Subject: CCF #9320, Nov 23: "Progress Report on IFCSS Financial Inspection"

From: [email-masked]
Date: Mon, 22 Nov 1993 21:46:41 PST

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                       Tuesday, November 23, 1993

                            (Issue No. 9320)

       Special Edition:  Progress Report on IFCSS Financial Inspection

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Table of Contents                                        Author | # of Lines
============================================================================
                  Progress Report on IFCSS Financial Inspection

Summary:    Site Inspection of IFCSS HQ Financial Situations...........  155
Report I:   Opinion Report of Financial Statement Audit.................  41
Report II:  An Evaluation of the IFCSS' Financial/Budgetary System...... 135
Report III: Seven More Items for Treasurer's Duties.....................  23

Date:    November 14, 1993
Status:  For Immediate Release

To:      IFCSS Council
Cc:      IFCSS HQ; IFCSS Supervisory Committee

From:    IFCSS Council Financial Inspection Team
         Qi Bing, Liu Chen, Bai Yan and Zhou Hongguang (signed)

Prepared by: Zhou Hongguang

                 (From: Zhou Hongguang <[email-masked]> Nov-18-93)
                                       (Source: IFCSSVC <[email-masked]>)

===========***==========***==========**==========***==========***===========
Summary:    Site Inspection of IFCSS HQ Financial Situations...........  155
----------------------------------------------------------------------------

I. Objective

To report the progress on the implementation of the Council Resolution
on Financial Inspection of IFCSS HQ.

To give  a   partial but actual    picture of the IFCSS   HQ financial
operation.

II. Brief Process

2.1 Parties involved

The Council  Inspection Team(IT): Qi  Bing,  Liu Chen, Bai  Yan (Guest
Consultant to the Inspection Team) and  Zhou Hongguang; Council Member
Chen Dong as an observer.

The HQ: Lin Changsheng, Shi Heping, Jiang Zuihong, Geng Xiao.

2.2 Time and Place

November 6-7, 1993; The IFCSS HQ in Washington, DC.

2.3 November 6, Saturday, 1993

Because the HQ insisted   that Bai Yan,   the guest consultant  to the
Council Finance    Inspection Team,  would  not  allowed  to   see the
financial records of IFCSS, the IT, temporarily charged by Qi Bing for
Zhou Hongguang who was  unable to appeared at  the HQ, could not start
inspection work until intervention by some Council and SVC members. IT
was only able to asked general  questions about the financial reports,
CSPA information Center, Insurance Return and NED.

2.4 November 7, Sunday, 1993

At the  beginning, Zhou Hongguang on  behalf of IT announced two rules
to  govern   this  day's inspection    work  and  HQ  agreed.   One is
non-conclusive. In case there is a dispute, IT  will not argue with HQ
and will put it in record. Another is  that Minutes of Meeting will be
taken.  The  meeting between   the   IT and  HQ   started  in a   good
mood. However, Lin Changsheng again blocked the inspection work by not
allowing  Bai  Yan to review    some   financial records. After   Zhou
Hongguang read the Article 11 of the Financial Regulations to him, Lin
Changsheng insisted his position and still disagreed.  IT reviewed the
expenditure of CSPA Information Center and the revenue and expenditure
except miscellaneous of the 5th  Congress. However when IT was leaving
leaving, Jiang  Zuihong still hadn't  found invoices for Miscellaneous
Expenses for 5th Congress to explain about $4,800 difference.

III. Accessibility of Financial Statements

The financial statements  of IFCSS are NOT confidential documentation;
they are   public information under   Maryland General Corporation Law
under   which  IFCSS    is    registered  and operates.    Like  other
not-for-profit  organizations, IFCSS  is required by   law to made its
annual  financial statements  open    for public scrutiny.    IFCSS is
accountable   to   those   who    furnish  resources     and   receive
services. However, the names  of June 4th  victims  can be  treated as
exceptional.

IV. Impression

The  accounting and budgeting format  adopted by the IFCSS is commonly
called as line-item, which is  oriented toward  control of objects  of
expenditure.  This  format  does  not  effectively identify  what  has
actually   happened in the  services  furnished  by the  IFCSS to  the
Chinese Students  and Scholars   (CSS) community.  Additionally,  this
format  does not  provide  genuine information  on  how  the  budgeted
programs/functions are executed as planned.

The specific problems with the IFCSS "Financial Statements" are listed
in the Appendix.

