************************************************************** IFCSS Headquarters News Release No. 5107 February 16, 1994 ************************************************************** Independent Federation of Chinese Students and Scholars (IFCSS) 733 15th Street, N.W., Suite 440, Washington, D.C.20005 Tel. (202)347-0017 Fax: (202)347-0018 Email: ifcss@wam.umd.edu IFCSS Working Meeting Special Report (2): CPA Jeff Lin on IFCSS Financial Situation, Part I ================================================= At the recent IFCSS working meeting, Mr. Jeff Lin, the CPA who compiled IFCSS financial statements, gave a report on IFCSS financial situation. The following is the complete transcription of the question-and-answer session conducted by Mr. Lin. Q: I noticed in the financial statement that IFCSS paid some tax penalty. I want to know if that could have been avoided. If yes, who should be responsible for it? A: If a company has a full-time bookkeeper, he/she should know whether the company makes profits or suffers losses. However, your organization is a non-profit organization, probably nobody anticipated the sudden rise in the insurance-related income, nor was anybody aware that this income was not tax-deductible, in addition, you don't have a full-time bookkeeper. As far as I know, your treasurer, Miss Jiang, is well-trained, but she may not have this kind of experience. If you want to point finger at someone, I'd say it's very hard to pinpoint at anyone. But if you had a full-time bookkeeper, this could have been his/her responsibility. Q: What is the "bad debt" in your report? A: Probably somebody made the check to you, but the check couldn't be cashed. I don't know if anyone has tried to make the person write a good check or the person simply refused to do it. Anyway, the check got bounced back and became bad debt. Your accounts are managed on an accrual basis. Had it been managed on a cash basis, there would not have been such a problem, for in that case the bad check would not have been counted as income. Q: I have two questions. What are the expenditures from the June 4th Foundation fund? The second question is: what is the difference between working committees and projects? A: I cannot talk about the technical side of your question. Probably your executive officers are able to tell you the difference. As far as the June 4th funds, I know you have two different categories of expenditures: one is relief fund for June 4th victims and their families, the other is June 4th meeting. (Lin Changsheng: the latter was spent on memorial activities, such as candle-light vigil.) Q: If somebody wants to express professional opinion on IFCSS accounts, does he or she have to possess certain qualifications? A: He/she must have the license and pass the CPA exam. He/she should also have experience. If you want to engage an auditor, you have to make sure that the auditor has experience in your particular field. You have to specify in your engagement letter your requirements. He'll have to do a very detailed auditing. Then all kinds confirmation follow, such as bank confirmation, receivables confirmation, and internal control. Only after that can he/she express an opinion that whether your reports reflect the overall business of your company. For the present assignment, I am not engaged in this manner, therefore, I am not going to express opinions as an auditor. Q: I mean if someone is not independent, like one of us, can do that? A: Definitely not. Say if your brother is a share-holder of the company, you can't do it. Q: (inaudible) A: That's why you should ask an outsider to do it. You can look at the statements I prepared, one is the balance sheet, one is about profits and losses, one is the cash flow, these three are the most basic. Strictly speaking, there should be a sum balance. These four statements, plus footnotes, you cannot do without footnotes, form the complete financial statements. Q: Just now you suggested that IFCSS may use some of its fund to buy mutual fund. Are non-profit organizations allowed to do this? A: This is called "investment income." Non-profit organizations can engage in investment activities. But if all your income were investment income, you would become a holding company. That would be another issue. Q: You mentioned that the insurance commission is making too large a proportion of IFCSS income, which may jeopardize IFCSS's non- profit status. Could the insurance company pay its commission in two different ways: one part is commission, the other part is donation? A: It's a good suggestion. It has been explored in the past. If the insurance company could send you a letter saying that $20,000 is commission and $100,000 is donation, it would be O.K., but obviously the insurance company won't do it. Q: You mentioned that you have worked for many different organizations. I'd like to know how these organizations manage to inspect their accounts apart from inviting CPAs. A: Only very big organizations do internal auditing. Its focus is to oversee if financial record agree with the daily expenditures. If you don't have a full-time bookkeeper, it'll be difficult. Since your organization has a large amount of financial activities, I suggest that you hire a full-time bookkeeper to do nothing but bookkeeping. This bookkeeper should not be allowed to touch fund. The most often stressed principle in accounting is separation of duties. You have to separate the person in charge of money from the person in charge of accounts. It's very hard for the same person to manage both. Q: There is an opinion that since this is a non-profit organization, its books