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									                CHALLENGE INDUSTRIES, INC.




                                 Accounting & Financial
                            Policies and Procedures Manual

                                  Effective September 1, 2006
                                                   (revised May 28, 2009)




Effective Date(s)
The effective date of all policies described in this manual is September 1, 2006. If a policy is added or modified subsequent to this date, the
effective date of the new/revised policy will be indicated parenthetically immediately following the policy heading.
This Page Deliberately Left Blank




               2
                                    TABLE OF CONTENTS
                                                                    Page Number

Introduction                                                              9

                                         GENERAL POLICIES

Accounting Department Overview                                           10
     Organization                                                        10
     Responsibilities of the Accounting Department                       10
     Responsibilities of the Finance Committee Responsibilities          11

Business Conduct                                                         12
      Practice of Ethical Behavior                                       12
      Compliance with Laws, Regulations and Organization Policies        12

Conflicts of Interest                                                    13
       Introduction                                                      13
       What Constitutes a Conflict of Interest                           13
       Disclosure Requirements                                           14
       Resolution of Conflicts of Interest                               14
       Violations of This Policy                                         15
       Disciplinary Action                                               15

Policy on Suspected Misconduct                                           16
       Introduction                                                      16
       Definitions                                                       16
       Reporting Responsibilities                                        17
       Whistleblower Protection                                          17
       Investigative Responsibilities                                    18
       Protection of Records – Federal Matters                           18
       Disciplinary Action                                               18
       Confidentiality                                                   19
       Disclosure to Outside Parties                                     19

Security                                                                 20
       Accounting Department                                             20
       Access to Electronically Stored Accounting Data                   20
       Storage of Back-up Files                                          20
       Storage of Sensitive Data                                         20
       Destruction of Consumer Information                          21
       General Office Security                                           21

Technology and Electronic Communications                                 22
      Purpose and Scope                                                  22
      Acceptable Use of Organization Property                            22
      Password Security                                                  22
      Confidentiality                                                    23
      Disposal of Computer Equipment                                     23
      Copyrighted Information                                            23

                                                 3
       Installation of Software                                        23
       Other Prohibited Uses                                           23
       Disciplinary Action for Violations                              24
       Reporting of Suspected Violations                               24

General Ledger and Chart of Accounts                                   25
      Chart of Accounts Overview                                       25
      Distribution of Chart of Accounts                                25
      Control of Chart of Accounts                                     25
      Account Definitions                                              26
      Changes to the Chart of Accounts                                 28
      Fiscal Year of Organization                                      28
      Accounting Estimates                                             28
      Journal Entries                                                  29


                 POLICIES ASSOCIATED WITH REVENUES AND CASH RECEIPTS

Revenue                                                                30
     Revenue Recognition Policies                                      30
     Revenue From Multiple Deliverable Arrangements                    30
     Refunds of Revenue Received                                       30

Contributions Received                                                 30
       Definitions                                                     30
       Distinguishing Contributions from Exchange Transactions         31
       Accounting for Contributions                                    32
       Receipts and Disclosures                                        32
       Gift Acceptance Policy                                          33

Billing/Invoicing Policies                                             34
        Overview                                                       34
        Responsibilities for Billing and Collection                    35
        Customer Invoicing (Non-Membership)                            35
        Accounts Receivable Entry Policies                             35
        Classification of Income and Net Assets                        35

Cash Receipts                                                          37
      Overview                                                         37
      Processing of Checks and Cash Received in the Mail               37
      Endorsement of Checks                                            37
      Timeliness of Bank Deposits                                      37
      Reconciliation of Deposits                                       37
      Processing of Credit Cards                                       38

Accounts Receivable Management                                         39
     Monitoring and Reconciliations                                    39
     Collections                                                       39
     Credits and Other Adjustments to Accounts Receivable              39
     Accounts Receivable Write-Off Authorization Procedures            39
     Reserve for Uncollectible Accounts                                40


                                                      4
            POLICIES ASSOCIATED WITH EXPENDITURES AND DISBURSEMENTS

Purchasing Policies and Procedures                                                      41
      Overview                                                                          41
      Responsibility for Purchasing                                                     41
      Non-Discrimination Policy                                                         42
      Use of Purchase Orders                                                            42
      Authorizations and Purchasing Limits                                              42
      Required Solicitation of Quotations from Vendors                                  43
      Extension of Due Dates and Receipt of Late Proposals                              44
      Evaluation of Alternative Vendors                                                 44
      Affirmative Consideration of Minority, Small Business & Women-Owned Business 44
      Special Purchasing Conditions                                                     45
      Right to Audit Clause                                                             45
      Vendor Files and Required Documentation                                           46
      Ethical Conduct in Purchasing                                                     46
      Conflicts of Interest Prohibited                                                  46
      Receipt and Acceptance of Goods                                                   47

Political Intervention                                                                  48
       Prohibited Expenditures                                                          48
       Endorsements of Candidates                                                       48
       Prohibited Use of Organization Assets and Resources                              48

Lobbying                                                                                49
      Introduction                                                                      49
      Definition of Lobbying Activities                                                 49
      Segregation of Lobbying Expenditures                                              49
      Lobbying Election                                                                 50

Accounts Payable Management                                                             51
     Overview                                                                           51
     Recording of Accounts Payable                                                      51
     Accounts Payable Cut-off                                                           51
     Establishment of Control Devices                                                   52
     Processing of Invoices                                                             52
     Payment Discounts                                                                  52
     Employee Expense Reports                                                           53
     Reconciliation of A/P Subsidiary Ledger to General Ledger                          53
     Management of Accounts Payable Vendor Master File                                  53

Travel and Business Entertainment                                                       54
       Travel Advances                                                                  54
       Employee and Director Business Travel                                            54
       Reasonableness of Travel Costs                                                   55
       Special Rules Pertaining to Air Travel                                           55
       Spouse/Partner Travel                                                            56
       Policy for the Review of Expense Reimbursements                                  56

Cash Disbursement (Check-Writing) Policies                                              57
      Check Preparation                                                                 57
      Check Signing                                                                     57
                                                5
       Mailing of Checks                                                        57
       Voided Checks and Stop Payments                                          58
       Record-Keeping Associated with Independent Contractors                   58

Credit Cards                                                                    59
       Issuance of Corporate Credit Cards                                       59
       Cardholder Responsibilities                                              59
       Revocation of Corporate Credit Cards                                     60
       Policy for the Review of Corporate Credit Card Statements                60


Payroll and Related Policies                                                    61
       Classification of Workers as Independent Contractors or Employees        61
       Payroll Administration                                                   62
       Changes in Payroll Data                                                  63
       Payroll Taxes                                                            64
       Preparation of Timesheets for Non-Exempt Employees                       64
       Processing of Timesheets for Non-Exempt Employees                        64
       Preparation of Timecards for Hourly Employees                            65
       Processing of Timecards for Hourly Employees                             65
       Preparation of Timecards and Production Sheets for Consumers             65
       Processing of Timecards and Production Sheets for Consumers              66
       Tampering With, Altering, or Falsifying Time Records                     66
       Review of Payroll                                                        66
       Distribution of Payroll                                                  66


                    POLICIES PERTAINING TO SPECIFIC ASSET ACCOUNTS

Cash and Cash Management                                                        68
      Cash Accounts                                                             68
      Authorized Signers                                                        69
      Bank Reconciliations                                                      69
      Cash Flow Management                                                      69
      Stale Checks                                                              69
      Petty Cash                                                                70
      Wire Transfers                                                            70

Inventory                                                                       71
       Description of Inventory                                                 71
       Accounting for Inventory                                                 71
       Physical Counts                                                          71
       Contributed Inventory                                                    71

Prepaid Expenses                                                                72
      Accounting Treatment                                                 72
      Procedures                                                                72

Investment Policies                                                             73
      Introduction                                                              73
      Delegation of Authority                                                   73
      Investment Goals                                                          73
      Investment Guidelines                                                     74
                                                 6
       Interfund Borrowing                                                    75
       Social Responsibility                                                  75
       Accounting Treatment                                              75
       Procedures and Reporting                                               76
       Accounting for Investments in Other Entities                           76

Property and Equipment                                                        78
      Capitalization Policy                                                   78
      Contributed Assets                                                      78
      Establishment and Maintenance of a Fixed Asset Listing                  78
      Depreciation and Useful Lives                                           79
      Changes in Estimated Useful Lives                                       79
      Repairs of Fixed Assets                                                 80
      Dispositions of Fixed Assets                                            80
      Write-Offs of Fixed Assets                                              80
      Impairment Losses                                                       80

Leases                                                                        82
      Classification of Leases                                                82
      Accounting for Leases                                                   82
      Scheduled Increases in Rent Payments                                    83
      Rent Abatements and Other Lease Incentives                              83
      Changes in Lease Terms                                                  83

Software Acquisition and Development Costs                                    84
      Costs to be Capitalized                                                 84
      Costs to be Expensed as Incurred                                        84


          POLICIES PERTAINING TO SPECIFIC LIABILITY AND NET ASSET ACCOUNTS

Accrued Liabilities                                                           85
      Identification of Liabilities                                           85

Notes Payable                                                                 86
      Record-Keeping                                                          86
      Accounting and Classification                                      86
      Non-Interest-Bearing Notes Payable                                      86

Net Assets                                                                    88
      Classification of Net Assets                                            88
      Reclassifications from Restricted to Unrestricted Net Assets            88
      Reclassifications from Unrestricted to Restricted Net Assets            88
      Disclosures                                                             88


                  POLICIES ASSOCIATED WITH FINANCIAL AND TAX REPORTING

Financial Statements                                                          90
      Standard Financial Statements of the Organization                       90
      Frequency of Preparation                                                90
      Review and Distribution                                                 91
      Annual Financial Statements                                             91
                                                7
Government Returns                                                92
      Overview                                                    92
      Filing of Returns                                           92
      Public Access to Information Returns                        93

Unrelated Business Activities                                     95
      Identification and Classification                           95
      Allocation of Expenses to Unrelated Activities              95
      Reporting                                                   95


                            FINANCIAL MANAGEMENT POLICIES
Budgeting                                                         96
     Overview                                                     96
     Preparation and Adoption                                     96
     Monitoring Performance                                       96
     Budget Modifications                                         97

Annual Audit                                                      98
      Role of the Independent Auditor                             98
      How Often to Review the Selection of the Auditor            98
      Selecting an Auditor                                        98
      Preparation for the Annual Audit                            99
      Concluding the Audit                                        100

Insurance                                                         101
      Overview                                                    101
      Coverage Guidelines                                         101
      Annual Review                                               102

Record Retention                                                  103
      Policy                                                      103

Functional Expense Allocations                                    105
      Overview                                                    105
      Direct Charging of Costs                                    105
      Allocation of Overhead Costs                                105
      Accounting for Joint Activities That Include Fund-Raising   105




                                                  8
INTRODUCTION
The following accounting manual is intended to provide an overview of the accounting policies and
procedures applicable to the Challenge Industries, Inc., which shall be referred to as “Challenge
Industries, Inc.” or “the Organization” throughout this manual.

Challenge Industries, Inc. is incorporated in the state of New York. Challenge Industries, Inc. is
exempt from federal income taxes under IRC Section 501(c)(3) as a nonprofit corporation. Challenge
Industries, Inc.’s tax-exempt mission is to support people with disabilities and other barriers to
employment in developing and matching their skills, interests, and talents to the needs of today’s
workplace.

This manual shall document the financial operations of the Organization. Its primary purpose is to
formalize accounting policies and selected procedures for the accounting staff and to document internal
controls.

The contents of this manual were approved as official policy of the Organization by the Executive
Director and Director of Finance. All Challenge Industries, Inc. staff are bound by the policies herein,
and any deviation from established policy is prohibited.




