By Lee Klumpp, CPA, CGMA

The FASB clarifies longstanding question for nonprofits.

Nonprofits received long-awaited clarification on a key accounting question from the Financial Accounting Standards Board. As discussed in the article on page 1, the FASB released a final accounting standards update (ASU), Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU aims to standardize how grants and other contracts are classified across the sector, as either an exchange transaction or a contribution.

Classifying grants as either a contribution or exchange transaction is the first step in implementing revenue recognition. The clarified guidance in ASU 2018-08 aims to help nonprofits complete that first step in a consistent way across the sector.

This article outlines a practical example of the process to evaluate a grant under the new ASU.

Practical Example: How to evaluate a grant under the new guidance

Description of ‘Nonprofit A’:  A large research association that specializes in space exploration. Its mission is advancing scientific discoveries and supporting the advancement of new technology. The organization receives funding from various individuals, corporations and governments to support its efforts.

Description of the grant: Nonprofit A received a $15 million grant from the federal government to finance the costs of a research initiative to test the effectiveness of newly developed technology.

How should Nonprofit A classify the $15 million grant? This grant could be classified as either an exchange transaction or a contribution, depending on the exact parameters of the funding. Let’s examine both scenarios:

	Classify the grant as an exchange transaction if:	Classify the grant as a contribution if:
Specific provisions of the grant	The resources are paid by the federal government as the work is incurred (cost reimbursement) and request for payment is submitted. The federal government specifies the protocol of the testing, material the technology is made of, and the type and duration of testing that must take place. The federal government requires a detailed report of the test outcome within two months of its conclusion and any intellectual property (IP) as a result of the grant belongs to the federal government.	Nonprofit A makes all decisions about research protocol, material the technology is made of, and the type and duration of testing that must take place. In addition, the nonprofit retains all the commercial rights for any IP that is developed as a result of the research. Nonprofit A still has to produce the detailed report of the test outcome within two months.
Deciding factor: Reason for classifying the grant as an exchange transaction or contribution	This example would be an exchange transaction because of how prescriptive the grant is, and because the government owns the IP. Therefore, in this case the federal government is receiving something of commensurate value.	In this scenario, the transaction would be considered a contribution because there is no commensurate value being exchanged. Even though Nonprofit A is expected to produce a report, the FASB does not consider this an equal exchange of value. The ASU deems filing this type of specified report to be administrative in nature and not a performance standard.
Is the grant subject to the new revenue recognition standard?	Yes. All exchange transactions are subject to Accounting Standards Codification Topic 606, Revenue Recognition from Contracts with Customers.	No. The above scenario is a conditional contribution, which is not subject to revenue recognition. The condition is met as the work is incurred in accordance with the grant agreement. Determining whether a grant is conditional or unconditional can be difficult. The ASU states that determining if a donor-imposed condition exists is the key to determining when the contribution can be recognized as revenue. The first consideration is whether the grant agreement has a right-of-return requirement in which the grantee must return to the promisor (grantor) assets transferred as part of the agreement or a right to release of the promisor from its obligation to transfer assets. The scenario in the above does not meet any of these requirements. Additionally, the ASU has provided the following indicators that  could create a barrier and make the grant conditional: The inclusion of a measurable performance-related barrier or other measurable barrier. Whether a stipulation is related to the purpose of the agreement. The extent to which a stipulation limits discretion by the recipient.

Disclaimer: These examples are for illustrative purposes only. Changing even one fact in the example could significantly change the accounting treatment.

What types of organizations need to take action?

• Grantees: All nonprofits that receive grants from foundations, governments or other funding entities will need to assess how they are accounting for contributions. Colleges, universities, research institutions and social services organizations that rely heavily on grants and contracts could see the greatest impact.
• Grantors: Non-governmental organizations like public and private foundations, as well as for-profit entities that issue grants to nonprofits, will need to think about how they write their grants and contracts.

What organizations will not experience a significant impact?

• Public charities: As organizations that derive the bulk of their funding from individual contributions, they will be less impacted by this guidance.
• Local, state and federal governments: Nonprofits will still need to assess how they classify federal and state funding, but governmental bodies are not within the FASB’s scope and do not need to comply with this guidance. Governments are subject to standards issued by the Governmental Accounting Standards Board.

