actionable data.
  • How do you engage with the stakeholders of your organization? Leveraging data will tell your organization’s story and communicate success to donors and other key stakeholders.
  • What correlations can you develop from the data? This helps you identify the types of data analytics that will have the most  impact.
  • How does spending further the mission and contribute to the overall revenue of the organization and provide future revenue streams? How your organization deploys capital will measure return on investment for critical spending.
  • What key performance indicators (KPI) provide critical financial insight? Identifying the critical KPI will allow you to monitor and modify the most crucial financial aspects of your organization.
  • How are you securing your sensitive data given increased data privacy concerns and regulations? Failure to comply with data protection regulations can result in steep financial penalties from regulatory bodies.
  • How are you measuring operational efficiency? Identifying this will allow you to monitor and modify the most crucial operational aspects of your organization.
  • What can you learn about achieving your goals and how will you know when you achieved success? Such results will provide management and those charged with governance the information necessary to monitor the success of programs and identify potential loss leaders.

Internally, answering these questions will help drive your data strategy. Data collection and analytics can help you develop quantitative evidence and help you determine what programs are working and where improvements might be needed. Building a successful data strategy can even drive healthy competition internally whereas programs can use comparative data to measure each other or even for fundraising to challenge revenue goals. Actionable data also will build correlations and a profile of excellence as your data gets stronger. This will provide a higher level of confidence allowing you to make stronger strategic decisions.

Externally, using data to make your philanthropic endeavors and guiding principles stand out can help win the fight for critical funding and lead to organizational success. Communicating your mission through data-based stories will continue to attract stakeholders and promote your mission through evidence-based analyses, which help your organization thrive.

Main Street Lending Program Open To Nonprofits

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The Main Street Lending Program’s (MSLP) Nonprofit Organization New Loan Facility (NONLF) and Expanded Loan Facility (NOELF) are now fully operational and accepting submissions of eligible loans through the Main Street lender portal by registered eligible lenders. MSLP loans, funded under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, are intended to help small-and medium-sized businesses that were in sound financial condition before the pandemic maintain their operations until they can recover.

Additional information on the programs can be found on the Federal Reserve website.

 

OMB Issues 2020 Compliance Supplement

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Did you ever take an open book test in school? It always made doing well much easier. The 2020 Compliance Supplement is a textbook for your organization’s equivalent of a compliance exam (the single audit). Its primary purpose is to assist auditors in performing single audits, but it is also a resource to help your organization comply with the requirements of your federal direct and pass-through grants and contracts.

On Aug. 18, 2020, the Office of Management and Budget (OMB) issued the 2020 Compliance Supplement (Supplement). The Supplement is effective for single audits of fiscal years beginning after June 30, 2019 – so June 30, 2020 fiscal year-ends.

The Supplement provides the information needed by auditors to perform the single audits and is updated annually for new programs and changes to existing programs. This document is extremely helpful to recipients of federal awards because in Part 2, known as the “Matrix,” the Supplement outlines the compliance requirements applicable to federal programs that are included in the Supplement. Additionally, the Supplement also provides information to assist an organization in identifying the compliance requirements that it must adhere to for those programs that are not specifically listed in the Supplement (see Part 7).

As all organizations have experienced, everything is changing because of COVID-19. The 2020 Supplement currently only provides a discussion of the general implications of the COVID-19 pandemic to single audits. The Supplement does not include the new COVID-19 related programs or information on modified compliance requirements that are unique to COVID-19 for existing programs. OMB is working with federal agencies to identify additional guidance that is needed for new COVID-19 related programs and existing programs where compliance requirements have changed due to COVID-19. OMB plans to publish an addendum to this Supplement in the fall of 2020.

Is Your Organization Audit Ready?

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By Barbara Finke, CPA

Whether you are facing an audit for the first time or you have been audited for years, making sure that your organization is ready might feel a bit overwhelming. Here are a few tips that will help you get organized and ready for the first, or just the next, audit.

First, what is an audit (and what is it not)? The purpose of an audit, as defined by the American Institute of Certified Public Accountants (AICPA), is “to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. An auditor’s opinion enhances the degree of confidence that intended users can place on the financial statements.” An audit provides reasonable assurance, not absolute assurance, that the financial statements are correct (not materially misstated) within a defined threshold. The AICPA provides a set of standards that all audit firms are required to follow to achieve the appropriate level of assurance to issue the opinion. But an audit is not just a generic set of checklists. The auditor creates a tailored set of procedures based on a gained understanding of your organization that will mitigate the risk of material misstatements in your financial statements.