                                                    9
                                      GENERAL POLICIES


ACCOUNTING DEPARTMENT OVERVIEW
Organization

The accounting department consists of four staff who manage and process financial information for
Challenge Industries, Inc. The positions comprising the accounting department of Challenge Industries,
Inc. are as follows:

               Director of Finance
               Senior Staff Accountant
               Accounts Payable Clerk
               Data Entry Clerk

Other officers and employees of Challenge Industries, Inc. who have financial responsibilities are as
follows:
               Executive Director
               Director of Operations
               Director of Services
               Director of Quality Assurance, Program Development, and Compliance
               Treasurer of the Board of Directors
               Finance Committee of the Board of Directors
               Executive Committee of the Board of Directors
               Board of Directors

Responsibilities of the Accounting Department

The primary responsibilities of the Accounting Department consist of:

               General Ledger
               Budgeting
               Cash and Investment Management
               Asset Management
               Grants and Contracts Administration
               Purchasing
               Accounts Receivable and Billing
               Cash Receipts
               Accounts Payable
               Cash Disbursements
               Payroll and Benefits
               Financial Statement Processing
               External Reporting of Financial Information
               Bank Reconciliation
               Reconciliation of Asset and Liability Accounts of the General Ledger
               Reconciliation of Sub-Ledgers
               Compliance with Government Reporting Requirements
               Annual Audit
               Leases
               Insurance

                                                  10
Responsibilities of the Finance Committee of the Board of Directors

The primary responsibilities of the Finance Committee consist of:

              Review of organization financial and business policies and plans
              Recommend to the Board of Directors actions related to financial and business policies
                      and plans
              Review of fiscal operations relative to financial and business policies and plans
              Review all Conflict of Interest disclosure forms completed by directors and the Executive
                      Director, and determine appropriate resolution in accordance with the “Resolution
                      of Conflicts of Interest” section of this policy.
              Investigate suspected misconduct involving Executive Director and executive level
                      positions, as well as board members and officers. in fulfilling its investigative
                      responsibilities, the Finance Committee shall have the authority to seek the
                      advice and/or contract for the services of outside firms, including but not limited
                      to law firms, CPA firms, forensic accountants and investigators, etc.
              Review the management and investment of all of Challenge Industries, Inc. funds in
                      accordance with the “Investment Policies” section of this policy.




                                                  11
BUSINESS CONDUCT

Practice of Ethical Behavior

Unethical actions, or the appearance of unethical actions, are unacceptable under any conditions. The
policies and reputation of Challenge Industries, Inc. depend to a very large extent on the following
considerations.

Each employee must apply her/his own sense of personal ethics, which should extend beyond
compliance with applicable laws and regulations in business situations, to govern behavior where no
existing regulation provides a guideline. It is each employee's responsibility to apply common sense in
business decisions where specific rules do not provide all the answers.

In determining compliance with this standard in specific situations, employees should ask themselves
the following questions:

1.     Is my action legal?

2.     Is my action ethical?

3.     Does my action comply with Challenge Industries, Inc. policy?

4.     Am I sure my action does not appear inappropriate?

5.     Am I sure that I would not be embarrassed or compromised if my action became known with the
       Organization or publicly?

6.     Am I sure that my action meets my personal code of ethics and behavior?

7.     Would I feel comfortable defending my actions on the 6 o’clock news?

Each employee should be able to answer "yes" to all of these questions before taking action.

Each Director, Manager and Supervisor is responsible for the ethical business behavior of her/his
subordinates. Directors, Managers and Supervisors must weigh carefully all courses of action
suggested in ethical as well as economic terms, and base their final decisions on the guidelines
provided by this policy as well as their personal sense of right and wrong.


Compliance With Laws, Regulations, and Organization Policies

Challenge Industries, Inc. does not tolerate the willful violation or circumvention of any Federal, state,
local, or foreign law by an employee during the course of that person's employment; nor does the
Organization tolerate the disregard or circumvention of Challenge Industries, Inc. policy or engagement
in unscrupulous dealings. Employees should not attempt to accomplish by indirect means, through
agents or intermediaries, that which is directly forbidden.

Implementation of the provisions of this policy is one of the standards by which the performance of all
levels of employees will be measured.



                                                   12
CONFLICTS OF INTEREST

Introduction

In the course of business, situations may arise in which a Organization decision-maker has a conflict of
interest, or in which the process of making a decision may create an appearance of a conflict of
interest.

All directors and employees have an obligation to

1.      Avoid conflicts of interest, or the appearance of conflicts, between their personal interests and
        those of the Organization in dealing with outside entities or individuals,

2.      Disclose real and apparent conflicts of interest to the board of directors, and

3.      Refrain from participation in any decisions on matters that involve a real conflict of interest or
        the appearance of a conflict.


What Constitutes a Conflict of Interest

A conflict of interest arises when a director or employee involved in making a decision is in the position
to benefit, directly or indirectly, from his/her dealings with the Organization or person conducting
business with the Organization.

Examples of conflicts of interest include, but are not limited to, situations in which a director or
employee of the Organization:

1.      Negotiates or approves a contract, purchase, or lease on behalf of the Organization and has a
        direct or indirect interest in, or receives personal benefit from, the Organization or individual
        providing the goods or services;

2.      Negotiates or approves a contract, sale, or lease on behalf of the Organization and has a direct
        or indirect interest in, or receives personal benefit from, the Organization or individual receiving
        the goods or services;

3.      Employs or approves the employment of, on behalf of the Organization, a person who is an
        immediate family member of the director or employee;

4.      Sells products or services offered by the Organization in competition with the Organization;

5.      Uses the Organization’s facilities, other assets, employees, or other resources for personal
gain;

6.      Receives a substantial gift from a vendor, if the director or employee is responsible for initiating
        or approving purchases from that vendor.



                                                     13
Interests are considered reportable as a possible conflict under this policy if they exceed one-percent of
the ownership or profits interests in a business or partnership. Indirect interests include those interests
held by spouses, children, brothers, sisters, and spouses of children, brothers, and sisters.

Disclosure Requirements

The first step in addressing conflicts of interest is disclosure. A director or employee who believes that
he/she may be perceived as having a conflict of interest in a discussion or decision must disclose that
conflict to the group making the decision. Most concerns about conflicts of interest may be resolved
and appropriately addressed through prompt and complete disclosure.

In furtherance of that objective, the Organization has adopted the following requirements

1.     On an annual basis, all directors, the Executive Director, members of senior management, and
       employees with purchasing and/or hiring responsibilities or authority shall make a written
       disclosure to the Executive Director and the chair of the Finance Committee of all reportable
       conflicts.

2.     Prior to the preparation of the disclosure statements, the accounting department shall distribute
       to the persons identified in the preceding step a list of all vendors with whom the Organization
       has transacted business at any time during the preceding year, along with a copy of the
       disclosure statement;

3.     The Executive Director shall review all forms completed by employees, and the Finance
       Committee shall review all forms completed by directors and the Executive Director, and
       determine appropriate resolution in accordance with the next section of this policy.


Resolution of Conflicts of Interest

All real or apparent conflicts of interest shall be disclosed to the Finance Committee and the executive
director of the Organization.

The Finance Committee shall be responsible for making all decisions concerning resolutions of conflicts
involving directors, the Executive Director, and other members of senior management. Should the
reportable conflict involve a member of the Finance Committee other than the chair of the Finance
Committee, the chair shall be responsible for making all decisions concerning resolutions of conflicts
involving the Finance Committee member. Should the conflict involve the chair of the Finance
Committee, the chair of the board shall be responsible for making all decisions concerning resolutions
of the conflict.

The Executive Director shall be responsible for making all decisions concerning resolutions of conflicts
involving employees below the senior management level, subject to the approval of the Finance
Committee.

A director or employee may appeal a determination that an actual or apparent conflict of interest exists.
The appeal must be directed to the chair of the board. Appeals must be made within 30 days of the
initial determination. Resolution of the appeal shall be made by vote of the full board of directors. Board
members who are the subject of the appeal, or who have a conflict of interests with respect to the
subject of the appeal, shall abstain from participating in discussing or voting on the resolution, unless
their discussion is requested by the remaining members of the board.


                                                    14
Violations of This Policy

Given the importance of resolving conflicts of interest, violations of this policy, including failure to
disclose conflicts of interest, may result in termination of a director, Executive Director, or member of
senior management (at the direction of the Finance Committee) or employee (at the direction of the
Executive Director or chair of the Finance Committee).


Disciplinary Action

Failure to comply with the standards contained in this policy will result in disciplinary action that may
include termination, referral for criminal prosecution, and reimbursement to the Organization or to the
government, for any loss or damage resulting from the violation. As with all matters involving
disciplinary action, principles of fairness will apply. Any employee charged with a violation of this policy
will be afforded an opportunity to explain her/his actions before disciplinary action is taken.

Disciplinary action will be taken:

1.     Against any employee who authorizes or participates directly in actions that are a violation of
       this policy.

2.     Against any employee who has deliberately failed to report a violation or deliberately withheld
       relevant and material information concerning a violation of this policy.

3.     Against any Director, Manager or Supervisor who attempts to retaliate, directly or indirectly, or
       encourages others to do so, against any employee who reports a violation of this policy.




                                                     15
POLICY ON SUSPECTED MISCONDUCT

Introduction

The purpose of this document is to communicate the policy of Challenge Industries, Inc. regarding
actions to be taken with respect to suspected misconduct committed, encountered, or observed by
employees and volunteers of Challenge Industries, Inc.

Like all organizations, the Challenge Industries, Inc. faces many risks associated with fraud, abuse, and
other forms of misconduct. The impact of these acts, collectively referred to as misconduct throughout
this policy, may include, but not be limited to:

               Financial losses and liabilities
               Loss of current and future revenue and customers
               Negative publicity and damage to the Organization’s good public image
               Loss of employees and difficulty in attracting new personnel
               Deterioration of employee morale
               Harm to the Organization’s relationships with customers, vendors, bankers, and sub-
               contractors
               Litigation and related costs of investigations, etc.

Our Organization is committed to establishing and maintaining a work environment of the highest
ethical standards. Achievement of this goal requires the cooperation and assistance of every employee
and volunteer, at all levels of the Organization.


Definitions

For purposes of this policy, misconduct includes, but is not limited to:

1.     Actions that violate the Organization’s Code of Conduct (and any underlying policies) or any of
       the accounting and financial policies included in this manual

2.     Fraud (see below)

3.     Forgery or alteration of checks, bank drafts, documents or other records (including electronic
       records)

4.     Destruction, alteration, mutilation, or concealment of any document or record with the intent to
       obstruct or influence an investigation, or in relation to or contemplation of any such
       investigation, carried out by a department or agency of the Federal government or by
       representatives of the Organization in connection with this policy

5.     Disclosure to any external party of proprietary information or confidential personal information
       obtained in connection with employment with or service to the Organization

6.     Unauthorized personal or other inappropriate (non-business) use of the Organization’s
       equipment, assets, services, personnel or other resources

7.     Acts that violate federal, state, or local laws


                                                     16
8.     Accepting or seeking anything of material value from contractors, vendors, or persons providing
       goods or services to Challenge Industries, Inc.. Exception: gifts less than a nominal [Editor’s
       note: organizations should quantify the term “nominal”, such as by establishing a $50 or some
       other threshold] in value.

9.     Impropriety of the handling or reporting of money of financial transactions

9.     Failure to report known instances of misconduct in accordance with the reporting responsibilities
       described herein (including tolerance by Supervisory employees of misconduct of subordinates)

Fraud is further defined to include, but not be limited to:

               Theft, embezzlement, or other misappropriation of assets (including assets of or
               intended for the Organization, as well as those of our customers, subcontractors,
               vendors, contractors, suppliers, and others with whom the Organization has a business
               relationship)
               Intentional misstatements in the Organization’s records, including intentional
               misstatements of accounting records or financial statements
               Authorizing or receiving payment for goods not received or services not performed
               Authorizing or receiving payments for hours not worked
               Forgery or alteration of documents, including but not limited to checks, time sheets,
               contracts, purchase orders, receiving reports

It is the policy of Challenge Industries, Inc. to prohibit each of the preceding acts of misconduct on the
part of Organization employees, officers, executives, volunteers and others responsible for carrying out
the Organization’s activities.


Reporting Responsibilities

It is the responsibility of every employee, officer, and volunteer to immediately report suspected
misconduct to their Supervisor, to the Director of Finance, or to the Finance Committee of the Board of
Directors. Supervisors, when they have received a report of suspected misconduct, must immediately
report such acts to their Supervisor, to the Director of Finance, or to the Finance Committee of the
Board of Directors.


Whistleblower Protection

Any reprisal against a reporting individual because of that individual, in good faith, reporting a
suspected act of misconduct in accordance with this policy, or providing to a law enforcement officer
any truthful information relating to the commission or possible commission of a Federal offense, is
prohibited and will, in turn, be considered an act of misconduct subject to the disciplinary procedures
described herein.


Investigative Responsibilities

Proper handling of allegations is imperative. Due to the sensitive nature of suspected misconduct,
Supervisors and managers should not, under any circumstances, perform any investigative procedures.


                                                     17
The Director of Finance has the primary responsibility for investigating suspected misconduct involving
employees below the Executive Director and executive management level. A summary of all
investigative work conducted by the Director of Finance shall be made to the Finance Committee.

The Finance Committee has the primary responsibility for investigating suspected misconduct involving
Executive Director and executive level positions, as well as board members and officers. However, the
Finance Committee may request the assistance of the Director of Finance in any such investigation

Investigation into suspected misconduct will be performed without regard to the suspected individual’s
position, length of service, or relationship with the Organization.