What’s next for nonprofits?

Accounting changes are like a relay race. Today, the FASB handed off clarified guidance on accounting for contributions and answered a long-standing question for the sector. And now it’s up to nonprofits to apply it to their own books and run the rest of the race to implement revenue recognition and finish strong.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

By Ken Eye and Andrea Wilson

The internal audit (IA) function is vital to the health of any nonprofit, regardless of mission or scope. The audit committee and its individual members are crucial partners in safeguarding the integrity, purpose and, ultimately, the success of organizations.

But, they often face challenges navigating a strained regulatory environment, all while trying to do more with less. Adjusting to these new realities means that proper management is more important than ever. This article outlines the top 10 challenges keeping internal auditors up at night, and providing remedies to help them continue their critical work.

1. CHANGES TO OPERATIONS OR STRATEGY

For most nonprofit organizations, change is inevitable. As the needs of communities, internal dynamics, priorities and leadership transform, nonprofits adjust their mission and strategies. While this dynamism is essential for organizations to further their work, change can create strain for internal auditors. Whether its expanding operations to a new location, working with new donors or rolling out a new organizational structure, internal auditors are often left scrambling to ensure compliance.

THE REMEDY: Change is unavoidable, but compliance headaches don’t have to be. Nonprofits should be proactive about integrating internal audit into large scale organizational changes. This means allocating IA resources to evaluate emerging compliance and legal requirements, incorporating IA into the strategic decision-making process at the outset, revising policies and procedures with the new compliance environment, and developing succession plans to facilitate smooth personnel changes. And, IA should not just be involved in the change process—organizations should allow internal auditors to conduct post-implementation assessments to ensure ongoing compliance.

2. ORGANIZATIONAL CULTURE

The organizational culture of nonprofit organizations usually centers on a mission that employees are passionate about. This passion attracts staff personally motivated to help the overall organization succeed, but can come at the cost of internal controls. For nonprofits, “the cause” can often be promoted at any cost. Mid-level management professionals can be highly skilled in technical areas, but may lack knowledge in compliance, financial accountability and oversight. A lack of interactive communication between key administrative and program units within the organization can result in insufficient internal controls.

THE REMEDY: To balance maintaining organizational culture with proper operational management, communication is essential. Nonprofits should develop a sound communication strategy that brings the internal audit and compliance functions in regular contact with the rest of the staff. During these interactions, IA professionals should be sure to communicate how risk management practices align with overall organizational strategy and mission objectives. Bringing people together in this way helps make IA an integral part of an organization, rather than an afterthought.

Even when strong communications are in place, breakdowns are sometimes inevitable. Organizations should conduct regular assessments of business processes to determine where breakdowns in communication between business units occur. These assessments should help identify gaps that could pose significant risks to the organization.

Based on the results of these assessments, organizations should design and implement remediation plans, including scheduling necessary trainings for all employees and rolling out new process flows and accountability points to close any gaps.

3. NEW TECHNOLOGY

Technological advances help organizations store and share data, but new technology is often implemented without the knowledge or involvement of the internal audit function, to potentially disastrous and costly results. Ideally, internal auditors should assess new technology well before it’s utilized to review issues like control over sensitive data, continuity of the technologies between offices, and adherence to compliance and regulatory requirements. Without this review, nonprofits leave themselves open to a number of risky consequences, as well as operational inefficiencies.

THE REMEDY: Technology can be a huge boon to nonprofit organizations, but only when it’s used wisely. IA should work with nonprofit leaders to first assess technology currently being used organization-wide, and then identify what the organization still needs to address. Internal auditors can assist with researching and proposing approved technologies for organization-wide usage, to facilitate cohesion and compliance and to help management improve system efficiencies.

Organizations also need to implement proper internal controls to ensure they’re mitigating technology risk as much as possible. IA can conduct a risk assessment of each technology used and implement policies to restrict or prevent the use of high-risk programs or devices. Organizations should also require similar checks and risk assessments for all new technology prior to usage.

