National Standards: Qualified Audit and Supporting Organizations

The Community Foundations National Standards Board Determinations Committee with guidance from the Council on Foundations legal department can grant a waiver to the National Standards requirement that a community foundation must submit an unqualified opinion from its auditors. The CFNSB may grant a waiver if a qualification due solely to the fact that the community foundation did not include a Type I or Type II supporting organization in its audits. To receive a waiver, the community foundation must provide additional documentation regarding the supporting organization’s assets and activities.

Generally Accepted Accounting Principles (GAAP) require the consolidation of controlled entities, including Type I and Type II supporting organizations, in the parent organization’s audit. The National Standards confirmation and reconfirmation processes do not include review of a community foundation’s supporting organizations. Therefore, denying accreditation because a community foundation opted not to include a supporting organization in its audited financial seems outside of the scope of the current National Standards review process. That said, not including a supporting organization’s assets in the parent organization’s audit, is not a best practice.

Types of Supporting Organizations

Supporting organizations (SOs) come in three basic types. Both Type I and Type II SOs are controlled by their supported organization (parent), although the control mechanism differs between the two. Type III supporting organizations, which are not controlled by their supported organization, are uncommon in the work of community foundations and are not required to be included in a community foundation’s audit. All three types must file Form 990 with the Internal Revenue Service and Type Is and Type IIs must do so separately from their supported organization despite their inclusion in the supported organization’s financial statements. The effect of this is that information about the operations of a supporting organization is readily available to any member of the public although the failure to include the supporting organization in the community foundation’s audit means that the financial data has not been independently verified unless the supporting organization has its own audit.

Community Foundations Board of Directors Fiduciary Duties for Supporting Organizations

Although supporting organizations are corporate entities with their own boards of directors, community foundation boards do have fiduciary obligations with respect to those that are Type I or Type II. These obligations arise from the fact that the community foundation boards control the board of the supporting organization, either because they appoint a majority of the supporting organization’s board (Type I) or because the boards are the same or substantially overlapping (the most common form of Type II). In exercising this power of appointment (and, if necessary, of removal), the community foundation’s board must act in the best interest of the community foundation to ensure that the supporting organization’s assets are invested prudently and that its grants and other expenditures further the purposes of the community foundation. The Council on Foundations legal department recommends that community foundation boards demonstrate their due diligence in this regard by receiving and reviewing an annual report of the activities of their supporting organizations. This should include a copy of the supporting organization’s Form 990. Much of this may happen organically if the supporting organization is included in the community foundation’s audit.

Additional Reporting for National Standards

The Community Foundation National Standards Board requires a community foundation with a qualified audit due to opting not to include their supporting organizations must provide additional information to be found in compliance with National Standards. When requesting a waiver, a community foundation must provide the following information.

  1. The community foundation must submit a detailed explanation of the community foundation’s reasons for not consolidating the supporting organization.
  2. The community foundation must submit information about whether the supporting organization is audited separately from the community foundation.
  3. The community foundation must provide a statement of the due diligence controls, if any, the community foundation has in place. For example, many community foundations manage their supporting organization’s investments and some require that all grants run through the community foundation.
  4. The community foundation Board of Directors must review, approve, and sign the waiver statement.

Here is the waiver statement for the Board of Directors to submit with the additional information you provide with your submission.

To the board of directors of the XYZ Community Foundation:

The Community Foundations National Standards Board has received your request for a waiver from the requirement that the community foundation have an annual audit conducted by an independent certified public accountant who has provided an unqualified opinion. Your audit has resulted in a qualified opinion because it did not include a community foundation’s supporting organization(s). Your supporting organization(s) is/are Type I or Type II supporting organization that must be included in your audit in accordance with generally accepted accounting principles (GAAP).

To facilitate review of your request, you represent that the following is the case:

  1. The failure to include the supporting organization is the only reason why your audit opinion is qualified.
  2. You are aware that failure to follow generally accepted accounting principles is not a best practice.
  3. You understand and agree that you have fiduciary responsibilities with respect to the operation of the supporting organization.
  4. To fulfill those responsibilities, if you do not do so already, you will require the supporting organization to provide you with an annual report that covers its activities, including its investments and its grants. This report will include a copy of its most recent Form 990 as filed with the Internal Revenue Service.
  5. You will review and discuss this report at a meeting of the board.

If you maintain additional controls over the activities of the supporting organization, please provide a list. Examples include pooling the supporting organization’s assets with those of the community foundation for investment purposes, maintaining the community foundation’s checkbook or otherwise requiring community foundation approval for expenditures, and more frequent or different reporting requirements.

Each member of the community foundation’s board must review and sign this document.You may add a signature page.

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