In fulfilling its investigative responsibilities, the Finance Committee shall have the authority to seek the
advice and/or contract for the services of outside firms, including but not limited to law firms, CPA firms,
forensic accountants and investigators, etc.

Properly designated members of the investigative team (as authorized by the Finance Committee) shall
have free and unrestricted access to all Organization records and premises, whether owned or rented,
at all times. They shall also have the authority to examine, copy and remove all or any portion of the
contents (in paper or electronic form) of filing cabinets, storage facilities, desks, credenzas and
computers without prior knowledge or consent of any individual who might use or have custody of any
such items or facilities when it is within the scope of an investigation into suspected misconduct or
related follow-up procedures.

Neither the existence nor the status or results of investigations into suspected misconduct shall be
disclosed or discussed with any individual other than those with a legitimate need to know in order to
perform their duties and fulfill their responsibilities effectively.


Protection of Records – Federal Matters

It is Challenge Industries, Inc.’s policy to prohibit the knowing destruction, alteration, mutilation, or
concealment of any record, document, or tangible object with the intent to obstruct or influence the
investigation or proper administration of any matter within the jurisdiction of any department or agency
of the United States government, or in relation to or contemplation of any such matter or case.

Violations of this policy will be considered violations of the Organization’s Code of Ethics and subject to
the investigative, reporting, and disclosure procedures described earlier in this Policy on Suspected
Misconduct.


Disciplinary Action

Based on the results of investigations into allegations of misconduct, disciplinary action may be taken
against violators. Disciplinary action shall be coordinated with appropriate representatives from the
Human Resources Department. The seriousness of misconduct will be considered in determining
appropriate disciplinary action, which may include:

               Reprimand
               Probation
               Suspension
               Demotion
               Termination

                                                    18
               Reimbursement of losses or damages
               Referral for criminal prosecution or civil action

This listing of possible disciplinary actions is for information purposes only and does not bind the
Organization to follow any particular policy or procedure.


Confidentiality

The Finance Committee and the Director of Finance treat all information received confidentially. Any
employee who suspects dishonest or fraudulent activity will notify the Director of Finance or the
Finance Committee Chair immediately, and should not attempt to personally conduct investigations or
interviews/interrogations related to any suspected fraudulent act (see Reporting Procedures section
above).

Great care must be taken in the investigation of suspected improprieties or irregularities so as to avoid
mistaken accusations or alerting suspected individuals that an investigation is under way. Investigation
results will not be disclosed or discussed with anyone other than those who have a legitimate need to
know. This is important in order to avoid damaging the reputations of persons suspected but
subsequently found innocent of wrongful conduct and to protect Challenge Industries, Inc. from
potential civil liability.

An employee who discovers or suspects fraudulent activity may remain anonymous. All inquiries
concerning the activity under investigation from the suspected individual(s), his or her attorney or
representative(s), or any other inquirer should be directed to the Finance Committee or legal counsel.
No information concerning the status of an investigation will be given out. The proper response to any
inquiry is “I am not at liberty to discuss this matter.” Under no circumstances should any reference be
made to “the allegation”, “the crime”, “the fraud”, “the forgery”, “the misappropriation”, or any other
specific reference.

The reporting individual should be informed of the following:

1.     Do not contact the suspected individual in an effort to determine facts or demand restitution.

2.     Do not discuss the case, facts, suspicions, or allegations with anyone unless specifically asked
       to do so by the Challenge Industries, Inc. legal counsel or the Finance Committee.

Disclosure to Outside Parties

Allegations of and information related to allegations of suspected misconduct shall not be disclosed to
third parties except under the provisions described in this policy (such as disclosure to outside
investigators hired by the Organization to aid in an investigation).

However, all known frauds involving the Executive Director, senior management, or members of the
board of directors, as well as all material frauds involving employees below the senior management
level, shall be disclosed by the Finance Committee to the Organization’s external auditors.




                                                     19
SECURITY

Accounting Department

A lock will be maintained on the door leading into the Challenge Industries, Inc. Accounting
Department. This door shall be closed and locked in the evenings and whenever the Accounting
Department is vacant. The key to this lock will be provided to the Director of Finance, the Senior Staff
Accountant, and the Accounts Payable Clerk. The lock will be changed whenever any of these
individuals leaves the employment of Challenge Industries, Inc.

The Challenge Industries, Inc. corporate seals and blank check stock shall be stored in a locked file
cabinet in the Accounting Department. Access to this file cabinet shall be by keys in the possession of
the Director of Finance, the Senior Staff Accountant, and Accounts Payable Clerk.

Petty cash is stored in a locked drawer in a cash box. The Senior Staff Accountant and the Accounts
Payable Clerk will be the only employees with a key to the drawer.


Access to Electronically Stored Accounting Data

It is the policy of Challenge Industries, Inc. to utilize passwords to restrict access to accounting
software and data. Only duly authorized accounting personnel with data input responsibilities will be
assigned passwords that allow access to the system.

Accounting personnel are expected to keep their passwords secret. Administration of passwords shall
be performed by the Manager of Information Systems.


Storage of Back-Up Files

It is the policy of Challenge Industries, Inc. to maintain back-up copies of electronic data files off-site.
Access to back-up files shall be limited to individuals authorized by management.


Storage of Sensitive Data

In addition to accounting and financial data stored in the accounting department, other sensitive data,
such as social security numbers of employees or credit card information of donors, members, etc may
be stored in areas other than the accounting department, such as in the Development and Human
Resources offices. It is the policy of Challenge Industries, Inc. to:

1.     Minimize the storage of sensitive data outside the accounting department by shredding
       documents with such data or deleting the sensitive data from documents that are stored outside
       the accounting department whenever possible; and



                                                      20
2.     Require that all sensitive data that is stored in areas other than the accounting department be
       secured in locked filing cabinets that are placed in offices that are locked after hours.

Further, it is the Organization’s policy to restrict access to sensitive data to Organization employees
only and only to employees with a legitimate need for such access.


Destruction of Consumer Information

As stated earlier, all sensitive data is subject to a policy requiring proper secure storage of such data. It
is also the policy of Challenge Industries, Inc. that the destruction of all consumer information obtained
by the Organization for any reason shall be performed by shredding such documents. Such shredding
will be performed on a schedule determined by each department that possesses such data and this
destruction schedule shall be made a part of Challenge Industries, Inc.’s Record Retention policy (see
the “Fiscal Management” policies section of this manual).


General Office Security

During normal business hours, all visitors are required to sign in with the receptionist and receive a
Visitor’s Tag. After hours, a building key and security code is required for access to the offices of
Challenge Industries, Inc.. Keys are issued only to employees of Challenge Industries, Inc..




                                                     21
TECHNOLOGY AND ELECTRONIC COMMUNICATIONS

Purpose and Scope

The purpose of this policy is to identify guidelines for the use of Challenge Industries, Inc. technologies
and communications systems. This policy establishes a minimum standard that must be upheld and
enforced by users of the organization’s technologies and communications systems.

The term “user” as used in these policies refers to employees (whether full-time, part-time or limited-
term), independent contractors, consultants, and any other user having authorized access to, and using
any of, the organization’s computers or electronic communications resources.

Computer and electronic communications resources include, but are not limited to, host computers, file
servers, stand alone computers, laptops, printers, fax machines, phones, on-line services, E-mail
systems, bulletin board systems, and all software that is owned, licensed or operated by Challenge
Industries, Inc..


Acceptable Use of Organization Property

Use of the organization’s computers and electronic communications technologies is for programmatic
and business activities of Challenge Industries, Inc.. All use of such resources shall be in an honest,
ethical, and legal manner that conforms to applicable license agreements, contracts, and policies
regarding their intended use. Although incidental and occasional personal use of the organization’s
communications systems are permitted, users automatically waive any rights to privacy.

In addition, the information, ideas, concepts and knowledge described, documented or contained in the
organization’s electronic systems are the intellectual property of Challenge Industries, Inc.. The copying
or use of the organization’s intellectual property for personal use or benefit during or after employment
(or period of contract) with Challenge Industries, Inc. is prohibited unless approved in advance by the
Board of Directors.

All hardware (laptops, computers, monitors, mice, keyboards, printers, telephones, fax machines, etc)
issued by Challenge Industries, Inc. is the property of the organization and should be treated as such.
Users may not physically alter or attempt repairs on any hardware at any time. Users must report any
problems with hardware to the Manager of Information Systems.


Password Security

Users are responsible for safeguarding their login passwords. Passwords may not be shared, nor
should they be printed or stored on-line. Users should not leave their computers unattended without
logging off.




                                                    22
Confidentiality

All information about individuals, families or organizations served by Challenge Industries, Inc. is
confidential. No information may be shared with any person or organization outside Challenge
Industries, Inc. without the prior written approval of the individual, family or organization and the
Executive Director.


Disposal of Computer Equipment

It is the policy of Challenge Industries, Inc. run “file-shredding” software on all computer hard drives
prior to disposing of computer equipment. File-shredding software overwrites all areas of the
computer’s hard drive in a manner that makes it impossible for subsequent users to retrieve any of the
data on the hard drive. This procedure shall be performed by Challenge Industries, Inc.’s Manager of
Information Systems.


Copyrighted Information

Use of Challenge Industries, Inc. electronic communication systems to copy, modify, or transmit
documents, software, information or other materials protected by copyright, trademark, patent or trade
secrecy laws, without obtaining prior written permission from the owner of such rights in such materials,
is prohibited.


Installation of Software

The installation of new software on the computers of Challenge Industries, Inc. without the prior
approval of Manager of Information Systems is prohibited. If an employee desires to install any new
programs onto a Challenge Industries, Inc. computer, written permission should first be obtained.


Other Prohibited Uses

Other prohibited uses of the organization’s communication systems include, but are not limited to:

1.     Engaging in any communication that is discriminatory, defamatory, pornographic, obscene,
       racist, sexist or that evidences religious bias, or is otherwise of a derogatory nature toward any
       specific person, or toward any race, nationality, gender, marital status, sexual orientation,
       religion, disability, physical characteristic, or age group.

2.     Browsing or downloading and/or forwarding and/or printing pornographic, profane,
       discriminatory, threatening or otherwise offensive material from any source including, but not
       limited to, the Internet.

3.     Engaging in any communication that is in violation of federal, state or local laws.



                                                    23
4.      Proselytizing or promoting and religious belief or tenet.

5.      Campaigning for or against any candidate for political office or any ballot proposal or issue.

6.      Sending, forwarding, redistributing or replying to “chain letters.”

7.      Unauthorized use of passwords to gain access to another user’s information or communications
        on Challenge Industries, Inc. systems or elsewhere.

8.      Advertising, solicitation or other commercial, non-programmatic use.

9.      Knowingly introducing a computer virus into the organization’s communication system or
        otherwise knowingly causing damage to the organization’s systems.

10.     Using the organization’s systems in a manner that interferes with normal business functions in
        any way, including but not limited to, streaming audio from the Internet during business hours,
        stock tickers, installing unauthorized software, etc.

11.     Excessive personal use of the organization’s technologies that preempts any business activity
        or interferes with organizational productivity.

12.     Sending E-mail messages under an assumed name or obscuring the origin of an E-mail
        message sent or received.


Disciplinary Action for Violations

Challenge Industries, Inc. requires all users to adhere to this policy. Violations of this policy will result in
disciplinary action as outlined in the Human Services Policies and Procedures Manual for Staff
Members, which could include termination of employment.


Reporting of Suspected Violations

Suspected violations of these policies should be immediately and confidentially reported to your
immediate Supervisor. If you prefer not to discuss it with your Supervisor, you may contact the
Executive Director or any member of the Finance Committee.

Challenge Industries, Inc. reserves the right to install programs that monitor employee use of the
Internet and electronic communication systems and to act on any violations of these policies found
through use of such programs. Challenge Industries, Inc. further reserves the right to examine any and
all electronic communications sent or received by employees via the organization’s electronic
communications systems.




                                                      24
GENERAL LEDGER AND CHART OF ACCOUNTS


The general ledger is defined as a group of accounts that supports the information shown in the major
financial statements. The general ledger is used to accumulate all financial transactions of Challenge
Industries, Inc., and is supported by subsidiary ledgers that provide details for certain accounts in the
general ledger. The general ledger is the foundation for the accumulation of data and reports.


Chart of Accounts Overview

The chart of accounts is the framework for the general ledger system, and therefore the basis for
Challenge Industries, Inc.'s accounting system. The chart of accounts consists of account titles and
account numbers assigned to the titles. General ledger accounts are used to accumulate transactions
and the impact of these transactions on each asset, liability, net asset, revenue, expense and gain and
loss account.