What might cause you to need an audit for the first time? New funding sources, whether debt or grants, may require an organization to submit financial statements audited in accordance with generally accepted accounting principles . Therefore, before any new grant or debt is signed, make sure someone in the accounting department is reviewing the requirements thoroughly. A first-time audit is not something you want to be surprised with!

During the COVID-19 pandemic, your organization may have taken on new debt that requires an audit. In addition, you may have received funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act or other pandemic related funding that may require an audit under Office of Management and Budget’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). To understand if the funding you received is subject to the Uniform Guidance, you should review the Assistance Listing available at https://beta.sam.gov/ or contact the funding source.

So, how can you ensure that your organization is prepared for the first audit? Follow these 10 steps:

1.Gather all of your organizational documents and significant contracts into one central location (preferably electronically), including:

  • Articles of Incorporation
  • Bylaws
  • Corporate Operating Agreement
  • Internal Revenue Service (IRS) exemption determination letter
  • IRS Form 1023 or 1024
  • Applicable state tax determination letters
  • All significant contracts (customer/grants/leases/vendor/pledge agreements)
  • Board minutes from the year(s) under audit
  • Commercial insurance policies
  • Trust agreements (annuities, life insurance policies, split-interest agreements, etc.)
  • All pension and post-retirement plan documents
  • Legal titles for real property owned
  • Corporate organizational chart
  • Staff organizational chart
  • Organization policies and procedures manuals
  • Other organizational documents

2. Document your key financial statement processes and policies. During the documentation process consider if your organization has proper internal controls and if the performance of those controls is adequately documented. Remember to consider your controls and policies over information technology systems that support your accounting records.

  • For guidance around internal controls, certain resources are available from the Committee of Sponsoring Organizations of the Treadway Commission at www.coso.org or the Green Book published by the U.S. Government Accountability Office at www.gao.gov.

3. Compile a list of related parties, including related entities, and clearly document the relationship with each related party including a listing of any related agreements between the parties.

  • Consider consulting with your legal counsel (internal or external) to ensure all legal relationships are properly documented.

4. Review your accounting records and ensure that reconciliations are available for any balance sheet account as necessary to reconcile sub-ledger data (or any data maintained outside of the ledger) to the trial balance.

5. Ensure that transactional data from the period under audit (proof of expenses, sales, contributions or payroll records) is organized and available for testing as requested.

6. Ensure that a full schedule of all property and equipment, and related depreciation and amortization, is available.

7. Obtain sample audited financial statements of similar organizations. Review the financial statements to gain an understanding of what data to have available to produce the required footnote disclosures. Sample financial statements can be found on a nonprofit’s website, www.Guidestar.org, or on the Federal Audit Clearinghouse website https://harvester.census.gov/facweb/ (if the nonprofit was required to have an audit performed in accordance with Uniform Guidance).

Once you’ve hired your firm of choice (and before any recurring engagement) you should:

8. Facilitate a meeting with the audit team and those individuals you have designated as your financial governance committee (audit committee, finance committee, board of directors, etc.) to set expectations and discuss specific risks related to your organization.

9. Hold a meeting with the audit team and your management to discuss timing and specific items that you will need to prepare based on the tailored approach prepared by the auditor. Finalize the timeline of all deliverables to ensure that your financial statements will be issued by the date required. Once you have received the specific list of items to be prepared by the organization, hold an internal meeting to assign responsibility for each task and consider how the information will be organized and reviewed prior to delivery to the auditor.

10. If your organization has inventory, ensure that you invite the audit team to the year-end count or the next scheduled perpetual count.

With careful consideration of these steps and allowing adequate time for your team to pull and organize this information, even a first-year audit should run smoothly.