V. Conclusion

The general purpose financial   statements referred to above  does NOT
present fairly, in most material  respects, the financial position  of
the   IFCSS,  as of   September  30,  1993, and  the   results of  its
operations, and the changes in financial position of the IFCSS' budget
for  the  entire fiscal  period of  1993-1994  in conformity  with the
Generally Accepted Accounting Principles (GAAP).

VI. Recommendation

6.1  The Council Finance Committee keeps   overseeing the HQ financial
operation and the Inspection Team continue to complete the inspection.

6.3 The IFCSS Financial Statements must be prepared in accordance with
the General Accepted Accounting Principles (GAAP) and the Treasurer at
HQ is required to perform her duty in conformity of GAAP.

6.2  As a legal requirement,  the IFCSS' budget must  be balanced on a
year-to- year basis. The Executive Office of the  IFCSS must see to it
that each expenditure must stay within the limit of budget.

VII. Appendix

1. The financial statements for the above mentioned two fiscal periods
of time  are  incomplete. Cash  Flow Statements  are  not  prepared to
reflect available working capitals.

2. No financial statements  are made for the restricted accounts--June
4th, CSPA, Insurance, and NED for Fiscal  Year 1992-93. Therefore, the
primary users of the financial statements, namely the Council, donors,
and investors, have no way of knowing the financial situation affected
by those accounts and the changes in the accounts themselves.

3. Common and necessary categories of  both Operating Statements (also
called Income Statement) and Balance Sheets are  omitted to the extent
of mis-  presenting the entire  financial situation of  the IFCSS. For
instance, Operating   Statements miss Beginning Fund  Balance; Balance
Sheets miss Noncurrent Assets.

4. In the accounts presented  in the financial statements, Ending Fund
Balances of the  previous  fiscal period  do not match  with Beginning
Fund Balances of the following time period. This  does not accord with
the time- period assumption of accounting.

5. The annual information return  with the IRS for "unrelated business
income"   on the  Form 990  is  inadequate  in  support   of the IFCSS
tax-exempt status. Since the IFCSS,  Foundation Account and the IFCSS,
Inc.   Account   are  different respectively    for not-for-profit and
for-profit   activities, "unrelated business   income" should be filed
under Form 990-T.

6.  Residual equity  transfers of such   program accounts as CSS,  5th
Congress, CSPA,   and Flood Relief  are not  reported in the financial
statements, thus distorting spendable financial resources.

7. Capital outlays   (assets purchased at   and  above $500)  are  not
reported  as  a  reduction of financial   resources  in the  Operating
Statements. Nor are the depreciation expenses reported.

8. The cash amount in the  financial statements are reported while the
bank reconciliation is  not conducted, thus  generating incorrect cash
balance.  A bank  reconciliation must  be made  immediately after each
bank statement is received.

9. Some  financial   data are  not  verifiable   due  to  a  lack   of
availability of evidence,  i.e., original invoices and  receipts. This
leads  to the difficulty   of ascertaining the  validity of accounting
transactions and balances reasonable doubt.

10. Miscellaneous items (revenues   and  expenses) are overstated   to
create    unnecessary       uncertainty         for          financial
forecasting.  Miscellaneous items can be  further grouped according to
ordinary categories.

Acknowledgments:

The Council Finance  Team would like to thank  the concern and support
from the general  public. We owe a  special thanks  Mr. Bai Yan,  from
Texas Tech University, for  his  dedication to financial  wellbeing of
IFCSS, his expertise, professionalism and generous volunteerism.

IT thanks Council Member Liu Chen  for his unhesitatedly acceptance of
invitation to join IT and hard yet tough work.

Als another  special thanks goes  to the anonymous IFCSS activists for
their continuous care and dedication for  IFCSS operation and valuable
consultation.

IT wants to thank  Geng Xiao for  his never  ceased assistance  to and
support for the Council Financial inspection. IT also wish thank Zhang
Qingsong for his kind assistance for IT.

IT thanks Council  Member Chen Dong for  his volunteer  observation of
the cooperation form HQ is acknowledged.

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Dear Colleagues and CSS:

The following is  Part I of  Inspection Report on the site-examination
of  the IFCSS HQ  financial operation,  prepared  by Mr. Yan Bai,  the
guest  consultant to   the   Council Financial  Inspection   Team. The
Progress Report from the Inspection Team is mainly based on it.

Thank you for your attention.