Challenge Industries, Inc.’s chart of accounts is comprised of six types of accounts:

       1.      Assets (1000-1999)
       2.      Liabilities (2000-2999)
       3.      Net Assets (3000-3999)
       4.      Revenues (4000-4999)
       5.      Expenses (5000-5999)
       6.      Offsets (6000-6999)

Each account number shall be preceded by a one-digit company number and a three-digit department
number and followed by a three-digit project/function sub-code.
             (ie., Challenge-Transitional Services-Staff Travel-OPTSII / 1-600-5360-090)


Distribution of Chart of Accounts

All Challenge Industries, Inc. employees involved with account coding responsibilities (assignment or
review of coding) or budgetary responsibilities will be issued a current chart of accounts or coding
guide. As the chart of accounts is revised, an updated copy of the chart of accounts or coding guide
shall be distributed to these individuals promptly.


Control of Chart of Accounts

Challenge Industries, Inc.'s chart of accounts is monitored and controlled by the Director of Finance.
Responsibilities include the handling of all account maintenance, such as additions and deletions. Any
additions or deletions of accounts should be approved by the Director of Finance, who ensures that the
chart of accounts is consistent with the organizational structure of Challenge Industries, Inc. and meets
the needs of each division and department.

                                                    25
Account Definitions

General Ledger
Account Range         Category      Definition
1000 - 1999           Assets
                                    Assets are probable future economic benefits obtained or
                                    controlled by the organization as a result of past transactions or
                                    events. Assets of Challenge Industries, Inc. are classified as
                                    current assets, fixed assets, contra-assets, and other assets.

                                    Current assets are assets that are available or can be made
                                    readily available to meet the cost of operations or to pay current
                                    liabilities. Some examples are cash, temporary investments, and
                                    receivables that will be collected within one year of the statement
                                    of financial position date.

                                    Fixed assets (property and equipment) are tangible assets with a
                                    useful life of more than one year that are acquired for use in the
                                    operation of the organization and are not held for resale.

                                    Contra-assets are accounts that reduce asset accounts, such as
                                    accumulated depreciation and reserves for uncollectible accounts
                                    receivable

                                    Other assets include long-term assets that are assets acquired
                                    without the intention of disposing them in the near future. Some
                                    examples are security deposits, property and long-term
                                    investments.

2000 – 2999           Liabilities
                                    Liabilities are probable future sacrifices of economic benefits
                                    arising from present obligations of the organization to transfer
                                    assets or provide services to other entities in the future as a result
                                    of past transactions or events. Liabilities of Challenge Industries,
                                    Inc. are classified as current, long-term or contingent.

                                    Current liabilities are probable sacrifices of economic benefits that
                                    will likely occur within one year of the date of the financial
                                    statements or which have a due date of one year or less.
                                    Common examples of current liabilities include accounts payable,
                                    accrued liabilities, short-term notes payable, and deferred
                                    revenue.

                                    Long-Term Liabilities are probable sacrifices of economic benefits
                                    that will likely occur more than one year from the date of the
                                    financial statements. An example is the non-current portion of a
                                    mortgage loan.
                                                    26
                           Contingent Liabilities are probable sacrifices of economic benefits
                           that will likely occur more than one year from the date of the
                           financial statements, but only be estimated based on available
                           information. An example is the workers’ compensation safety
                           group assessments that are estimated based on the groups
                           history and performance.

3000 - 3999   Net Assets
                           Net Assets is the difference between total assets and total
                           liabilities and are a reflection of the organization’s net worth.

4000 - 4999   Revenues
                           Revenues are inflows or other enhancements of assets, or
                           settlements of liabilities, from delivering or producing goods,
                           rendering services, or other activities that constitute an
                           organization’s ongoing major or central operations. Revenues of
                           Challenge Industries, Inc. include membership dues, conference
                           registrations, and sales of publications.

                           Revenues of Challenge Industries, Inc. also include contributions
                           received from donors and grants received from government
                           agencies, private foundations and corporations.

5000 - 5999   Expenses
                           Expenses are outflows or other using up of assets or incurrences
                           of liabilities from delivering or producing goods, rendering
                           services, or carrying out other activities that constitute Challenge
                           Industries, Inc.’s ongoing major or central operations.

6000 – 6999   Offsets
                           Offsets are used to allocate expenses across departments for
                           financial reporting purposes only. The net balance of all 6000 –
                           6999 accounts shall be zero (0).




                                         27
Changes to the Chart of Accounts

Additions to, deletions from, or any other changes to Challenge Industries, Inc.’s standard chart of
accounts shall only be done with the approval of the Director of Finance.


Fiscal Year of Organization

Challenge Industries, Inc. shall operate on a fiscal year that begins on January 1 and ends on
December 31. Any changes to the fiscal year of the organization must be ratified by majority vote of
Challenge Industries, Inc.’s Board of Directors.


Accounting Estimates

Challenge Industries, Inc. utilizes numerous estimates in the preparation of its interim and annual
financial statements. Some of those estimates include:

1.     Useful lives of property and equipment

2.     Collectibility of receivables and promises to give

3.     Fair market values of investments

4.     Fair market values of donated assets

5.     Values of contributed services

6.     Allocations of income between contribution income and exchange transactions

7.     Joint cost allocations

8.     Allocations of certain indirect costs

9.     Allocations of time/salaries

It is Challenge Industries, Inc.’s policy that all such estimates shall be reassessed, reviewed, and
approved by the Director of Finance on an annual basis. Documentation shall be maintained supporting
all key conclusions, bases, and other elements associated with each accounting estimate. All material
estimates, and changes in estimates from one year to the next, shall be disclosed to the Organization’s
Finance Committee and Challenge Industries, Inc.’s external audit firm.




                                                   28
Journal Entries

All general ledgers entries that do not originate from a subsidiary ledger shall be supported by General
Journal Entry form, which shall include a reasonable explanation of each such entry. Examples of such
journal entries include:

1.     Recording of non-cash transactions
2.     Corrections of posting errors
3.     Non-recurring accruals of income and expenses

Certain journal entries, called recurring journal entries, occur in every accounting period. These entries
may include, but are not limited to:

1.     Depreciation of fixed assets
2.     Amortization of prepaid expenses
3.     Accruals of recurring revenues
4.     Accruals of recurring expenses

Support for recurring journal entries shall be in the form of a schedule associated with the underlying
asset or liability account or, in the case of short-term recurring journal entries or immaterial items, in the
form of a General Journal Entry.

It is the policy of Challenge Industries, Inc. that all journal entries not originating from subsidiary ledgers
shall be authorized in writing by the Senior Staff Accountant or Director of Finance by initialing or
signing the entries.




                                                      29
       POLICIES ASSOCIATED WITH REVENUES AND CASH RECEIPTS


REVENUE


Revenue Recognition Policies

Challenge Industries, Inc. receives revenue from several types of transactions. Revenue from each of
these types of transactions is recognized in the financial statements of Challenge Industries, Inc. in the
following manner:

1.     Contract Income – Monthly billing or accrual based on annual contracts for employment
       services with the New York State Office of Mental Retardation and Developmental Disabilities,
       NYS Office of Mental Health, NYS Education Department (VESID), Tompkins County Workforce
       Investment Board, and Tompkins County Department of Social Services

2.     Grant Income - Monthly accrual based on incurrence of allowable costs (for cost-
       reimbursement awards) or based on other terms of the award (for fixed price, unit-of-service,
       and other types of awards)

3.     Business Operations Income – Invoiced through the accounts receivable system of financial
       reporting software for Work Center, Enclaves, Microfilm & Digital Services, Hydroponic
       Greenhouse (Finger Lakes Fresh), Ithaca College Dining, and Janitorial Services (invoices are
       generated upon completion or work order, delivery of product, or completion of monthly service)

4.     Contributions - Recognized as income when received, unless accompanied by restrictions or
       conditions (see the next section on contribution income)

Immaterial categories of revenue may be recorded on the cash basis of accounting (i.e. recorded as
revenue when received) as deemed appropriate by the Director of Finance.

CONTRIBUTIONS RECEIVED

Definitions

The following definitions shall apply with respect to the policies described in this section:

Contribution - An unconditional transfer of cash or other assets to the Organization, or a settlement or
cancellation of the Organization's liabilities, in a voluntary nonreciprocal transfer by another entity
acting other than as an owner.

Temporary Restriction - A donor-imposed stipulation that specifies a future and uncertain event
whose occurrence or failure to occur gives the promisor a right of return of the assets it has transferred
to the Organization or releases the promisor from its obligation to transfer its assets.
                                                     30
Restriction - A donor-imposed stipulation that specifies a use for the contributed asset that is either
limited to a specific future time period or is more specific than the broad limits resulting from the nature
of the Organization, the environment in which it operates, and the purposes specified in Challenge
Industries, Inc.'s articles of incorporation and bylaws. Restrictions on Challenge Industries, Inc.'s use of
an asset may be temporary or permanent.

Nonreciprocal Transfer - A transaction in which an entity incurs a liability or transfers assets to
Challenge Industries, Inc. without directly receiving value from Challenge Industries, Inc. in exchange.

Exchange Transaction - A reciprocal transaction in which Challenge Industries, Inc. and another entity
each receive and sacrifice something of approximately equal value.


Distinguishing Contributions from Exchange Transactions

Challenge Industries, Inc. receives income in the form of contributions, revenue from exchange
transactions, and income from activities with characteristics of both contributions and exchange
transactions. Challenge Industries, Inc. shall consider the following criteria, and any other relevant
factors, in determining whether income will be accounted for as contribution income, exchange
transaction revenue, or both:

1.     Challenge Industries, Inc.'s intent in soliciting the asset, as stated in the accompanying
materials;

2.     The expressed intent of the entity providing resources to Challenge Industries, Inc. (i.e. does
       the resource provider state its intent is to support Challenge Industries, Inc.'s programs or that it
       anticipates specified benefits in exchange?);

3.     Whether the method of delivery of the asset is specified by the resource provider (exchange
       transaction) or is at the discretion of Challenge Industries, Inc. (contribution);

4.     Whether payment received by Challenge Industries, Inc. is determined by the resource provider
       (contribution) or is equal to the value of the assets/services provided by Challenge Industries,
       Inc., or the cost of those assets plus a markup (exchange transaction);

5.     Whether there are provisions for penalties (due to nonperformance) beyond the amount of
       payment (exchange transaction) or whether penalties are limited to the delivery of assets
       already produced and return of unspent funds (contribution); and

6.     Whether assets are to be delivered by Challenge Industries, Inc. to individuals or organizations
       other than the resource provider (contribution) or whether they are delivered directly to the
       resource provider or to individuals or organizations closely connected to the resource provider.




                                                    31
Accounting for Contributions

Challenge Industries, Inc. shall recognize contribution income in the period in which the Organization
receives restricted or unrestricted assets in nonreciprocal transfers, or unconditional promises of future
nonreciprocal asset transfers, from donors. Contribution income shall be classified as increases in
unrestricted, temporarily restricted, or permanently restricted net assets based on the existence or
absence of such restrictions.

When the final time or use restriction associated with a contributed asset has been met, a
reclassification between temporarily restricted and unrestricted net assets shall be recorded.

Contributions of noncash assets (food, clothing, etc) shall be recorded at fair market value as of the
date of the gift. The value assigned to such noncash assets shall be determined by Challenge
Industries, Inc. Director of Finance. Values provided by donors shall be considered in establishing
these valuations, however, the final value used for accounting purposes shall be the value determined
by Challenge Industries, Inc. Further, it is the policy of Challenge Industries, Inc. not to certify any
valuation of noncash assets provided by donors.


Receipts and Disclosures

Challenge Industries, Inc. and its donors are subject to certain disclosure and reporting requirements
imposed under the Internal Revenue Code and the underlying Regulations. To comply with those rules,
Challenge Industries, Inc. shall adhere to the following guidelines with respect to contributions received
by the Organization.

For any separate contribution received, Challenge Industries, Inc. shall provide an acknowledgment of
contribution receipt to the donor. The acknowledgment shall be prepared by the Challenge Industries,
Inc. Development Associate. All acknowledgments prepared by Challenge Industries, Inc. shall include
the following information:

1.     The amount of cash received and/or a description (but not an assessment of the value) of any
       noncash property received;

2.     A statement of whether Challenge Industries, Inc. provided any goods or services to the donor
       in consideration, in whole or in part, for any of the cash or property received by the Organization
       from the donor, and

3.     If any goods or services were provided to the donor by Challenge Industries, Inc., a description
       and good faith estimate of the value of those goods or services.