And for recurring audits? In addition to Tips 8-10 above, consider:

  • After the initial audit, the relationship with your audit firm shouldn’t be just the yearly audit. Keep in touch throughout the year to discuss changes in your strategies, funding, processes, etc. so your auditors can advise if there are any potential accounting or compliance issues you should consider. A nonprofit’s financial statements are often public documents, so checking in on how new events and transactions may impact your audit and financial statement presentation can help mitigate unwanted surprises. Talk to your auditors about any changes in accounting controls or any new funding streams that might impact compliance requirements.
  • Stay informed about any changes to legislation, accounting pronouncements or other compliance updates that will impact your organization’s financial statement presentation or compliance rules. While it is often assumed that it is only the auditor’s job to keep up with changes, management is ultimately responsible for all the information in the financial statements and, therefore, should have a working knowledge of requirements. Keeping up with the changes will also ensure that the accounting system and records are set up to produce the required information the auditors will need to audit your organization’s adoption of new standards.

    Stay organized! Create a logical electronic filing system to ensure that you can easily locate the information that has been requested and your team has prepared. Then, keep the files until the following year for reference.

  • The COVID-19 pandemic required many organizations to move office personnel to a remote environment. Some localities are still under shelter-in-place mandates, and some organizations have chosen not to bring the full team back into the office. In all likelihood a portion, if not all, of your audit in the coming months will be handled remotely. The keys to a successful audit under COVID-19 pandemic restrictions are communication and flexibility. Here are some additional considerations as you prepare for a remote audit:
  • Review what, if any, changes have occurred in the internal control processes to accommodate remote working. Are there changes in the check writing or depositing process? Are there changes to approval controls? Discuss these changes with your auditor ahead of the scheduled audit.
  • Discuss with your auditor what file repository system will be utilized for the remote sharing of data from your organization to your auditors in a secure manner. Ensure that the filing system will meet the cybersecurity requirements of your organization.
  • Discuss the timeline with your auditor well in advance this year. Consider if additional time may be required for your team to transfer physical files to electronic copies.
  • Consider using video technology to allow for the auditor to observe processes through the digital environment and allow for “in-person” meetings and interviews throughout the audit. An auditor could potentially even use digital methods to conduct a physical inventory count observation.
  • Consider safety protocols that your organization and the audit firm will require if in-person work or meetings are considered necessary. Ensure that each team understands the legal and organizational requirements for protective equipment and social distancing protocol.

The word audit can often be a source of fear and dread. However, if you follow the tips above, your organization can be audit ready. An organization that is well prepared will see the audit process as a helpful tool for financial health and not an exhaustive exercise in pulling data. Communication with your auditors has always been important but with the current COVID-19 restrictions both communication and flexibility will be even more critical to a smooth audit process.

Nonprofits Have Additional Time To Comply With New Lease Accounting Standards

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By Lee Klumpp, CPA, CGMA

In 2016, the Financial Accounting Standards Board (FASB) updated its lease accounting rules (ASC 842) and closed a diversity in practice in the previous standard. The major change is that organizations must now include lease assets and liabilities on their balance sheets. The upshot is that despite a recently granted extension that applies to private companies and nonprofits, the task of becoming compliant is urgent and challenging. Impacted nonprofits don’t have a moment to spare.

Under the previous standards, operating leases were off-balance sheet. That essentially allowed companies to omit certain lease assets and liabilities from their balance sheets, potentially skewing their debt-to-equity ratio. In 2016, the International Accounting Standards Board estimated that public companies using either the International Financial Reporting Standards or accounting principles generally accepted in the United States of America (U.S. GAAP) had around $3.3 trillion of lease commitments, 85% of which were not recorded on their balance sheets. This, of course, makes it difficult for shareholders (stakeholders), investors and lenders to get a true sense of an organization’s financial health. Under the previous ASC 840 standard, operating leases were only required to be disclosed in the footnotes of the financial statements. Under ASC 842, the only leases that may be omitted from financial statements are short-term leases with an original term of fewer than 12 months. ASC 842 increases transparency and comparability among organizations that enter into lease agreements and provides a clearer picture of an organization’s liabilities related to leasing obligations. ASC 842 also includes extensive disclosures intended to enable users of financial statements to understand the amount, timing and judgment related to an entity’s accounting for leases and the related cash flows as well as disclosure of both qualitative and quantitative information about leases.

But what it also does is implement a one-size-fits-all accounting standard that significantly increases the reporting burden on smaller, nonpublic companies, including nonprofits. Implementation will involve significant challenges and require major investments in time, money and other resources. Fortunately at its Oct. 16, 2019 meeting, FASB affirmed its decisions on two proposed Accounting Standards Updates (ASUs) – one of which extended the implementation deadline for the new standards on leases that were not yet effective for private companies and nonprofits to the first fiscal year after Dec. 15, 2020, instead of Dec. 15, 2019, as originally mandated.