Zhou Hongguang
Coordinator
Council Financial Inspection

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Report I:   Opinion Report of Financial Statement Audit.................  41
----------------------------------------------------------------------------
From: Bai Yan <[email-masked]>

                             OPINION REPORT
                        OF FINANCIAL STATEMENT AUDIT
                                11/11/93

We  have audited the general purpose   financial statements for Fiscal
Year 1992-93 and Fiscal Year 1993-94 (1st Quarter) of the IFCSS, as of
September 30, 1993. These financial  statements are the responsibility
of the Executive Office of the IFCSS. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance  with generally accepted auditing
standards. Those standards require that  we plan and perform the audit
to obtain reasonable   assurance  about whether the  general   purpose
financial  statements are free   of  material misstatement. An   audit
includes examing, on an on-site  inspection basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes   assessing the  accounting principles   used and significant
estimates  made  by  the  Executive Office of  the  IFCSS,  as well as
evaluating   the   overall   general   purpose  financial   statements
presentation.  We believe that  our  audit provides a reasonable basis
for our opinion.

In our opinion, the  general purpose financial statements referred  to
above  does  not present   fairly,   in most material  respects,   the
financial  position of  the IFCSS, as  of September  30, 1993, and the
results of its  operations, and the changes  in financial position  of
the  IFCSS' budget  for the   entire fiscal  period  of  1993-1994  in
conformity with generally accepted accounting principles.

Our audit  was made for  the purpose  of  forming  an opinion  on  the
general purpose financial statements taken  as  a whole. Our  concrete
comments with regard to both combining and individual fund and account
and the financial statements  as a  whole  are appended as  evidential
matter and as recommendations for further operating improvement.

Financial Inspection Team,
Council of the IFCSS

                                Appendix
        (See "VII. Appendix" in the previous section - Editor)

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Report II:  An Evaluation of the IFCSS' Financial/Budgetary System...... 135
----------------------------------------------------------------------------
From: Bai Yan <[email-masked]>

                            AN EVALUATION OF
                THE IFCSS' FINANCIAL/BUDGETARY SYSTEM
                                11/13/93

As a result of field inspection and observation  at the Headquarter of
the IFCSS, this evaluation summarizes the  preliminary findings on the
structure and operations   of  the IFCSS' financial,  accounting,  and
budgetary activities.  Despite the  great  achievements  in  financial
management,    this  evaluation  focuses  on  the   shortcomings  that
potentially hold back the IFCSS' managerial progress toward efficiency
and effectiveness. To this end, the preliminary findings are stated in
the form of suggestions and recommendations.

This evaluation should not be considered as a  complete summary of the
IFCSS' entire fiscal  operation, though it   is intent on  providing a
realistic picture  as comprehensive as possible.   Indeed, there is no
way such a complete evaluation  could be attempted  at this time given
the short duration of on-site inspection and  the shortage of detailed
information.

A. Program Accounting and Budgeting

The accounting and  budgeting format adopted by  the IFCSS is commonly
called as line-item, which is  oriented toward  control of objects  of
expenditure.   Although, the line-item  format facilitates  control of
expenditures  according to kinds   of supplies and services purchased,
this  format does not  effectively identify what has actually happened
in  the services furnished  by the IFCSS to  the  Chinese Students and
Scholars (CSS) community.  Additionally,  this format does not provide
genuine   information  on  how the   budgeted   programs/functions are
executed as planned. In view of this, program accounting and budgeting
is recommended wherein expenditures are based primarily on programs of
work such as CSPA and 5th Congress.

Once programs are identified,  specific account should be  established
to account for its administration, including acquisitions, processing,
and personnel. Any residual fund balance,  whether surplus or deficit,
of   programs should then be tied   with  the IFCSS'  general fund for
operation.   Considering  the  nature  of limited  life-span  of  many
programs, the  IFCSS' revenues should be  allocated in accordance with
the objectives   of  various defined  programs rather   than be lumped
indiscriminately for general operation.

B. Balanced Budget

As a legal   requirement, the  IFCSS'   budget must be balanced  on  a
year-to-year basis. The Executive  Office of the  IFCSS must see to it
that each expenditure must stay within the limit  of budget. To better
supervise spending under  the ceiling, a statement of budget-to-actual
comparisons must be prepared by the Executive Office  of the IFCSS for
all accounts and funds that have annual appropriated budgets.

For  this purpose,  financial  statements must be  prepared for fiscal
year rather than calendar year. One confusing  event that obscures the
line  of  financial  obligation is    the   IFCSS' Annual   Conference
(Congress).  This means that the expenses  for  each Annual Conference
(Congress) must be realized  for  the year-period covered by  previous
budget.  Payments  for any   accrued liabilities of  Annual Conference
should be therefore considered as obligation of the last fiscal year.