When Challenge Industries, Inc. receives cash in excess of $75, or noncash property with a value in
excess of $75, as part of a quid pro quo transaction, the Organization shall follow additional disclosure
procedures. For purposes of this paragraph, a "quid pro quo" transaction is one in which Challenge
Industries, Inc. receives cash or property in a transaction that is part contribution and part exchange
transaction (i.e. the value of the goods or services provided to the donor by Challenge Industries, Inc. is
less than the value of cash or property provided by the donor). In such instances, Challenge Industries,
                                                     32
Inc. shall provide to the donor a receipt stating that only the amount contributed in excess of the fair
market value of the goods or services provided by Challenge Industries, Inc. may be deducted as a
charitable contribution. The receipt shall also include a good-faith estimate of the fair market value of
the goods or services provided to the donor by Challenge Industries, Inc.

IRS rules provide for certain exceptions to the preceding disclosure rules applicable to quid pro quo
transactions. As such, Challenge Industries, Inc. shall not provide receipts when it receives cash or
property in excess of $75 in any of the following circumstances:

1.     The goods provided to the donor during 2005 bear Challenge Industries, Inc.'s name or logo
       and have an aggregate cost of $8.30 or less;

2.     The goods provided to the donor in 2005 have a fair market value equal to no more than 2% of
       the contribution or $83, whichever is less; or

3.     The gift received by Challenge Industries, Inc. resulted from the Organization's 2005 fundraising
       appeal that included articles worth no more than $8.30, as well as a request for contributions
       and a statement that the recipient may keep the article even if a contribution is not made.

The preceding thresholds are adjusted for inflation by the IRS on an annual basis. Inflation adjustments
subsequent to 2005 are incorporated into this policy manual by reference.

All estimates of the fair market value of goods or services provided by Challenge Industries, Inc. shall
be prepared by the Accounting Department under the guidance of the Director of Finance.

It is the policy of Challenge Industries, Inc. to comply with all current federal and state rules regarding
solicitation and collection of charitable contributions, whether specifically addressed in this manual or
not, as well as all future revisions to those rules.

Gift Acceptance Policy

Challenge Industries, Inc. shall accept charitable contributions of all types of assets from any type of
donor, with the following exceptions:

1.     Contributions of non-liquid assets or assets possessing legal or other characteristics rendering
       the asset difficult to sell or convert to liquid assets, as determined by the Director of Finance;

2.     Contributions with donor-imposed restrictions that provide excessive control to the donor over
       future uses of the donated asset(s), as determined by the Director of Finance;

3.     Contributions with donor-imposed restrictions that violate or involve uses that go beyond the
       organization’s current mission statement and tax-exempt purpose, as determined by the
       Director of Finance; and

4.     Contributions from donors involved in businesses or activities that are deemed inconsistent with
       Challenge Industries, Inc.’s mission, as determined by the Executive Director.

                                                     33
BILLING/INVOICING POLICIES

Overview

The following is a list of items billed and/or accrued and received by Challenge Industries, Inc. and the
frequency with which each is billed:

Quarterly Billings
   1. NYS Education Department Vocational and Educational Services to Individuals with DisabilitIes
       (VESID) Supported Employment Contract C007196
   2. Tompkins County Department of Social Services Post Employment Support Services (PESS)
       Contract DSS2006-321

Monthly Billings
1.     Medicaid Pre-Vocational Services
2.     Medicaid NYS OPTS I Services Contract C060047
3.     Medicaid NYS OPTS II Services Contract C060174
4.     NYS Education Department Vocational and Educational Services to Individuals with Disabilities
       (VESID) Unified Contract Services C007971
5.     Tompkins County Department of Social Services STEPS, STEPS Non-Custodial Parent, and
       Community Work Experience Programs
6.     Tompkins County Workforce Investment Board Youth Services Program Contract and Disability
       Program Navigator Contract
7.     Cornell University Disability Case Management Services and Cornell University Administrative
       Support Services
8.     Ithaca College Dining Services Dishroom Contract
9.     Cornell University Custodial Services Contract
10.    Janitorial Services Contracts (various)Grants and contracts (See separate section on “Policies
       Associated with Federal Awards” for billing policies associated with federal grant agreements)

Daily (“as needed”) Billing
1.      Business Operations completed Work Orders
2.      Greenhouse (FLF) deliveries


Responsibilities for Billing and Collection

Challenge Industries, Inc.’s Accounting Department is responsible for the invoicing of goods and
services as well as the collection of outstanding receivables with the exception of the following:

Challenge Industries, Inc.’s Services Department is responsible for the billing of NYS OPTS I & II
Medicaid Services; Tompkins County Department of Social Services STEPS, STEPS Non-Custodial
Parent, and Community Work Experience Programs; and VESID Unified Contract Services

Challenge Industries, Inc.’s Director of Finance is responsible for the billing of VESID Supported
Employment Contract; Tompkins County Department of Social Services Post Employment Support

                                                   34
Services Contract; Tompkins County Workforce Investment Board Youth Services Program Contract
and Disability Program Navigator Contract

 (Note: Cash receipts, credit memo, and collection policies will be discussed in subsequent sections).


Customer Invoicing

It is the policy of Challenge Industries, Inc. to complete customer work orders and forward an invoice
after the merchandise is shipped.

The following information must be included with customer orders, or on file from previous orders, in
order for Challenge Industries, Inc. to establish credit for a customer:

1.     Customer name
2.     Contact name at customer
3.     Mailing address and telephone number
4.     IRS Form W-9

See the section on “Accounts Receivable Management” for policies regarding follow-up on uncollected
receivables.


Accounts Receivable Entry Policies

Posting of customer invoices, credit memos, and other adjustments to the accounts receivable
subsidiary ledger of shall be performed by the Senior Staff Accountant.


Classification of Income and Net Assets

All income received by Challenge Industries, Inc. is classified as "unrestricted", with the exception of
the following:

1.     Grants and other awards received from government agencies or other grantors, which are
       classified as temporarily restricted
2.     Special endowments received from donors requesting that these funds be permanently
       restricted for specific purposes

From time to time, Challenge Industries, Inc. may raise other forms of contribution income which carry
stipulations that Challenge Industries, Inc. utilize the funds for a specific purpose or within a specified
time period identified by the donor of the funds. When this form of contribution income is received,
Challenge Industries, Inc. shall classify this income as Temporarily Restricted income.

As with all Temporarily Restricted net assets, when the restriction associated with a contribution has
been met (due to the passing of time or the use of the resource for the purpose designated by the
donor), Challenge Industries, Inc. will reclassify the related net assets from "Temporarily Restricted" to
                                                      35
"Unrestricted" in its Statement of Financial Position and reflect this reclassification as an activity in its
Statement of Activities.

From time to time, the Challenge Industries, Inc. Board of Directors may determine that it is appropriate
to set funds aside for specific projects. To the extent these set-asides result from a Board action, rather
than a donor-imposed requirement, the resulting set-aside shall be classified as “unrestricted”.
However, to identify these funds as being set aside for special projects, such set-asides shall be
labeled “Board-Designated” funds within the unrestricted net assets of Challenge Industries, Inc., and
shall be reported as a separate component of unrestricted net assets on the Challenge Industries, Inc.
financial statements.




                                                      36
CASH RECEIPTS

Overview

Cash (including checks payable to the organization) is the most liquid asset an organization has.
Therefore, it is the objective of Challenge Industries, Inc. to establish and follow the strongest possible
internal controls in this area.


Processing of Checks and Cash Received in the Mail

For funds that are received directly at Challenge Industries, Inc., cash receipts are centralized to
ensure that cash received is appropriately directed, recorded and deposited on a timely basis.

Mail is opened and a listing of cash/checks received shall be prepared in an open area, in the presence
of other employees, and under the supervision of the Director of Finance. The individual preparing the
daily list of receipts shall be someone that is not involved in the accounts receivable or accounts
payable process.

A deposit slip is prepared from the cash/checks received by the Senior Staff Accountant and compared
to the daily receipts listing for discrepancies by the Director of Finance. Deposits are prepared and
taken to the bank by an individual other than the employee who prepared the daily cash receipts listing.


Endorsement of Checks

It is the policy of Challenge Industries, Inc. that all checks received that are payable to the Organization
shall immediately be restrictively endorsed by the individual who prepares the daily receipts listing. The
restrictive endorsement shall be a rubber stamp that includes the following information:

1.     For Deposit Only
2.     Challenge Industries, Inc.


Timeliness of Bank Deposits

It is the policy of Challenge Industries, Inc. that bank deposits will be made on a daily basis, unless the
total amount received for deposit is less than $1,000 or if funds are received after the daily afternoon
deposit. In no event shall deposits be made less frequently than weekly.


Reconciliation of Deposits

On a periodic basis, the Director of Finance, who does not prepare the initial cash receipts listing or
bank deposit, shall reconcile the listings of receipts to bank deposits reflected on the monthly bank
statement. Any discrepancies shall be immediately investigated.

                                                    37
Processing of Credit Cards

Challenge Industries, Inc. accepts Mastercard, Visa and American Express credit cards for payment, all
of which are authorized through the participating credit card company. This is done by following the
credit card authorization instructions from the participating credit card company.

For all credit card payments, Challenge Industries, Inc. will document the following information:

1.     Customer/Organization name, address and phone number
2.     Name of credit cardholder
3.     Address of cardholder
4.     Credit card number
5.     Expiration date

All credit card processing shall be performed by one individual designated by the Director of Finance.
This individual shall be independent of the accounts receivable function.


Processing of ACH Transfers

Challenge Industries, Inc. accepts ACH Transfers for payment. The Senior Staff Accountant receives
an email advice from the customer or State agency regarding the transfer date and amount. The
transfer is confirmed by the Senior Staff Accountant by inquiry on Challenge’s operating checking
account at the bank. Upon confirmation, The Senior Staff Accountant notifies the individual preparing
the daily list of cash receipts to enter the transfer on this list for that day.




                                                   38
ACCOUNTS RECEIVABLE MANAGEMENT

Monitoring and Reconciliations

On a monthly basis, a detailed accounts receivable report (showing aged, outstanding invoices by
customer) is generated and reconciled to the general ledger by the accounting department. All
differences are immediately investigated and resolved, and the reconciliation is reviewed by the
Director of Finance.


Collections

Collections are performed on a monthly basis, according to a review of the outstanding items shown on
the accounts receivable aging report. This report shows the current month’s activity for each customer
and prior months’ balances outstanding for 30, 60, and over 90 days.

Customers with unpaid balances receive statements every thirty days. After a balance is unpaid for 60
days, an accounting department employee will contact the customer by telephone and attempt to
collect the amount due. A record will be kept of all telephone contacts.

If 120 days have elapsed without payment, a letter will be sent to the customer requesting payment or
documentation that payment has already been made. In addition, weekly telephone calls will be placed
in an attempt to collect the amount due.

If 180 days have passed without payment, the account will be reviewed by the Director of Finance to
determine of the account should be turned over to a collection agency or attorney.

If 1 year has passed, the account with be written off to the Bad Debts account.


Credits and Other Adjustments to Accounts Receivable

From time to time, credits against accounts receivable from transactions other than payments and bad
debts will occur. Examples of other credits include returned products and adjustments for billing errors.
All credits shall be processed by an employee who is independent of the cash receipts function. In
addition, all credits over $200 (except for rebills of equal amounts) shall be authorized by the Director of
Finance.


Accounts Receivable Write-Off Authorization Procedures

         It is the policy of Challenge Industries, Inc. to ensure that all available means of collecting
accounts receivable have been exhausted before write-off procedures are initiated. Write-offs are
initiated by the Director of Finance in accordance with time frame stated above.



                                                      39
Once a write-off has been processed, the Customer is listed as poor credit risk and any future credit will
only be extended if the back debt is paid and the customer is no longer deemed a collection risk by the
Director of Finance.

If write-off procedures have been initiated, the following accounting treatment applies:

1.     Current year invoices that are written off will either be charged against an appropriate revenue
       or revenue adjustment account or against the original account credited.
2.     Invoices written off that are dated prior to the current year will be treated as bad debt and will
       reduce the allowance for doubtful accounts, discussed in the next section.


Reserve for Uncollectible Accounts

It is the policy of Challenge Industries, Inc. to maintain a reserve for uncollectible accounts receivable.
At the end of each fiscal year, the allowance for doubtful accounts is adjusted based on the following
factors:

1.     An analysis of outstanding, aged accounts receivable
2.     Historical collection and bad debt experience
3.     Evaluations of specific accounts based on discussions with the department that originated the
       sale resulting in the receivable

Year-end adjustments to the reserve for uncollectible accounts shall be performed only with
authorization from the Director of Finance with assistance from the auditing firm.