4. CYBERSECURITY

With new technologies exploding in popularity, cybersecurity risks abound. Nonprofit organizations often mistakenly believe they aren’t of interest to cyber criminals, but the amount of personal data they store from donors and employees, and the tendency to underinvest in cybersecurity measures, make them an ideal target. It can be difficult for nonprofits to maintain up-to-date technology and hardware, keep pace with technological changes and navigate the shifting regulatory landscape with their limited funding. Nonprofits also frequently partner with technology suppliers and other contractors that leave them open to third-party cyber risks.

THE REMEDY: The first step to mitigating cyber risk is to conduct an organization-wide cybersecurity risk assessment that includes partner, contractor and technology supplier cybersecurity as part of the due diligence process. This assessment should shed light on where internal and external gaps exist. Following the assessment, organizations should implement additional controls by updating policies, procedures and internal controls to address identified gaps.

A startling number of cyber incidents arise from employees unknowingly exposing the organization to bad actors. Training staff to recognize these exposures is fundamental to their prevention. Nonprofits need to regularly communicate risks to employees and vendors to ensure everyone is adhering to established policies.

Monitoring cyber risk needs to be an ongoing effort. Nonprofits should develop a risk assessment schedule to examine internal partner, contractor and technology supplier cybersecurity on a quarterly or annual basis. Internal audit can assist with implementing these assessments.

5. COMPLIANCE WITH FUNDER REQUIREMENTS

Nonprofit organizations often have the unique challenge of negotiating compliance requirements across multiple funding sources including government entities, individuals, private foundations or other organizations. This challenge is only growing as budget cuts force organizations to focus on diversifying revenue streams and expanding donor pools, and with a recent increase in donor audits of specific grant activity at the materiality level. Further complicating the matter is a growing emphasis on international accounting standards (as opposed to relying on U.S. generally accepted accounting principles).

THE REMEDY: To clarify exactly what funding requirements an organization faces, it should conduct a compliance assessment, comparing requirements across all donor agreements to determine areas of overlap and areas of discontinuity. These agreements should then be compared against written policies and current practices to identify gaps.

Remediation plans can amend policies and procedures, and staff trainings should be conducted to ensure all levels and functions understand their role in maintaining compliance with funding requirements.

Staying current is critical. Nonprofits should develop a compliance assessment schedule, and IA and compliance departments need to stay on top of new funding streams and emerging trends so they can pivot when necessary.

6. FINANCIAL CONTROLS

Even though nonprofits are motivated by making an impact rather than money, organizations still face a host of hurdles when it comes to financial management. Many international nonprofits operate in countries with cash-based economies, making it tough to maintain adequate control of funds and sufficient supporting documentation. And new payment technologies, while enabling new and widespread operational tools, are often accompanied by verification and other control challenges. Nonprofits also face resource constraints and may have a limited number of finance staff to oversee financial management processes, which can be manual and prone to human error. For organizations with several offices, branches often operate with little to no centralized oversight over their accounting and cash management procedures.

THE REMEDY: Nonprofits should review cash management procedures and evaluate typical expenditure cycles to identify potential risk areas across the entirety of an organization. Internal audit is central in assisting management in testing cash management controls.

• Organizations can then implement additional controls in keeping with best practices, like limiting cash handling or volume of cash transactions where possible. Nonprofit managers should consider investing in technologies and resources that limit high risk processes.

Standardizing procedures will help cut down on variance of practices between offices. All branches should centralize accounting and reporting procedures. At a minimum, each location should maintain copies of supporting documentation of all expenditures and financial reporting and should regularly review them with staff.

7. RELIANCE ON THIRD PARTIES

Vendor actions can create extremely adverse consequences for nonprofit organizations. Concerns range from reputation damage to the vendor’s illegal acts being attributed to the nonprofit organization. This risk applies to all types of organizational relationships with vendors and nonprofits, especially those administering federal grant programs given increased subrecipient monitoring and due diligence requirements.

Despite the risks, most nonprofits rely on partners or contractors for critical program functions. This makes it difficult to conduct due diligence reviews and monitoring activities, particularly when the partners/contractors are numerous, geographically dispersed or operating overseas. Partners are normally tasked with self-reporting, meaning frauds like ghost employee payments are easily hidden. Contractors also usually have access to organizational networks and information, creating an additional layer of risk.