C. Accessibility of Financial Statements

Whatever organization  has a responsibility  to others for its actions
and the  consequences  of these actions  is  accountable  to them. The
organization is accountable to those who furnish resources and receive
services. In  this sense, financial  statements must be made available
to users--donors, investors, the Council, and the members of the IFCSS
and CSS.  There is no withholding  of the  above said information that
can be justified from reasonable request.

Like   other  not-for-profit   organizations,   the annual   financial
statements are made   open for  public  scrutiny in  many forms.   One
feasible way for the IFCSS in terms of low cost  and convenience is to
store these documents  at FTP site. Please  be adviced  that financial
statements are not secret documentations; they are public information.

In the  same token, accountability encompasses accounting stewardship,
which refers     to the  sufficient  or full    disclosure of  revenue
resources, administration of resources  and the execution of plans for
conserving  and consuming them. The afore-said  users must have access
to knowing where money comes from and where it goes. The names of June
4th victims can be treated as exceptional.

D. Separation of Nonprofit Account and Profit Account

The IFCSS' general  fund is composed  of two distinct accounts--IFCSS,
Foundation for nonprofit purpose  and  IFCSS, Inc. for profit  seeking
purpose.  Right now these two accounts are combined and filed together
under one tax  form (Form 990). The  problem  of this practice  is the
failure of providing distinct information on each activity as separate
entity. Furthermore, it constitutes a potential challenge from IRS.

It is suggested  that these two accounts  be separated and recorded as
distinct operations for totally different purposes. This separation is
also helpful  to   the IFCSS'  identity  and  functions--Democracy and
Services.    Synthesizing  the  foregoing, a   combined  comprehensive
financial  statements are  desirable at  the year-end,  which not only
delineates separate  accounts but provides  a whole  picture of entire
operation of the IFCSS.

E. Establishment of Vouchers System

Adherence to  certain    procedural   details  is  a    guarantee   of
accountability in substance.  A voucher is  nothing  but a documentary
record of  a  formal financial transaction.  To   ensure a responsible
accounting system, receipt voucher  system and payment voucher  system
are recommended.

Receipt Voucher:  Receipt voucher should be  prenumbered consecutively
and written  for every incoming item  of  receipt. It  is advisable to
record on the  receipt voucher not  only the name  of the person whose
account should be credited but also the name of  the person making the
payment. The receipt should bear the signature of the person receiving
the money. Checks should be endorsed upon receipt.

Payment Voucher:  Accounting  for   disbursements starts   with proper
authorization  for all  disbursements.   In  the case   of payments on
budget appropriation, the authorization is through action taken by the
Council of the IFCSS.   Authorization procedures for purchases  should
be set up and placed in the control  of designated persons. A purchase
order form is an effective means of controlling purchases. The invoice
for payment  must be certified.  Paid invoices  and statements must be
date  stamped,   preferably by   a  perforating stamp,    to  minimize
possibilities  of  duplicate payments.  Payment  should  be made  only
against original invoices or statements.

F. Executive Oversight

The  executive  system    established     to  monitor    and    review
financial/accounting activities has  been ineffective  and spotty. The
oversight  process lacks   standardization' and  relies  primarily  on
self-reporting by the  treasurer, as opposed  to taking initiatives to
make inquiries.  It is strongly  suggested that the President and Vice
President      of    the  IFCSS     should be    familiar    with  the
financial/accounting procedures (not  necessarily all the details) and
see to it that the IFCSS' financial situation is  healthy at any point
of time.

To foster  an effective  communication  between the treasurer  and the
President and Vice President, the treasurer  should be obliged to keep
them  informed   with   the detailed  information   plus  professional
judgments.

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Report III: Seven More Items for Treasurer's Duties.....................  23
----------------------------------------------------------------------------
From: Bai Yan <[email-masked]>

                                SEVEN MORE ITEMS
                             FOR TREASURER'S DUTIES

1. The treasurer must see that all financial events are recorded in an
appropriate manner.

2. The  treasurer must ensure that  accurate and  meaningful financial
statements are prepared reflecting clearly  what has happened during a
given period.

3. The treasurer is  responsible  for safeguarding  the assets  of the
IFCSS through appropriate controls.

4. The    treasurer is  responsible for  the   prudent  management  of
financial assets. This means, among other  things, that excess cash is
judiciously invested to ensure optimal financial return.

5. The treasurer must be able to  anticipate financial problems of the
IFCSS.  A major tool in this regard is a carefully prepared budget.

6.  The treasurer must ensure  that an independent  audit is conducted
and that full consideration is given to the auditor's recommendations.

7. The treasurer must do  all the above  in accordance with the spirit
and the letter of the law of the land.

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+ Executive Editor: Shusheng Luan           Executive Moderator: Tong Shen +

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