This reserve account is used in the following year to write off those items that are deemed uncollectible
from the prior year after further collection efforts have been abandoned, as described earlier.




                                                     40
     POLICIES ASSOCIATED WITH EXPENDITURES AND DISBURSEMENTS


PURCHASING POLICIES AND PROCEDURES
Overview

The policies described in this section apply to all purchases made by Challenge Industries, Inc.

It is the policy of Challenge Industries, Inc. to follow a practice of ethical, responsible and reasonable
procedures related to purchasing, agreements and contracts, and related forms of commitment. The
policies in this section describe the principles and procedures that all staff shall adhere to in the
completion of their designated responsibilities.


Responsibility for Purchasing

All department heads shall have the authority to approve purchases on behalf of their department,
within the guidelines described in this policies manual. In addition, department heads may allow
responsible individuals within their department to initiate purchases on behalf of their department for
which the department head has final approval authority.

The Director of Finance has approval authority over all purchases and contractual commitments as
defined in this policy. The Director of Finance shall make the final determination on any proposed
purchases where budgetary or other conditions may result in denial.


Non-Discrimination Policy

All vendors/contractors who are the recipients of Organization funds, or who propose to perform any
work or furnish any goods under agreements with Challenge Industries, Inc. shall agree to these
important principles:

1.     Vendors/Contractors will not discriminate against any employee or applicant for employment
       because of race, religion, color, sexual orientation or national origin, except where religion, sex,
       or national origin is a bona fide occupational qualification reasonably necessary to the normal
       operation of the vendors/contractors.

2.     Vendors/contractors agree to post in conspicuous places, available to employees and
       applicants for employment, notices setting forth the provisions of this non-discrimination clause.
       Notices, advertisement and solicitations placed in accordance with Federal law, rule or
       regulation shall be deemed sufficient for meeting the intent of this section.


Use of Purchase Orders

It is the policy of Challenge Industries, Inc. to utilize a purchase order system. A properly completed
purchase order shall be required for each purchase decision (i.e. total amount of goods and services
                                                     41
purchased, not unit cost) in excess of $1,000, with the exception of travel advances and expense
reimbursements, which require the preparation of a separate form described elsewhere in this manual.
A properly completed Purchase Order shall contain the following information, at a minimum:

1.     Specifications or statement of goods or services required

2.     Vendor name, address, point of contact and phone number

3.     Delivery or performance schedules

4.     Special conditions (if applicable)

5.     Catalog number, page number, etc. (if applicable)

6.     Net price per unit, less discount, if any

7.     Total amount of order (excluding any applicable shipping charges)

10.    Authorized signatures

11.    Date PO prepared

Purchase orders shall be kept in a secure area in each department and issued upon request from an
authorized purchaser. Copies of all purchase orders issued shall be forwarded to the accounting
department for review and matching to vendor invoices. Outstanding purchase orders shall be reviewed
periodically for follow-up with the issuer to ensure goods and services are still required. At least every
six months, the Director of Finance shall review any purchase orders over 6 months old.


Authorizations and Purchasing Limits

All completed check requests and purchase orders must be signed by the preparer and approved by
the department director. In addition, the Director of Finance must approve all purchases in excess of
$1,000.

All contracts in excess of $5,000 between Challenge Industries, Inc. and outside parties must be
reviewed and approved by the Department Director or Director of Finance, as well as the Executive
Director. The Executive Director is authorized to enter into any contract on behalf of Challenge
Industries, Inc. Contracts of $5,000 or less must be reviewed and approved by the Department Director
and the Director of Finance, but do not require approval from the Executive Director. These policies
shall also apply to renewals of existing contracts.


Required Solicitation of Quotations from Vendors

Purchase decisions exceeding $5,000 for labor, equipment, supplies or services purchased, leased or
contracted for shall be made only after receiving, whenever possible, oral quotations from at least three
(3) vendors.
                                                   42
Purchase decisions exceeding $20,000 for labor, equipment, supplies or services purchased, leased or
contracted for shall be made only after receiving whenever possible, written quotations from at least
three (3) vendors. Specific selections shall be recommended, via the Department Heads, to the
Director of Finance for approval with written quotations attached for review. Recommendations shall be
based on consideration of all applicable criteria as described under “Evaluation of Alternative Vendors”
below.

All Purchase decisions of $100,000 or more shall be made by obtaining competitive proposals from at
least three (3) responsible vendors. Sealed bids shall be utilized when required by a Federal awarding
agency.

Solicitations for goods and services (requests for proposals) should provide for all of the following:

1.     A clear and accurate description of the technical requirements for the material, product or
       service to be procured. In competitive procurements, such a description shall not contain
       features, which unduly restrict competition.

2.     Requirements which the bidder/offeror must fulfill and all other factors to be used in evaluating
       bids or proposals (see the next section entitled “Evaluation of Alternative Vendors” for required
       criteria)

3.     A description, whenever practicable, of technical requirements in terms of functions to be
       performed or performance required, including the range of acceptable characteristics or
       minimum acceptable standards.

4.     The specific features of "brand name or equal" descriptions that bidders are required to meet
       when such items are included in the solicitations.

5.     Preference, to the extent practicable and economically feasible, for products and services that
       conserve natural resources and protect the environment and are energy efficient.

6.     A description of the proper format, if any, in which proposals must be submitted, including the
       name of the Challenge Industries, Inc. person to whom proposals should be sent.

7.     The date by which proposals are due.

8.     Required delivery or performance dates/schedules.

9.     Clear indications of the quantity(ies) requested and unit(s) of measure.


Extensions of Due Dates and Receipt of Late Proposals

Solicitations should provide for sufficient time to permit the preparation and submission of offers before
the specified due date. However, in the event that a prospective offeror requests an extension to a due
date specified in a solicitation, and such an extension is both justified and compatible with the


                                                    43
requirements of Challenge Industries, Inc., an extension may be granted by the purchasing
representative.

Vendor proposals are considered late if received after the due date and time specified in the
solicitation. All such late proposals shall be marked “Late Proposal” on the outside of the envelope and
retained, unopened, in the procurement folder. Vendors that submit late proposals shall be sent a letter
notifying them that their proposal was late and could not be considered for award.


Evaluation of Alternative Vendors

Alternative vendors shall be evaluated on a weighted scale that considers the following criteria:

1.     Adequacy of the proposed methodology of the vendor
2.     Skill and experience of key personnel
3.     Demonstrated company experience
4.     Other technical specifications (designated by department requesting proposals)
5.     Compliance with administrative requirements of the request for proposal (format, due date, etc.)
6.     Vendor’s financial stability
7.     Vendor’s demonstrated commitment to the nonprofit sector
8.     Results of communications with references supplied by vendor
9.     Ability/commitment to meeting time deadlines
10.    Cost
11.    Minority- or women-owned business status of vendor
12.    Other criteria (to be specified by department requesting proposal)

Not all of the preceding criteria may apply in each purchasing scenario. However, in each situation
requiring consideration of alternative vendors, the department responsible for the purchase shall
establish the relative importance of each criterion prior to requesting proposals and shall evaluate each
proposal on the basis of the criteria and weighting that have been determined.

After a vendor has been selected and approved by the department director, the final selection shall be
approved by the Executive Director prior to entering into a contract.


Affirmative Consideration of Minority, Small Business and Women-Owned Businesses

Positive efforts shall be made by Challenge Industries, Inc. to utilize small businesses, minority-owned
firms, and women's business enterprises, whenever possible. The following steps shall be taken in
furtherance of this goal:

1.     Ensure that small business, minority-owned firms, and women's business enterprises are used
       to the fullest extent practicable.

2.     Make information on forthcoming opportunities available and arrange time frames for purchases
       and contracts to encourage and facilitate participation by small business, minority-owned firms
       and women's business enterprises.


                                                   44
3.     Consider in the contract process whether firms competing for larger contracts tend to
       subcontract with small businesses, minority-owned firms and women's business enterprises.

4.     Encourage contracting with consortiums of small businesses, minority owned firms and
       women's business enterprises when a contract is too large for one of these firms to handle
       individually.

5.     Use the services and assistance, as appropriate, of such organizations as the Small Business
       Administration and the Department of Commerce's Minority Business Development Agency in
       the minority-owned firms and women's business enterprises.


Special Purchasing Conditions

Emergencies:

Where equipment, materials, parts, and/or services are needed, quotations will not be necessary if the
health, welfare, safety, etc., of staff and protection of Organization property is involved.

Single Distributor/Source:

Where there is only one (1) distributor for merchandise needed and no other product meets the stated
needs or specifications, quotations will not be necessary.

Federally-Funded Programs:

Purchases that will be charged to programs funded with federal awards will be subject to additional
policies. These policies are described in a separate section, “Policies Associated With Federal
Awards.”


Right to Audit Clause

It is the policy of Challenge Industries, Inc. to require a “Right to Audit” clause in all contracts between
the Organizations and vendors that either 1) take any form of temporary possession of assets directed
for the Organization or 2) process data that will be used in any financial function of the Organization.
This Right to Audit clause shall permit access to and review of all documentation and processes
relating to the vendor’s operations that apply to Challenge Industries, Inc. as well as all documents
maintained or processed on behalf of Challenge Industries, Inc. for a period of three years. The clause
shall state that such audit procedures may be performed by Challenge Industries, Inc. employees or
any outside auditor or contractor designated by the Organization.


Vendor Files and Required Documentation

The Accounting Department shall create a vendor folder for each new vendor from whom Challenge
Industries, Inc. purchases goods or services.

                                                     45
Upon making the initial purchase from any vendor (regardless of whether a contract is involved), the
Accounts Payable Clerk shall mail a blank Form W-9 to that vendor, along with a request for the vendor
to complete and sign the W-9 or provide equivalent, substitute information and return it in the postage-
paid envelope provided. Completed, signed Forms W-9 or substitute documentation shall be filed in
each vendor’s folder. Vendors who do not return a completed, signed Form W-9 or provide equivalent
documentation shall be issued a Form 1099 at the end of each calendar year in accordance with the
policies described in the section of this manual on “Government Returns.”

See the section on “Payroll and Related Policies” for guidance on determining whether a vendor should
be treated as an employee.


Ethical Conduct in Purchasing

Ethical conduct in managing the Organization's purchasing activities is an absolute essential. Staff
must always be mindful that they represent the Board of Directors and share a professional trust with
other staff and the general membership.

Staff shall discourage the offer of, and decline, individual gifts or gratuities of value in any way that
might influence the purchase of supplies, equipment, and/or services. Staff shall notify their immediate
Supervisor if they are offered such gifts. Gifts to the Organization, viewed as normal business
incentives to obtain future Organization-approved business such as for meeting sites, are acceptable
donations.


Conflicts of Interest Prohibited

No officer, board member, employee, or agent of Challenge Industries, Inc. shall participate in the
selection or administration of a vendor if a real or apparent conflict of interest would be involved. Such
a conflict would arise if an officer, board member, employee or agent, or any member of his/her
immediate family, his/her spouse/partner, or an organization that employs or is about to employ any of
the parties indicated herein, has a financial or other interest in the vendor selected.

Officers, board members, employees and agents of Challenge Industries, Inc. shall neither solicit nor
accept gratuities, favors, or anything of monetary value from vendors or parties to sub-agreements.
However, unsolicited gifts of a nominal value of $10 may be accepted with the approval of the Director
of Finance.


Receipt and Acceptance of Goods

Any individual receiving goods shall inspect all goods received. Upon receipt of any item from a vendor,
the following actions shall immediately be taken:

1.     Verify the quantity of boxes/containers with the bill of lading and/or packing slip
2.     Examine boxes/containers for exterior damage
3.     Compare the description and quantity of goods to the packing slip (and/or purchase order if
       used)
                                                   46
4.     Examine goods for physical damage
5.     Note on the bill of lading and/or packing slip any discrepancies (missing or damaged
       boxes/containers, etc.)
6.     Initial and date the bill of lading and/or packing slip and forward the bill of lading to the
       Accounting Department

It is the policy of Challenge Industries, Inc. to perform the preceding inspection procedures in a timely
manner in order to facilitate prompt return of goods and/or communication with vendors.