Subsequently, in June 2020 the FASB decided to provide near-term relief for the adoption of the leasing standards based on feedback from stakeholders regarding challenges with the adoption as a result of the current business and capital disruptions caused by the coronavirus (COVID-19) pandemic. As a result, the FASB issued ASU 2020-05 which provides an additional one-year deferral of the effective date of the leasing standards. As a result, the leasing standards will now be effective for private companies and private nonprofits for fiscal years beginning after Dec. 15, 2021. Public nonprofits who had not issued their statements as of June 3, 2020, can also opt to defer adoption until fiscal years beginning after Dec. 15, 2019. This is an elective deferral so entities can still choose early adoption if they wish.

This is good news for nonprofits, which now have extra time to implement these changes. However, it should also serve as a wake-up call, as many organizations weren’t even aware of the change and the need to become compliant. Even within this updated timeline, ensuring compliance will be a significant effort.

Nonprofits face multiple significant implementation challenges such as:

  • The number of business arrangements that were previously not identified as leases may now be identified as meeting the definition of a lease or embedded lease
  • Existing systems and processes may need to be modified or enhanced in order to provide information necessary to address the new reporting and disclosure requirements
  • Multiple departments across the organization will be affected by this standard, including information technology (IT), tax, legal, treasury, and financial planning and analysis, among others
  • Ongoing efforts to remain compliant might be more significant than the initial implementation effort

It’s clear that complying with ASC 842 is a time-consuming process. Organizations should develop an implementation timeline keeping several factors top of mind, including existing lease commitments, data governance maturity and cross-function coordination needs.

To get started, organizations should first learn one of the key lessons from public companies that have already gone through this process: The standard requires the collection of significant data from every lease and business arrangement that could contain an embedded lease that exists on, or will exist after, the effective date. Analyzing leases and business arrangements to identify and extract those details for inclusion in the organization’s financial reports requires substantial time and resources. It is crucial to identify the full population of leases upon adoption of ASC 842.

Nonprofits should also consider adopting the following best practices:

Solicit the involvement of the entire organization: Although the implementation of ASC 842 is primarily the responsibility of the organization’s accounting department, successful implementation requires support from across the entity, especially when an organization has a large real estate portfolio or embedded leases. This may mean seeking assistance from IT, legal or procurement departments. Soliciting executive sponsorship to champion implementation will also help to streamline the process.

Use technology to your advantage: Under the stress of deadlines, the compilation of lease terms and data can be daunting, especially within larger nonprofits where leases may exist across departments – and possibly internationally if the organization has international operations. For organizations that have developed a robust data governance program or specific procedures to collect and manage enterprise data, implementation should be considerably easier. However, for the many organizations that have yet to build out these structures, there are off-the-shelf and purpose-built technology solutions that can help standardize and aggregate the information.

Keep an open line of communication: Organizations that maintain a large physical footprint are impacted the most. They should factor in extra time for both implementation and keeping stakeholders informed. Unexpected roadblocks, such as a delay in receiving necessary data from external sources, should also be accounted for in the timeline. Benchmarking the organization’s progress on implementation against its timeline throughout the process is paramount in keeping on task and meeting goals.

The bottom line is that even with the extension, it will take a concerted effort to become compliant in time. Nonprofits need to start the implementation process now.

Adapted from article in the Nonprofit Standard blog.

Privacy Shield Invalidated – Nonprofits May Not Be Affected But Should be Aware

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By Jibran Hussain, Andrew Tobel, J.D., CIPP/US, and Derrick King, CIPP/US

In this highly interconnected, digitized global economy, cross-border data flows are imperative in maintaining and enhancing strong ties between countries. On July 16, 2020, a pivotal component of European Union (EU)–United States (U.S.) data transfers, the EU-US Privacy Shield Framework (Privacy Shield), was declared invalid by the Court of Justice of the European Union (CJEU) with immediate effect. According to the CJEU, EU data transfers to the U.S. under the Privacy Shield arrangement are not safeguarded in a manner that are consistent with EU data privacy standards due to U.S. government surveillance programs.