THE REMEDY: Organizations should review current policies and procedures to ensure robust due diligence and monitoring processes are in place for all third-party relationships. This should include an assessment of partner/contractor access to project data, systems and networks, and the limitation of access where possible.

Nonprofits need to implement additional monitoring and verification processes, including:

• Conducting regular spot reviews or investigations of reported data
• Requiring partners and contractors to certify financial and programmatic assertions
• Verifying number of partner/contractor staff and salary payment amounts
• Conducting unannounced site visits
• Considering third-party verification systems

These processes should be re-evaluated on a regular basis to ensure their effectiveness.

8. PROCUREMENT PROCEDURES

Nonprofit organizations rely heavily on non-competitive procurement processes due to several reasons. Often, procurement procedures, selection criteria and selection decisions are inadequately documented, leaving organizations unable to show that there was no bias in the selection process. Preferred vendor lists are rarely updated, and control of vendor solicitation, selection and site visits is often left with just a few individuals.

THE REMEDY: IA should review current procurement procedures against industry standards and donor requirements. They should also be transparent about their procurement policies including:

• Publicly announcing tenders as much as possible
• Updating vendor lists through open competition as frequently as possible
• Verifying vendors and prices through in-person or third-party checks
• Comparing bids against market prices
• Documenting criteria and selection procedures to bid samples with procurement files
• Ensuring procurement/selection committees are rotated on a regular basis

9. TRANSPORTATION AND DISTRIBUTION

For organizations that distribute goods, inventory management and oversight can prove to be major sources of stress for internal auditors. Often, nonprofits have difficulties verifying receipt of goods or services by their intended beneficiary, and confirming the goods provided are in the same quality and quantity as what was purchased. Diversion, theft and product substitution are especially difficult to identify. Despite resource and capacity issues, recent increased scrutiny of internal controls and supply chain management means that organizations need to address these issues sooner rather than later.

THE REMEDY: To help combat issues in the distribution chain, organizations need to shore up monitoring procedures by:

• Establishing monitoring teams for critical points along the supply chain
• Implementing two-step or three-step verification procedures at each critical stage
• Hiring a third party to conduct site visits and monitor transportation and distribution
• Using technology to assist in tracking and monitoring, including unique identifiers on products for inventory and tracking purposes and requiring distributors to take time-stamped photos/videos of deliveries
• Another effective risk mitigation strategy is to communicate directly with beneficiaries. Organizations can hold pre-distribution meetings with communities to review any past issues or concerns. Detailed packing lists and/or photographs of parcel contents should be inside packages. Nonprofits can include in the contract clauses with distributors to withhold payments to distributors until delivery is confirmed. This further ensures the distributor is holding up its end of the agreement.

10. FRAUD AND CORRUPTION

It’s the job of the internal audit function to uncover fraud, waste and abuse in nonprofit organizations, but often they are set up for failure. Due to a lack of communication between functional and program units within organizations, increased used of third parties, outdated systems, increased regulations (and the list goes on…), the opportunity to exploit a nonprofit’s controls is growing at a time when IA resources are shrinking and reputational risk for organizations is at an all-time high.

THE REMEDY: Preventing fraud starts within an organization itself. Stakeholders should evaluate current fraud prevention, detection and investigation measures against regulatory requirements and develop a plan to remediate any identified gaps. They should also be sure to provide accessible fraud reporting mechanisms for all employees, partners, grantees/beneficiaries and stakeholders.

• Despite resource constraints, organizations need to ensure IA has the appropriate level of resources to detect and investigate potential cases of fraud. Funds should also be set aside for visits to third parties and office locations and the establishment of a fraud hotline. Put a process in place to notify any impacted funders in a timely manner and in line with donor requirements to prevent exacerbating the impact when fraud does occur.

It’s also key to establish a fraud prevention and detection assessment schedule so practices can stay up-to-date and make sure nothing falls through the cracks.