                                                   47
POLITICAL INTERVENTION


Prohibited Expenditures

Consistent with its tax-exempt status under Section 501(c)(3) the Internal Revenue Code, it is the policy
of Challenge Industries, Inc. that the Organization shall not incur any expenditure for political
intervention. For purposes of this policy, political intervention shall be defined as any activity associated
with the direct or indirect support or opposition of a candidate for elective public office at the federal,
state or local level. Political intervention does not include lobbying activities, defined as the direct or
indirect support or opposition for legislation, which is not prohibited under the Internal Revenue Code
for Challenge Industries, Inc. (see the next section in this manual). Examples of prohibited political
expenditures include, but are not limited to, the following:

1.     Contributions to political action committees
2.     Contributions to the campaigns of individual candidates for public office
3.     Contributions to political parties
4.     Expenditures to produce printed materials (including materials included in periodicals) that
       support or oppose candidates for public office
5.     Expenditures for the placement of political advertisements in periodicals


Endorsements of Candidates

It is the policy of Challenge Industries, Inc. not to endorse any candidates for public office in any
manner, either verbally or in writing. This policy extends to the actions of management and other
representatives of Challenge Industries, Inc., when these individuals are acting on behalf of, or are
otherwise representing, the Organization.


Prohibited Use of Organization Assets and Resources

It is the policy of Challenge Industries, Inc. that no assets or human resources of the organization shall
be utilized for political activities, as defined above. This prohibition extends to the use of Organization
assets or human resources in support of political activities that are engaged in personally by board
members, members of management, employees, or any other representatives of Challenge Industries,
Inc.. While there is no prohibition against these individuals engaging in political activities personally (on
their own time, and without representing that they are acting on behalf of the Organization), these
individuals must at all times be aware that Organization resources cannot at any time be utilized in
support of political activities.




                                                     48
LOBBYING

Introduction

Unlike political intervention, described in the preceding section, expenditures by a section 501(c)(3)
public charity for lobbying activities are allowable under the Internal revenue Code (however, if the
organization receives federal awards, no lobbying expenditures may be charged directly or indirectly to
any such award – i.e. the charity must have a non-federal source of income to which such lobbying
costs can be cited as the source of the activity).


Definition of Lobbying Activities

Lobbying activities conducted by the Organization may be either direct or indirect lobbying. Direct
lobbying activities consist of attempts to influence legislation through communication with any member
or employee of a legislative body (federal, state, or local levels) or, if the principal purpose of the
communication is lobbying, with any government official or employee who may participate in the
formulation of the legislation. Direct lobbying occurs when employees of the Organization or paid
lobbyists communicate directly in attempts to influence legislation. Lobbying is distinguishable from
advocacy activities, which involve efforts to advocate certain positions which may have legislative
implications, as long as a nonpartisan analysis of the relevant facts is performed.

Lobbying occurs only when there is a specific piece of legislation or legislative proposal pending that
the Organization is attempting to influence. Therefore, lobbying is considered to have taken place only
if both of the following elements are present:

1.     The communication refers to specific legislation (legislation that has been introduced or a
       specific legislative proposal that the Organization supports or opposes), and

2.     The communication reflects a view on the legislation (supporting or opposing it).

Indirect lobbying involves communications with the general public (rather than directly with legislators,
etc) where the communication includes the same two preceding characteristics plus it encourages the
recipient of the communication to take action with respect to the specific legislation (by contacting
legislators, etc).


Segregation of Lobbying Expenditures

Lobbying expenditures are allowable for charities under the Internal Revenue Code. However, lobbying
may not represent a substantial portion of the organization’s overall activities. The organization’s tax
exemption would be at risk if lobbying becomes a substantial portion of the Organization’s activities.

Accordingly, it is the policy of the Organization to segregate all direct and indirect lobbying expenditures
in a separate section of the chart of accounts in the general ledger. Where appropriate, lobbying
expenditures shall also be allocated their fair and reasonable share of employee benefits and other
indirect costs in accordance with cost allocation policies described elsewhere in this manual.




                                                    49
Lobbying Election

As a public charity, the Organization has two options with respect to the Internal Revenue Code’s
restriction against lobbying being a “substantial” portion of its activities. One option is to make a formal
lobbying election, which results in the organization following a specific mathematical formula to
determine its lobbying limitations. Exceeding the limitation would result in an excise tax assessed to the
Organization. Exceeding the limitation by 50-percent or more over a 4-year period would result in loss
of the Organization’s overall tax exemption. The other option is to not make the election, resulting in an
entirely judgmental assessment of its lobbying activities by the IRS. If it is deemed by the IRS to have
engaged in substantial lobbying for any period, the Organization would lose its overall tax exemption
under this option.

It is the policy of Challenge Industries, Inc. to make the Internal Revenue Code section 501(h) lobbying
election by filing Form 5768, and leaving that election in place. As a result, the organization shall report
its lobbying expenditures by completing the section for “Electing Charities” on Schedule A that
accompanies its annual Form 990 information return filed with IRS.




                                                    50
ACCOUNTS PAYABLE MANAGEMENT

Overview

Challenge Industries, Inc. strives to maintain efficient business practices and good cost control. A well
managed accounts payable function can assist in accomplishing this goal from the purchasing decision
through payment and check reconciliation.

It is the policy of Challenge Industries, Inc. that the recording of assets or expenses and the related
liability is performed by an employee independent of ordering and receiving. The amounts recorded are
based on the vendor invoice for the related goods or services. The vendor invoice should be supported
by an approved check request and/or purchase order where necessary, and should be reviewed and
approved by the Department Head prior to being processed for payment. Invoices and related general
ledger account distribution codes are reviewed prior to posting to the subsidiary system.

The primary objective for accounts payable and cash disbursements is to ensure that:

1.     Disbursements are properly authorized
2.     Invoices are processed in a timely manner
3.     Vendor credit terms and operating cash are managed for maximum benefits.


Recording of Accounts Payable

All valid accounts payable transactions, properly supported with the required documentation, shall be
recorded as accounts payable in a timely manner.

Accounts payable are processed at least weekly. Information is entered into the system from approved
invoices or disbursement vouchers with appropriate documentation attached.

It is the policy of Challenge Industries, Inc. that only original invoices will be processed for payment
unless duplicated copies have been verified as unpaid by researching the vendor records. No vendor
statements shall be processed for payment.


Accounts Payable Cut-Off

For purposes of the preparation of the Organization’s monthly financial statements, all vendor invoices
that are received, approved and supported with proper documentation by the tenth day of the following
month shall be recorded as accounts payable as of the end of the immediately preceding month if the
invoice pertains to goods or services delivered by month-end.




                                                   51
Establishment of Control Devices

Control of invoices is established by the Accounts Payable Clerk as soon as invoices are received.
Vendors will be instructed to mail all invoices directly to the accounts payable department.

Upon receipt of invoices, each invoice shall be date stamped, and distributed to the appropriate
personnel for approval.

Prior to any account payable being posted to the subsidiary system for payment, the following
documents shall be attached:

1.     Vendor invoice (employee expense report; employee flexible medical reimbursement; or
       mileage report)
2.     Bill of Lading and/or Packing slip (where appropriate)
3.     Purchase order for purchases in excess of $1,000
4.     Any other supporting documentation deemed appropriate.


Processing of Invoices

The following procedures shall be applied to each invoice by the Accounts Payable Clerk:

1.     Check the mathematical accuracy of the vendor invoice.
2.     Compare the nature, quantity and prices of all items ordered per the vendor invoice to the
       purchase order, packing slip and receiving report as applicable
3.     Document the general ledger distribution, using the Organization’s current chart of accounts
4.     Obtain the review and approval of the Department Head (or their designee) associated with the
       goods or services purchased as necessary.

Approvals by Department Heads (or their designees) indicate their acknowledgment of satisfactory
receipt of the goods or services invoiced, agreement with all terms appearing on the vendor invoice,
agreement with general ledger account codes, and agreement to pay vendor in full. Approvals shall be
documented with initials or signatures of the approving individual.


Payment Discounts

To the extent practical, it is the policy of Challenge Industries, Inc. to take advantage of all prompt
payment discounts offered by vendors. When availability of such discounts is noted, and all required
documentation in support of payment is available, payments will be scheduled so as to take full
advantage of the discounts.




                                                   52
Employee Expense Reports

Reimbursements for travel expenses, business meals, or other approved costs will be made only upon
the receipt of a properly approved and completed expense reimbursement form (see further policies
under “Travel and Business Entertainment”). All receipts must be attached, and a brief description of
the business purpose of trip or meeting must be noted on the form. Expense reports will be processed
for payment in the next vendor payment cycle if received within two business days of the deadline.
Expenses older than six months will not be reimbursed.


Reconciliation of A/P Subsidiary Ledger to General Ledger

At the end of each monthly accounting period, the total amount due to vendors per the accounts
payable subsidiary ledger shall be reconciled to the total per the accounts payable general ledger
account (control account). All differences are investigated and adjustments are made as necessary.
The reconciliation and the results of the investigation of differences are reviewed and approved by the
Director of Finance.

Also on a monthly basis, the Accounts Payable Clerk shall perform the following procedures:

1.     Check all statements received for unprocessed invoices.

2.     Check the Purchase Order file for open P.O.’s that are more than 60 days old and follow up.


Management of Accounts Payable Vendor Master File

Upon the receipt of an invoice from a new vendor that is not already in Challenge Industries, Inc.’s
Accounts Payable subsidiary system Vendor Master File, the Accounts Payable Clerk shall mail a Form
W-9 and a request for completion of the Form W-9, including the vendor’s full address and federal
employer identification number.

The Vendor Master File shall contain the following information:

1.     Vendor’s legal name and any DBA name(s)
2.     Street address and/or mailing address
3.     Federal employer identification number
4.     Telephone number
5.     Fax number (if available)
6.     Contact name (if any).

On an annual basis, vendors that have not been utilized over the preceding 24-month period may be
purged from the Vendor Master File in the Accounts Payable subsidiary system.




                                                   53
TRAVEL AND BUSINESS ENTERTAINMENT

Travel Advances

Funds will be advanced for upcoming travel only upon receipt of a completed and properly approved
check request for travel advance. Travel advances are generally limited to a maximum of $200 unless
there is a extraordinary need for additional funds. Travel advances are to be used only for the purpose
intended. Travel expenses are to be made in accordance with the Organization’s travel policies as
explained later in this section.

Employees receiving travel advances are required to sign for the advance signifying their
acknowledgement of, and agreement to, these policies. Employees receiving travel advances must
submit an expense report within 30 days of returning from travel. Any outstanding advances more than
30 days old will be deducted from an employee's next paycheck.


Employee and Director Business Travel

At the conclusion of a Challenge Industries, Inc. business trip, an employee that has incurred business-
related expenses should complete an Expense Report in accordance with the following policies:

1.     Identify each separately incurred business expense (i.e. do not group all expenses associated
       with one trip together)
2.     With the exception of tips, tolls and reimbursed mileage, all business expenses must be
       supported with invoices/receipts.
3.     For all lodging and any expenditure other than meals, vendor receipts/invoices must be
       submitted. Credit card charge slips do not represent adequate supporting documentation – a
       hotel receipt must be obtained to substantiate all lodging expenditures.
4.     For airfare, airline-issued receipts should be obtained. If a traveler fails to obtain a receipt, other
       evidence must be submitted indicating that a trip was taken and the amount paid (for example, a
       combination of an itinerary, a credit card receipt, and boarding passes).
5.     Mileage may be reimbursed at a rate equal to or less than the standard federal rates currently in
       effect, as published each year by the IRS.
6.     The business purpose of each trip must be adequately explained on each report.
7.     For all meals and other business expenditures, the following must be clearly identified:
       a.       Names, titles, organizations, and business relationships of all persons entertained
       b.       The business purpose of the meal or other business event (topics discussed, etc.)
8.     All expense reports must be signed and dated by the employee.
9.     All expense reports must be approved by the employee's Department Director.
10.    Only one expense report form should be prepared for each trip.

An employee will not be reimbursed for expense reports not meeting the preceding criteria. If the
Expense Report results in a balance due to Challenge Industries, Inc. (as a result of receiving a travel
advance greater than actual business expenditures), the employee must attach a check or sign a
statement indicating authorization to settle the balance due through a payroll deduction.


                                                     54
No further travel advances will be issued to any employee who has an outstanding balance due to
Challenge Industries, Inc. from previous business trips.


Reasonableness of Travel Costs

Challenge Industries, Inc. shall reimburse travelers only for those business-related costs that are
reasonably incurred. Accordingly, the following guidelines shall apply:

1.     Suites and other upgraded rooms at hotels shall not be allowed. Travelers should stay in
       standard rooms
2.     Ask hotels for any available discounts – nonprofit, government, corporate rates or conference
       blocked rooms
2.     When utilizing rental cars, travelers should rent midsize or smaller vehicles; Share rental cars
       whenever possible
3.     Business-related long-distance telephone calls while away on business travel are permitted, but
       should be kept to a minimum; Expense reports should explain long-distance charges
4.     Personal long-distance calls while away on business are reimbursable if kept to a minimum,
       such as one nightly call home to family. Personal calls in excess of this shall not be reimbursed
5.     Whenever possible, travelers should utilize long-distance calling cards when placing calls while
       away on travel. Avoid using the hotel’s long-distance service if possible
6.     Reasonable tips for baggage handling shall be reimbursed. No receipts are required
7.     Employees will not be reimbursed for any alcoholic beverages consumed by themselves or and
       persons being entertained.