GDPR Applicability Background

Any nonprofit that collects or processes any information relating directly or indirectly to identifiable individuals, in connection with the offer of goods and/or services or monitoring of EU residents, is subject to the General Data Protection Regulation (GDPR). This could include the collecting or processing of EU members’, benefactors’, grantees’, grantors’, or trustees’ Personal Data. Per the GDPR Personal Data are any data related to an identified or identifiable natural individual. Examples of Personal Data are first and last names, home address, Internet Protocol (IP) address, cookie identifiers and credit card numbers.

Nonprofits are not exempt from the GDPR, especially if they hold seminars or meetings in the EU, and/or monitor the online behavior of EU residents who visit their website, and/or maintain records on EU residents. Moreover, nonprofit activities that may also be in scope include the processing of Personal Data of volunteers, employees, donors, beneficiaries or fundraising activities. For example, if a U.S. nonprofit organization is aiding Yemeni refugees based in Germany – it would be required to comply with the GDPR as it is engaging in data processing activities pertaining to individuals in the EU. Lastly, the submission of grant reports to agencies or submission of accounting transactions from foreign office locations to U.S. home offices which include E.U. Personal Data may also have GDPR implications.

The CJEU’s decision is a major setback as it removes a commonly used method for transferring Personal Data from the EU to the U.S., i.e., the Privacy Shield. The Privacy Shield was administered by the Federal Trade Commission (FTC); however, 501(c)(3)s and other nonprofits, are not typically under the jurisdiction of the FTC and therefore likely could not participate in the Privacy Shield. Nonetheless, nonprofit organizations should be put on notice that transfer mechanisms are a requirement under the GDPR and subject to strict scrutiny by the courts. There are other data transfer mechanisms available should nonprofit organizations engage in EU-U.S. data transfers:

  • Standard Contractual Clauses
  • Binding Corporate Rules
  • Adequacy Decisions
  • Derogations for Specific Circumstances
  • Certification Mechanism

Permissible Data Transfer Mechanisms

The GDPR permits EU data transfers to non-EU countries which are deemed by the EU Commission to provide an “adequate” level of data protection standards. However, if there is no “adequacy decision,” organizations can utilize other data transfer mechanisms such as Standard Contractual Clauses (SCCs), Binding Corporate Rules (BCRs), and Derogations for specific circumstances. Crucially, the CJEU upheld the validity of SCCs, but stated there must be supplemental measures and additional data protection safeguards in place with special attention to access by judicial and administrative authorities. In particular, SCCs should include sufficient data protection safeguard provisions when organizations engage in EU-U.S. data transfers. As a result, organizations should reassess their SCC provisions by:

  • Reviewing the types of EU Personal Data subject to transfer and whether there is a risk of subpoenas by U.S. National Security agencies;
  • Assessing if the transfer of EU Personal Data is necessary and, if not, reducing the scope of the data transfer;
  • Including strong provisions that outline strong data retention practices (e.g., immediate deletion of EU Personal Data if no longer required);
  • Implementing strong encryption to protect EU Personal Data.

Additionally, BCRs are also a permissible data transfer mechanism that require similar SCC data protection safeguard provisions but require the approval of EU supervisory authorities. While this can take several months for approval, BCRs are more flexible for organizations as they result in less administrative burden once they are implemented. However, they can be a costly and lengthy process to implement.

On the contrary, under Article 49 of the GDPR, if a nonprofit organization has exhausted the data transfer options including BCRs or SCCs, a data transfer can still take place for a limited number of data subjects under Derogations for specific circumstances:

  • The data controller has assessed and provided sufficient safeguards pertaining to the protection of Personal Data of data subjects;
  • The data subject has consented to the data transfer after being informed of the risks associated with the data transfer due to a no adequacy decision or sufficient data transfer safeguards;
  • The data transfer is required for the performance of a contract between the data subject and the controller;
  • The data transfer is required for public interest reasons;
  • The data transfer is required to protect the vital interests of a data subject.

Nonprofit organizations, as the data controller, should inform the applicable data protection authority of the data transfer and subsequently inform the data subject.

Enforcement

Nonprofit organizations that fail to comply may risk fines by Data Protection Authorities (DPAs). As a Belgian nonprofit organization recently discovered, DPAs certainly have the appetite to punish organizations that fail to comply with data transfer requirements. The Belgian nonprofit organization was fined €1000 by the Belgian DPA, as it utilized a complainant’s Personal Data for direct marketing purposes and did not have a valid legal basis for processing the complainant’s Personal Data—which is a breach under the GDPR.