Internal auditors at nonprofits have a tough, but essential job that’s key to keeping the organization focused on mission fulfillment. By assessing current practices, developing action plans and regularly monitoring activities, organizations can mitigate risk and serve their beneficiaries more effectively.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

By Laura Kalick, JD, LLM in Taxation

Does your tax-exempt organization provide transportation and parking benefits to employees? If so, you may have another commuter headache: a new tax. Under the Tax Cut and Jobs Act of 2017 (the Act), a provision was added to the Internal Revenue Code that is likely to require many tax-exempt organizations to pay unrelated business income tax (UBIT). Certain costs of qualified transportation, including transit passes, qualified parking and more, will now be taxed as unrelated business income at 21 percent.

The Act added the following provision to the Internal Revenue Code: Internal Revenue Code (IRC) Section 512(a)(7): Increase in unrelated business taxable income by disallowed fringe.

This provision was an attempt to put exempt organizations on the same footing as taxable organizations that will no longer be able to deduct these costs. The provision is effective for amounts paid or incurred after Dec. 31, 2017.

Under this provision, certain qualified transportation fringe benefits, including those relating to parking garages, must be reported as unrelated business income (UBI). All tax-exempt organizations (and a college or university owned and operated by a state or other governmental unit) will have to include as unrelated business taxable income any amounts paid or incurred for any qualified transportation fringe benefit, including the following:

• A ride in a commuter highway vehicle between the employee’s home and workplace.
• A transit pass.
• Qualified parking.

Qualified parking is parking you provide to your employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles, or carpools. If an organization has its own garage that is used for parking that is already reported as UBI (e.g., parking for the general public), then the percentage of those costs attributable to the amount already included in its UBI does not have to be included in the amount treated as UBI under the new provision.

The UBIT on these employer costs is 21 percent at the federal level and state taxes may apply as well. Organizations should consider making estimated tax payments on these taxes.

These employee fringe benefits are still excluded from an employee’s income. Employers can generally exclude the value of transportation benefits provided to an employee during 2018 from the employee’s wages up to the following limits:

• $260 per month for combined commuter highway vehicle transportation and transit passes.
• $260 per month for qualified parking.

See IRS Publication 15-b for more information.

Even if the benefit is provided under a compensation reduction agreement, the payment will still result in UBIT for the organization. The only way the organization can avoid counting these benefits as UBI is to have the employee pay for the benefits with after-tax dollars.

COMPENSATION REDUCTION AGREEMENT EXAMPLE:

For 2018, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits is $260. Commuter employees can receive both the transit and parking benefits up to $520 per month tax-free.

On a per employee basis, for commuter and transit passes only, $260 monthly is $3,120 annually, and the UBI tax on this amount at 21 percent is $655 plus state taxes, if applicable. With 100 employees, the federal tax alone would be $655 per employee and approximately $65,500 in total. To the extent your organization provides a commuter benefit of up to $520 per month, the UBI tax can be much more.

Next Steps:

• Organizations should determine whether they provide these transportation and parking benefits, and if so, to how many employees, what kind and how much?
• Calculate the estimated tax payments for Federal UBI and the state, if applicable.
• If your organization has not filed Form 990-T in the past, enroll the organization in the Electronic Federal Tax Payment System in order to remit the taxes.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

By Michael Conover

Valid information on competitive pay levels and practices for “… similarly qualified persons in comparable positions at similarly situated organizations” has long been the basis for responsible management, and Internal Revenue Service (IRS) enforcement, of appropriate pay practices among all tax-exempt organizations.

When the IRS Intermediate Sanctions (Internal Revenue Code 4958) were enacted, the importance of good comparative data was underscored by its inclusion as one of the three elements of the protection offered in the Rebuttable Presumption of Reasonableness. The data provides a critical context for determining how much and how to pay a nonprofit’s executives.

Regardless of its importance, however, many organizations fail to devote the attention to this important element of their compensation program that it deserves. We regularly work with organizations that have difficulty describing or producing the data used as the basis for executive pay decisions. References are made to “a report done a while ago,” “a survey we had,” or “some Form 990s from organizations like us.” Examining the Form 990s and Schedule Js of these same organizations, we find they have checked all the appropriate boxes related to these data sources and yet there is little or nothing to be found.

