Managing Endowments Effectively

MATTHEW SOCHA: Welcome and thanks for listening to Cherry Bekaert's Not-for-Profit podcast series.

In each episode, we hear from the best in the business on the latest challenges, trends, and opportunities affecting Not-for-Profit organizations and educational institutions.

I'm Matthew Socha, leader of Cherry Bekaert's Not-for-Profit industry practice. I hope you enjoy and thanks for listening.

JASON STURDEVANT: Hello again, everyone. Good to be back for another episode.

Today we're going to be talking about endowments, especially in the context of educational organizations like private universities or K-12 schools.

We are going to cover a lot of information that can benefit any organization looking for best practices regarding their endowments. We like case studies in these kinds of conversations that show real-world impact, so we're going to look at a few of those today as well.

I'm JASON STURDEVANT, a manager in Cherry Bekaert's CFO Advisory group working primarily with Not-for-Profit and higher education institutions.

I've got eight years of background working first as an auditor and now as a consultant with a wide array of Not-for-Profit organizations, especially on projects regarding endowments.

Joining me today is Blakely Richard. Blakely, do you want to introduce yourself?

BLAKELY RICHARD: Hi Jason, my name is Blakely and I am also a prior auditor that now works alongside Jason within our GPS Advisory group at Cherry Bekaert.

My main focus is on Not-for-Profits, including K-12s, private colleges and universities, religious organizations, and various other entity types.

JASON STURDEVANT: Blakely, thanks for joining me today. You're one of the first people I think of in our firm when a school or another Not-for-Profit struggles to clean up their endowments.

I'm glad you're with me to walk through some of these case studies. I know you and I have worked together on multiple schools where the endowment is a real pain point.

One of the first I thought of for this case study was a private university that was incredibly short-staffed but needed the Cherry Bekaert team's help to wrap up their year-end. Could you tell us a little bit more about this case?

BLAKELY RICHARD: We worked on a private university together where the CFO had no support within the finance department to get the year closed out, work on the audit, and keep the new fiscal year rolling.

The endowments ended up being a mess. They changed their fund custodian with their investment accounts during the fiscal year, which led to investment activity getting messy and endowments not being rolled forward.

Until the investment side of the activity could really get fixed, there was no way their endowments could be rolled forward in the general ledger.

JASON STURDEVANT: This was a university dealing with staff turnover right around year-end, which is one of the most challenging times to deal with these issues. It's also when the current staff's limitations become the most apparent.

Endowments aren't something most people can jump into without training. Were this university's endowments and their investment records all wrong?

BLAKELY RICHARD: In this case, the university actually has the policies, processes, and procedures in place to ensure that investments are up to date within the general ledger.

Without a capable person available to keep up with that tracking, things were easily getting out of control and were not recorded. It was not that things were being posted wrong, but rather there was no capacity to keep things going accurately.

JASON STURDEVANT: So it's not a technical accounting problem. It's a problem with having the right people in place who have the skills, knowledge, and experience to stay on top of the records. What did the university end up trying to do?

BLAKELY RICHARD: While the university was searching to fill the controller position, they needed immediate help. Our Not-for-Profit Advisory group at Cherry Bekaert was brought on to assist with their endowments and other areas.

We picked up the tools they already had in place, updated the investment roll forward for the changing custodian, proposed an entry to adjust their general ledger, and finalized their endowment tracking for their financial statements.

JASON STURDEVANT: During the process, we were also able to identify and correct a few errors in tracking.

BLAKELY RICHARD: Exactly.

JASON STURDEVANT: It's extremely helpful for Not-for-Profits and institutions of higher education to have advisors they can trust to fill in gaps. We were able to provide a bridge for what was hopefully a one-time gap until they could fill the team.

I know you and I had another instance where the problem a private K-12 school had with their endowments wasn't due to a lack of personnel, but transitions in the controller position. Tell us more about this private school.

BLAKELY RICHARD: This client’s controller left the school while involved in many areas with no succession plan in place. An interim controller was brought in to keep the department moving, but the endowment accounting was neglected.

When the new full-time controller started, she noticed something seemed off. The audit team recommended using our advisory team to investigate the differences between the trial balance and the investment statements.

We discovered decisions made with no documentation, a large portion of activity missing, and errors in activity posted to the accounts.

JASON STURDEVANT: Records with a bunch of errors can sometimes be worse than not having updated records at all. Tell us more about the problems you found in the records.