Conclusion

Given the CJEU’s ruling on Privacy Shield, U.S. nonprofit organizations engaging in cross-border data transfers can be under greater scrutiny by the EU Commission and will be subject to regulatory fines and reputational loss for violations. However, by bolstering or implementing the aforementioned data transfer mechanisms, nonprofit organizations will be better equipped to navigate and adapt to the evolving data privacy requirements, primarily EU data transfers.

FASB Issues ASU On Contributed Nonfinancial Assets

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By Tammy Ricciardella, CPA

On Sept. 17, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU), 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. This ASU is intended to increase transparency on how contributed nonfinancial assets (also referred to as gifts-in-kind) received by nonprofits are to be used and how they are valued.

The ASU was issued to address stakeholder concerns about how nonprofit entities report contributed nonfinancial assets. Stakeholders expressed a need for additional transparency surrounding the amount of contributed nonfinancial assets and how they are used in a nonprofit’s programs and activities. Others noted the need for clarity in how these contributed nonfinancial assets were valued.

Though the update does not change the current recognition and measurement requirements in generally accepted accounting principles (GAAP), which is included in Accounting Standards Codification (ASC) 958-605, Revenue Recognition, the ASU is intended to improve current GAAP through enhancements to presentation and disclosures of contributed nonfinancial assets.

The scope of the ASU is limited to gifts of nonfinancial assets. The term nonfinancial assets includes fixed assets such as land, buildings and equipment; the use of fixed assets or utilities, materials and supplies such as food, clothing or pharmaceuticals; intangible assets; recognized contributed services; and unconditional promises of those assets. Many nonprofit organizations rely on these contributions to conduct their programs and mission-related activities.

The ASU requires that a nonprofit present contributed nonfinancial assets as a separate line item in the statement of activities apart from contributions of cash or other financial assets.

The ASU requires the following information be disclosed related to the contributed nonfinancial assets:

  • The contributed nonfinancial assets recognized in the statement of activities disaggregated by categories that depict the type of contributed nonfinancial assets.
  • Each category of contributed nonfinancial assets recognized as noted above should disclose the following:
    • Qualitative information about whether the contributed nonfinancial assets were either monetized or utilized during the reporting period.

          –  If utilized, a description of the programs or other activities in which those assets were used.

    • The nonprofit’s policy (if any) about monetizing rather than utilizing contributed nonfinancial assets.
    • A description of any donor restrictions associated with the contributed nonfinancial assets. An example of this would be if an entity received contributed pharmaceuticals, and the donor restricted these for use outside of the United States.
    • The valuation techniques and inputs used to arrive at a fair value measure in accordance with the requirements in ASC 820, Fair Value Measurements, at initial recognition.
    • The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient nonprofit is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets.

The amendments in the ASU should be applied on a retrospective basis and are effective for annual reporting periods beginning after June 15, 2021. Early adoption of the ASU is permitted.

Reprinted from the Nonprofit Standard blog.

“Are We Paying Our Executives Appropriately?” – Answer these 3 questions and you’ll know

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By Michael Conover

“Are we paying our executives appropriately?” I am frequently asked this question by board members and these questions have become even more frequent in the current COVID-19 environment. Amidst all the uncertainty, the question seems more relevant than ever. Whether it is an organization taking its first formal look at executive pay, a new board member serving on a compensation committee or a question raised following our presentation of an annual compensation “checkup,” it is a key question that every board should be able to confidently answer. Regardless of the type of nonprofit organization, there is an expectation (and IRS regulations!) that board members must be good stewards of the organization’s assets. This is especially true regarding the most highly compensated members of management.

Board members are specifically charged with responsibility for managing the pay for top executives, but many have little to no experience with the subject. Those individuals with some compensation experience with other organizations, frequently have little to no experience directly related to the nonprofit board on which they serve. This is likely the explanation for the prevalence of “Are we paying our executives appropriately?” question.