Another group of organizations we find has a different competitive data issue. They have competitive data to offer as the basis of compensation decisions, but there are serious issues about the quality and comparability of the data being used. The data may be drawn from organizations that are not at all comparable, positions that are marginally similar or based on such a small sample that the data’s validity is very questionable. In these situations, this poor data may be as bad, or possibly worse, than having no data at all because it may lead to problematic pay decisions.

Obtaining and properly using good data for compensation purposes requires some thoughtful examination of your organization, its positions, and the requirements for individuals holding those positions. Only after accurately understanding your own circumstances can a search begin for the sources of valid data needed. Areas that need to be explored include:

• Details of your organization: This information includes the type of service(s) your organization performs as well as the broad organizational metrics that reflect its size and scope (e.g., revenue, operating budget, total assets, number of employees, etc.). These are usually among the factors most readily used for identifying similar organizations.
• Primary role(s) of your position(s): Competitive data sources (surveys, Form 990s, etc.) usually offer only brief descriptions of positions and generic titles for job-matching purposes so the focus here is on the central focus and impact of your position in terms of overall impact on the organization. The chief/principal executive officer and chief/principal financial officer positions tend to be very similar from one organization to another and are Disqualified Individuals from an Intermediate Sanctions perspective. Therefore, they are routinely included in competitive data needs. Ensure you note any significant difference in the role played by your position vs. the typical benchmark. The presence of an additional role not associated with the typical benchmark for the position (or the absence of some portion of the role commonly associated with it must be taken into account to ensure appropriate comparisons will be made.
• Position requirements: The emphasis on position requirements is intentional. The purpose is to focus on the essential education, expertise, and experience required to perform the role, not what the current incumbent happens to have or acquired in the role. For example, the fact that the current receptionist has five years of experience at the front desk does not mean that five years is a requirement for a qualified incumbent. On the other hand, your position may require a type of professional certification, education, or experience that is unique and essential for successfully performing the role. For example, an individual holding the position of executive director in an association of athletic coaches and involved with external organizations regulating the conduct of the sport must have credible experience in the sport.

Armed with an accurate understanding of your own organization and the positions that will be examined in the competitive compensation assessment, attention now is focused on the identification of the data that will be sought for use in the analysis. The process follows the same criteria referenced above in the descriptors of your organization and positions, as follows:

• Organizations selected for inclusion in the analysis: Typically, these are organizations offering the same types of services that your organization provides. In some instances, there are other types of organizations, perhaps even for-profit ones that employ and compete for executive resources that are very similar to your specific organization. These can also be included in the search for competitive data. Compensation surveys are conducted among many different types of nonprofit organizations (e.g., higher education, social service organizations, professional/trade organizations, philanthropic foundations, etc.). In addition, Form 990 filings from other organizations like yours are also a source of competitive data. If necessary, a custom survey and/or consultant may be required to obtain data for specialized/hard-to-find sources of data.

The size and scope of organizations included in the analysis must be comparable to your organization. Revenue and budget levels for a group of organizations ranging from 50 percent to 200 percent of your size are typically viewed as reasonable for inclusion. Of course, care must be taken to avoid “skewing” the data in the direction of organizations much larger than your own.

I often explain the objective for identification of comparable organizations as comparing “apples to apples” but doesn’t necessarily need to be as specific as comparing McIntosh to Fuji.

• Selection of benchmark positions: Positions selected for comparisons should closely resemble the role described in your organization. Titles alone may not fully describe a position’s role or they may be misleading. A controller may be the chief/principal financial officer or a subordinate, depending on the data source in question. In those cases where a significant difference has been identified between your position and the external benchmark, it may be advisable to make adjustments (upward or downward) to competitive data to appropriately compare them.
• Special position requirements: Bona fide requirements for your organization’s position that are not typically associated with the benchmark position may also require an adjustment to competitive data in order to produce an appropriate comparison.