BLAKELY RICHARD: This was quite the puzzle to figure out what was missing, what was wrong, and what was correct. Activity was posted to the wrong restriction classes and transfers were out of balance.

There were no reconciliations between the general ledger and Raiser's Edge, which is their external fund accounting system that houses their investment activity. There were also unreconciled gifts intended for their endowment.

JASON STURDEVANT: That is a lot, and it is why they called our team at Cherry Bekaert.

BLAKELY RICHARD: Exactly. Once we mapped out these differences on the trial balance and investment statements, we were able to propose adjustments for the school to post.

As a result, the new controller was able to post these entries, close the books, and provide a final trial balance and investment roll forward to the audit team.

JASON STURDEVANT: Endowment accounting demands experience and capable problem solving. This K-12 school benefited from having Cherry Bekaert's Not-for-Profit team available to assist them through this process and make the year-end close flow smoothly.

BLAKELY RICHARD: I truly think they benefited from our help.

JASON STURDEVANT: The first two cases remind me of a third one where a private college had both a shortage of personnel and turnover in key finance positions. This college had been struggling to stay on top of their endowment for years.

Tell me a bit more about the situation before our team was called in.

BLAKELY RICHARD: This particular college lacked efficient and effective accounting over their endowments for years. With turnover in key roles and a lack of succession plans, the accounting became messy very quickly.

For fiscal year 2023, our accounting advisory team was brought in to help clean up the endowment accounting and get the audit to the finish line.

The fiscal year 2023 audit was finished nine months into fiscal year 2024, which meant 2024 was being neglected. They were in the same situation they were in for 2023.

Because the focus was on fiscal year 2023, the investment activity for 2024 was not posted. Endowments had not been touched, and unitization of earnings had not been taken to the individual endowment funds.

We were brought back for fiscal year 2024 to assist with that cleanup and help the new CFO and controller brought in during the year.

JASON STURDEVANT: Problems like that stack up, requiring more effort and detective work. Say more about what our team was able to do once we started wrapping our heads around the scale of this problem.

BLAKELY RICHARD: We worked closely with the finance department and the development team to understand what happened and what needed to happen to get everything completed and up to date.

First, our team created a process and a calculation to unitize endowment earnings out to those different funds.

We completed the unitization for the full 12 months of fiscal year 2024. This included rolling the investments forward, which was not complete.

We assisted with getting all investment accounts rolled forward, performed the unitization calculations, and proposed entries to get that activity posted. Then we completed the endowment roll forward.

JASON STURDEVANT: Throughout this process, we worked with both finance and development teams not only to fix what was happening in 2023 and 2024 but to come up with plans to address things proactively.

BLAKELY RICHARD: Correct. As we finished fiscal year 2023 and rolled into 2024, we provided recommendations to steer away from these issues in fiscal year 2025 and 2026.

Now in fiscal year 2025, we are continuing our work with the college to bridge the gap between finance and development. We are assisting with further cleanup and building out processes and procedures for investments and endowments they can use going forward.

JASON STURDEVANT: In these cases, there were critical failure points where a lack of documentation meant nobody could step in quickly to get things back on track.

My main takeaway is that endowment accounting is hard and requires careful thought and planning to ensure the best resources donors have made available are used effectively.

Blakely, you have a lot of experience working with endowments. Any closing thoughts on how Not-for-Profits can navigate these challenges?

BLAKELY RICHARD: Endowment accounting can definitely get out of hand if you don't have the tools in place. My biggest recommendation for all Not-for-Profits is to have a succession plan in place for turnover in key personnel.

Have strong processes and procedures to complete complex accounting areas and perform frequent reconciliations and roll forward processes during the year.

If you need guidance or assistance on implementing or completing your endowment accounting, please reach out to our team and we will gladly help you.

JASON STURDEVANT: Thanks, Blakely. Those are excellent recommendations based on your experience. Thank you for joining us today and for your hard work with these schools.

BLAKELY RICHARD: Thank you, Jason. It has been my pleasure.

JASON STURDEVANT: For those Not-for-Profits, institutions of higher education, and private K-12 schools who want to see how our Not-for-Profit Accounting Advisory team can help you, head over to cbh.com.

Search "NFP Accounting-as-a-Service" or "NFP Advisory" in the search bar or reach out to our team through the links in the episode notes. Thanks everyone for your time.

MATTHEW SOCHA: This is Matthew again. I hope you enjoyed this episode and look forward to our next one. Don't forget to subscribe.