It is a good question. And it is one that all boards, or at least their compensation committee, should be able to answer. If a board member does not know the answer, there should be no reluctance to ask the question. Unfortunately, people are sometimes hesitant to do so. People not familiar with the compensation topic or new to the organization’s board hold back. Whether unwilling to admit they have questions or feeling a need to “go along with others who seem to know what to do” or “continue to do things the way we’ve always done them”—the important question above just does not get asked. The path of least resistance is to simply chime in for the all too familiar “All those in favor, say Aye” board chorus.

In these COVID times there are, however, some new questions about executive compensation that need to be answered. Many of the familiar and essential factors normally included in board decisions about executive pay are no longer available or relevant. The disruption related to the virus has broadly impacted all sectors of the economy. The issue of competitiveness in terms of compensation is muted at least for the moment. Uncertainties abound and everyone is searching for answers about what they should do. For most organizations, the answers will come from within. Each must chart its own way for the foreseeable future. For this reason, I’d like to suggest the following three new questions to be considered to arrive at an answer for your organization related to whether executive pay is appropriate in these COVID times when unknowns seem to be the order of the day.

Question #1

Do our current financial condition and outlook for the next 18 to 24 months allow us to continue our current methods and levels of compensation for staff members and our executives?

Affordability is a critical issue and. possibly the most urgent one. If there are concerns about finances, there are a series of progressively more stringent techniques that can be taken, including: discontinuation of “voluntary” plans / payments; salary freeze; salary reduction; furloughs; staff reduction, etc. Each of these must be carefully weighed to arrive at the best answer for your organization. The consideration is not solely financial. Retention of key personnel, staff morale / engagement, continuation of critical services, stakeholder reactions, etc. are also important factors to consider.

Once decisions have been made about any cost-saving actions, they should be fully communicated to all concerned with as much advance notice as possible. In particular, all the details about the duration of the change(s) should be included to the degree that they can confidently be set. Future communications should be made as conditions change, as well as to affirm that the subject has not been forgotten.

Question #2

Under current conditions, should our competitive pay positioning policy be maintained?

Even if the organization’s financial condition can support holding current executive compensation at target levels in the competitive market, should they stay the same? There are several factors to consider.

COVID times have disrupted the availability and relevance of many sources of competitive compensation data. Newer IRS Form 990 filings are not being posted and are even more outdated than in normal times. Most compensation surveys are reporting on data collected pre-COVID and do not reflect current conditions. Reliable information on competitive compensation may not be available to guide pay decisions.

In some instances, competitive compensation levels have likely decreased due to temporary salary reductions, suspension of bonus / incentive plans, etc. The pressure to keep up with the market has decreased significantly for most organizations.

Finally, there are other factors that may weigh more heavily in executive compensation during these times such as: public / stakeholder perception of executive pay actions, equitable treatment of staff members vs. executives; etc.

For the next 12 to 18 months, executive compensation should be carefully considered as part of a thorough assessment of the organization’s situation and circumstances. As mentioned previously, competitiveness may not be as prominent a consideration now. Again, regular communication to all concerned about any change / moderation of traditional approaches to pay is critically important.

Question #3

What factors should be considered in executive pay decisions that are needed for 2020 or 2021?

COVID times may have deprived the organization of its traditional benchmarks or made its performance metrics no longer relevant. For this reason, many organizations will need to make pay decisions on a largely discretionary basis. Discretionary should not imply a hastily made monetary “thanks for everything” at year end. I am suggesting a thoughtful approach, one that requires pre-planning and discussion by the compensation committee of the criteria that will be used for any pay-related decision making.

Rather than delaying a discretionary decision until the final compensation committee meeting for 2020, boards would be well-advised to begin discussions and planning now for the specific factors that will be considered when these decisions are made. Board members can exchange and consider ideas to arrive at a general consensus about several critical factors that will be used.

For example, boards may consider:

  • How well has management cared for the organization’s employees?
  • How have the organization’s stakeholders been treated?
  • How have the organization’s vendors been treated?

These types of questions focus on the executives’ stewardship of the organization for the longer term. Once decided, the factors should be communicated to all concerned parties in advance. That information will highlight the behaviors and results that are important for moving forward through this time.

In summary, good answers to the three questions we’ve raised here are essential for a good answer to the “big” question—“Are we paying our executives appropriately?”—during these unprecedented times. Arriving at the right answer for your organization is critically important.

If you do not know the answer to “Are we paying our executives appropriately?” for your organization, please ask!

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