should be open to everybody. I want to know if this is realistic. If I am just somebody in the street, can I ask for a copy of the organization's financial records? A: For a non-profit organization, its books are open to its members and donors. It has no obligation to provide outsiders with the information. But this does not mean that outsiders cannot learn about it, they can learn from the government, which has all your records. But if an outsider asks a copy from you, you are not under any obligation to provide what he asks. Q: But suppose I am a member, I tell the organization's office that I want to inspect the books, can I do it? A: Even with members, the executive officers have their everyday duties and it is impossible for them to entertain everybody. If you want to come or want a copy, it has to be on your own expense. It's not realistic for any member to raise such demands. Q: If the organization authorizes its own people to conduct an internal control, are these people required to possess professional certificates? A: Not necessarily. But they must have professional skills. In addition, these people should come from a branch other than the administration. They should report directly to the Board or the Supervisory Committee. The inspector should be a full-time employee independent from daily operations. Q: As Board members, what kind of responsibilities and rights do we have in regard to the organization's finance? A: You must make sure at formal meetings how often the executive branch has to submit a report to you, for instance, once a year or twice a year. This is your responsibility. Did I answer your question? Q: Would the Board member have legal liabilities if the organization runs into debt? A: No. You would not be legally liable. You are a corporation, after all. The corporation itself is a legal person, so if the corporation goes bankruptcy, it won't have anything to do with the individual. You as an individual don't have to be legally responsible. Q: You said the statements ended June 30, 1993. When did they begin? A: The beginning date is July 1, 1992. A cycle consists of 12 months. The ones starting from July 1, 1993 cover the first part of the current year, the second part will be done later on. Q: Have you ever seen this statement prepared by the former IFCSS treasurer Miss Jiang? A: No. I have not. The title of this document is "Financial Report," not "financial statement." With financial reports, you can report by categories. If this were a financial statement, it would fall short of the standards. But since it is a report with the purpose of informing you how much money you have in each account, if there is anything special. The reports covers all the major points it is supposed to. From the point of treasurer or accounting department, this report can be said as fairly complete. Q: What do you mean by "major points"? A: If I am not mistaken, it is fairly complete. For instance, the revenue covers insurance, donation, donation from the public, CSPA program, service, miscellaneous revenue, interest income. The total revenue is $472,000. For expenditures, it lists HQ operation, HQ staff housing subsidies, office rent, phone bills, office supply, etc., etc.. The total HQ expenses is $197,000, from which are subtracted the 5th Congress, Council, working committee, and other related expenses, then the total is $317,000. Plus CSPA and the 5th Congress, the net balance is $74,000. Basically, the treasurer reported everything necessary. Although it is not as complete as the financial statements prepared by my firm, but doing it our way requires fairly sophisticated computer program. It is impossible to do it by hand. It took us several whole days even with the computer. Q: I'd like to know when we started to compile financial statements on a cash basis. In your professional opinion, what kind of reports should be view as satisfactory when the treasurer reports to the Board? If the Board authorizes somebody to do an internal control, what kind of reports by him/her should be viewed as satisfactory by the Board? A: From the information I have, your organization adopted accrual basis from the very beginning. But the funny thing is that when you did taxes, you used cash basis. That gives you trouble. If possible, when I help you file tax returns, I'll apply to change it to the accrual basis, too. They should be consistent. As for the bookkeeper's report, if he/she is a full-time bookkeeper, he/she should prepare a financial statement once a month, at least once three months, and report to the executive, who then submits it to the Board or the Supervisory Committee. However, if you don't have such explicit requirements and this person has too many other responsibilities, you would have to consider if this is possible. If not, you'll have to hire more people. As far as I know, your office is terribly busy. As for internal control, if you do not have segregation of duty, internal control is almost impossible. Suppose the same person approves the invoice and writes the check, you can't expect any internal control. I'll have to do an analysis for you. To my understanding, your problem lies with shortage of people. Because of the shortage, your right hand mixes with your left hand while the two hands are supposed to have separate duties. This is why you should consider hiring a full-time bookkeeper. If possible, there should be another person whose duty is to receive money and checks. The person who signs the check should not be the person who approves the invoice. Obviously, this is impossible with the two or three people you have. (To be continued)