Collecting this information about your organization and the external benchmarks planned for use prior to an analysis of competitive compensation is not the end of this process. Two critical steps remain. First, it is important to engage the organization’s governing body (e.g., board, compensation committee) and involve them in a review of this information and affirmation/modification of it for use in the analysis. Involving the independent members of the organization in the process performs a very helpful educational role about compensation and the importance of good competitive data. It also enlists individuals with a critical oversight role in the governance of pay in an independent validation of the plan to secure the data before it is collected. A sound rationale has been prepared and ratified for the analysis of competitive data which board and management should view as valid for this purpose.

Second, this description of your organization and positions, as well as the external benchmark criteria or the comparative framework, should be documented. It will become part of the other important documents maintained to support the compensation program (e.g., board minutes, compensation strategy/guiding principles, etc.). The framework should be reviewed periodically and updated as needed to ensure its continued relevance to your organization as well as the external marketplace(s) in which you compete for executive resources.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

By Lee Klumpp, CPA, CGMA

The 115th Congress has been busy with tax reform but has managed to introduce a proposed bill H.R. 4887 (“Grant Reporting Efficiency and Agreements Transparency Act of 2018” or “GREAT Act” or the “Act”) on Jan. 29, 2018, by Representatives Foxx (R-N.C.), Gomez (D-Calif.), Issa (R-Calif.), Quigley (D-Ill.), and Kilmer (D-Wash.). Three other members have signed on to the bill since it was introduced. The bill is currently before the House Committee on Oversight and Government Reform.

The sole objective of the Act is to modernize federal grant reporting by standardizing the information recipients submit to agencies. It is believed by its sponsors that the GREAT Act will transform federal grant reporting from disconnected documents into open data by directing the executive branch to adopt a standardized data structure for the information grantees must report to agencies. By replacing outdated documents with open data, the GREAT Act is intended to deliver transparency for grant-making agencies and the public and allow grantees to automate their reporting processes, thereby reducing compliance costs.

The GREAT Act would require the creation of a comprehensive and standardized data structure, or “taxonomy,” covering all data elements reported by recipients of federal awards, including both grant and cooperative agreements.

The sponsors of the Act believe that it can achieve and accomplish the following:

• Modernize reporting by recipients of federal grants and cooperative agreements by creating and imposing data standards for the information that grants and cooperative agreement recipients must report to the federal government.
• Implement the recommendation by the Director of the Office of Management and Budget, under Section 5(b)(6) of the Federal Funding Accountability and Transparency Act of 2006 (31 U.S.C. 6101 note), which includes the development of a “comprehensive taxonomy of standard definitions for core data elements required for managing federal financial assistance awards”.
• Reduce burden and compliance costs of recipients of federal grants and cooperative agreements by enabling technology solutions, existing or yet to be developed, by both the public and private sectors, to better manage data recipients already provide to the federal government.
• Strengthen oversight and management of federal grants and cooperative agreements by agencies through consolidated collection and display of and access to open data that has been standardized and, where appropriate, transparency to the public.

The proposed legislation tasks the Director of the Office of Management and Budget (OMB) and a leading grant agency, that will be designated when the bill has passed, with implementation. The implementation goals are as follows:

• Within one year: Establish government-wide data standards for information related to federal awards reported by recipients of federal awards.
• Within two years: Issue guidance to grant-making agencies on how to leverage new technologies and implement the new data standards into existing reporting practices with minimum disruption.

The bill directs OMB and a leading grant agency to publish grant reporting information, once transformed into open data, on a government-wide website, such as the existing grants.gov portal. It provides exceptions and restrictions, including:

• No personally identifiable or otherwise sensitive information will be published.
• Information not subject to disclosure under the Freedom of Information Act (Title 5, Section 552) will not be publicly disclosed.
• The OMB Director to permit exceptions on a case-by-case basis.

The Act would require each grant-making agency to begin collecting grant reports using the new data standards within three years.

Benefits

The sponsors of the GREAT Act believe that the federal government, the funding agencies, recipients and the public will all benefit from the Act’s implementation in the following ways:

• Reduce recipient compliance costs by automating the compilation and submission of reports to federal agencies.
• Create a single consolidated data set of post-award reports for federal grant recipient information applicable to all grant-making agencies and programs.
• Foster increased federal and public oversight and transparency into the distribution of federal funding.
• Facilitate the adoption of modern technologies for grant reporting.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com