Special Rules Pertaining to Air Travel

The following additional rules apply to air travel:

1.     Air travel should be at coach class; First class air travel shall not be reimbursed unless there is
       a documented medical reason
2.     Memberships in airline flight clubs is not reimbursable
3.     Cost of flight insurance is not reimbursable
4.     When airfare is $500 or more, two quotes from a travel agency and/or an airline should be
       obtained and attached to the expense report
5.     Cost of upgrade certificates is not reimbursable
6.     Cost of canceling and rebooking flights is not reimbursable, unless it can be shown that it was
       necessary or required for legitimate business reasons (such as changed meeting dates, etc.)
7.     Travelers must identify and pay for all personal flights, even if such flights are incorporated into
       a flight schedule that serves business purposes (i.e. Challenge Industries, Inc. will not
       reimburse for the personal legs of a trip).




                                                      55
Spouse/Partner Travel

It is the policy of Challenge Industries, Inc. not to reimburse any employee for separate travel costs (air
fare, etc.) associated with his/her spouse or partner. The cost of a shared hotel room need not be
allocated between employee/director and spouse/partner for purposes of this policy.


Policy for the Review of Corporate Credit Card Statements and Expense Reimbursements

It is the policy of Challenge Industries, Inc. that Corporate Credit Card Statements and Expense
Reimbursements be reviewed as follows:

The President’s Credit Card Statements and Expense Reimbursements shall be reviewed by the
Finance Committee of the Challenge Industries, Inc. Board of Directors every six months in July for the
period January through June and in January for the period of July through December of each year.

The Vice President(s)’s Credit Card Statements and Expense Reimbursements shall be reviewed by
the President of Challenge Industries, Inc. every six months in July for the period January through June
and in January for the period of July through December of each year.

All other Credit Card Statements and Expense Reimbursements shall be reviewed monthly by the Vice
President for Finance and/or Director of Finance.




                                                    56
CASH DISBURSEMENTS (CHECK-WRITING) POLICIES


Check Preparation

It is the policy of Challenge Industries, Inc. to print vendor checks and expense reimbursement checks
on a weekly basis. Checks shall be prepared by persons independent of those who initiate or approve
expenditures, as well as those who are authorized check signers.

All vendor and expense reimbursement checks shall be produced in accordance with the following
guidelines:

1.     Expenditures must be supported in conformity with the purchasing, accounts payable, and travel
       and business entertainment policies described in this manual
2.     Timing of disbursements should generally be made to take advantage of all early-payment
       discounts offered by vendors
3.     Generally, all vendors shall be paid within 30 days of submitting a proper invoice upon delivery
       of the requested goods or services
4.     Total cash requirements associated with each check run is monitored in conjunction with
       available cash balance in bank prior to the release of any checks
5.     All supporting documentation is attached to the corresponding check prior to forwarding the
       entire package to an authorized check signer
6.     Checks shall be utilized in numerical order (unused checks are stored in a locked file in the
       accounting department)
7.     Checks shall never be made payable to “bearer” or “cash”
8.     Checks shall never be signed prior to being prepared


Check Signing

Checks may only be signed by authorized signers or with an authorized signer’s facsimile signature
stamp. No checks shall be signed prior to the check being completed in its entirety (no signing of blank
checks).

Check signers should examine all original supporting documentation to ensure that each item has been
properly checked prior to signing a check. Checks should not be signed if supporting documentation
appears to be missing or there are any questions about a disbursement.


Mailing of Checks

After signature, checks are reviewed by the Director of Finance before mailing. The Director of Finance
will write on the Check Registere “Reviewed (date)” and sign the Check Register. The Check Register
will then be returned to the Accounts Payable Clerk for filing. Flexible medical reimbursement checks
will be given to the Human Resources Associate for recording and distribution to employees. Mileage


                                                   57
and employee expense reimbursement checks will be given to the Receptionist for distribution to
employees. All other checks will be placed in the outgoing mail bin in the receptionist area.


Voided Checks and Stop Payments

Checks may be voided due to processing errors by making proper notations in the check register and
defacing the check by clearly marking it as “VOID”. All voided checks shall be retained to aid in
preparation of bank reconciliations.

Stop payment orders may be made for checks lost in the mail or other valid reasons. Stop payments
are processed by telephone or internet instruction and authorization to the bank by accounting
personnel with this authority. The stop payment is recorded through the Accounts Payable subsidiary
system and a journal entry is made to record any related bank fees.


Record-Keeping Associated with Independent Contractors

Challenge Industries, Inc. shall obtain a completed Form W-9 or equivalent substitute documentation
from all vendors to whom payments are made (see “Accounts Payable Management” policies). A
record shall be maintained of all vendors to whom a Form 1099 is required to be issued at year-end.
Payments to such vendors shall be accumulated over the course of a calendar year.




                                                 58
CREDIT CARDS


Issuance of Corporate Credit Cards

Challenge Industries, Inc. employees who travel frequently on Organization business may request a
corporate credit card by contacting the Accounting Department. All corporate credit cards must be
approved by the Director of Finance. Cardholders will be required to sign a statement acknowledging
that the card shall be used exclusively for legitimate Organization-related business purposes and that
the cardholder agrees to take reasonable precautions to protect the card from loss or theft by storing it
in a secure location. Upon approval from the credit card company, a card will be issued bearing the
names of both the individual and Challenge Industries, Inc.


Cardholder Responsibilities

Every month, each cardholder will be provided with a statement detailing that month’s expenditures that
were charged to their corporate credit card. The cardholder is expected to review this statement within
five days because, while the card is expected to be used solely for legitimate Organization business
purposes, there may be inadvertent personal use or unauthorized uses of the card.

Cardholders must reimburse the organization for any such inadvertent personal charges within the
same five day period.

Any fraudulent or other unauthorized charges shall be immediately pointed out to the Director of
Finance for further investigation with the credit card provider.

In connection with their review of the monthly statement, each cardholder shall indicate their approval
of the statement by initialing the statement. The statement shall then be forwarded to the cardholder’s
immediate Supervisor, accompanied by original supporting documentation for all charges.
Documentation of meals, travel and valid business entertainment expenditures shall include all of the
same elements as described in the earlier policy on “Employee and Director Business Travel” (i.e.
names of people involved, business purpose, etc.)

The Director of Finance shall review and sign the monthly statement for all cardholders forward it to the
Accounting Department. The Director of Finance’s signature indicate that the purchases are approved,
that each cardholder was authorized to make the purchases, and that the purchases were made in
accordance with Challenge Industries, Inc. policies.

Cardholders shall report the loss or theft of a corporate credit card immediately by notifying the credit
card company (telephone number 1-866-552-8855, 24 hours a day, seven days a week) as well as the
Director of Finance.




                                                   59
Revocation of Corporate Credit Cards

Failure to comply with any of these policies associated with the use of Challenge Industries, Inc.’s
corporate credit cards shall be subject to possible revocation of credit card privileges. Determination of
whether credit cards are to be revoked shall be made by the Director of Finance, with approval from the
Executive Director.


Policy for the Review of Corporate Credit Card Statements and Expense Reimbursements

It is the policy of Challenge Industries, Inc. that Corporate Credit Card Statements and Expense
Reimbursements be reviewed as follows:

The President’s Credit Card Statements and Expense Reimbursements shall be reviewed by the
Finance Committee of the Challenge Industries, Inc. Board of Directors every six months in July for the
period January through June and in January for the period of July through December of each year.

The Vice President(s)’s Credit Card Statements and Expense Reimbursements shall be reviewed by
the President of Challenge Industries, Inc. every six months in July for the period January through June
and in January for the period of July through December of each year.

All other Credit Card Statements and Expense Reimbursements shall be reviewed monthly by the Vice
President for Finance and/or Director of Finance.




                                                   60
PAYROLL AND RELATED POLICIES

Classification of Workers as Independent Contractors or Employees

It is the policy of Challenge Industries, Inc. to consider all relevant facts and circumstances regarding
the relationship between Challenge Industries, Inc. and the individual in making determinations about
the classification of workers as independent contractors or employees. This determination is based on
the degree of control and independence associated with the relationship between Challenge Industries,
Inc. and the individual. Facts that provide evidence of the degree of control and independence fall into
three categories:

1.     Behavioral control

2.     Financial control

3.     The type of relationship of the parties

Facts associated with each of these categories that will be considered by Challenge Industries, Inc. in
making employee/contractor determinations shall include:

1.     Behavioral control:

       a.      Instructions given by Challenge Industries, Inc. to the worker that indicate control over
               the worker (suggesting an employee relationship), such as:

               (1)    When and where to work
               (2)    What tools or equipment to use
               (3)    What workers to hire or to assist with the work
               (4)    Where to purchase supplies and services
               (5)    What work must be performed by a specified individual
               (6)    What order or sequence to follow

       b.      Training provided by Challenge Industries, Inc. to the worker (i.e. employees typically
               are trained by their employer, whereas contractors typically provide their own training)

2.     Financial control:

       a.      The extent to which the worker has unreimbursed business expenses (i.e. employees
               are more likely to be fully reimbursed for their expenses than is a contractor)

       b.      The extent of the worker’s investment in the facilities/assets used in performing services
               for Challenge Industries, Inc. (greater investment associated with contractors)

       c.      The extent to which the worker makes services available to the relevant market

       d.      How Challenge Industries, Inc. pays the worker (i.e. guaranteed regular wage for
               employees vs. flat fee paid to some contractors)

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       e.      The extent to which the worker can realize a profit or loss.

3.     Type of Relationship:

       a.      Written contracts describing the relationship that Challenge Industries, Inc. and the
               individual intend to create

       b.      Whether Challenge Industries, Inc. provides the worker with employee-type benefits,
               such as insurance, paid leave, etc.

       c.      The permanency of the relationship

       d.      The extent to which services performed by the worker are a key aspect of the regular
               business of Challenge Industries, Inc.

If an individual qualifies for independent contractor status, the individual will be sent a Form 1099 if total
compensation paid to that individual for any calendar year, on the cash basis, is $600 or more. The
amount reported on a Form 1099 is equal to the compensation paid to that person during a calendar
year (on the cash basis). Excluded from “compensation” are reimbursements of business expenses that
have been accounted for by the contractor by supplying receipts and business explanations.

If an individual qualifies as an employee, a personnel file will be created for that individual and all
documentation required by the Challenge Industries, Inc. personnel policies shall be obtained. The
policies described in the remainder of this section shall apply to all workers classified as employees.


Payroll Administration

Challenge Industries, Inc. operates on a bi-weekly payroll. For all Challenge Industries, Inc. employees,
a personnel file is established and maintained with current documentation, as described throughout this
section and more fully described in Challenge Industries, Inc.'s Human Resources Policies and
Procedures Manual for Staff Members.

The following forms, documents and information shall be obtained and included in the personnel files of
all new employees:

1.     Challenge Industries, Inc. Employment Application (and resume, if applicable)
2.     Applicant references
3.     Form W-4 Employee Federal Withholding Certificate
4.     Form IT-2104 New York State Withholding Certificate
6.     Form I-9 Employment Eligibility Verification
7.     Copy of driver’s license
8.     Copy of Social Security card issued by the Social Security Administration
9.     Starting date and scheduled hours
10.    Job title and starting salary


                                                     62
11.    Authorization for direct deposit of paycheck, along with a voided check or deposit slip if the
       employee chooses direct deposit

For employees without a current, valid driver’s license, acceptable alternative documents shall include:

1.     U.S. Passport
2.     Certificate of U.S. Citizenship (INS Form N-560 or N-561)
3.     Voter’s registration card
4.     U.S. Military card
5.     ID card issued by a federal, state or local government, provided it contains a photo

For employees without a Social Security card, acceptable alternative documents shall include:

1.     U.S. Passport
2.     Certificate of U.S. Citizenship (INS Form N-560 or N-561)
3.     Original or certified copy of a birth certificate issued by a state, county or municipal authority
4.     Certificate of Birth Abroad issued by the Department of State (Form FS-545 or Form DS-1350)
5.     U.S. Citizen ID Card (INS Form I-197)
6.     Native American tribal document
7.     ID Card for use of Resident Citizen in the United States (INS Form I-179)

Each employee personnel file shall also indicate whether the employee is exempt or non-exempt from
the provisions of the Fair Labor Standards Act.


Changes in Payroll Data

It is the policy of Challenge Industries, Inc. that all of the following changes in payroll data are to be
authorized in writing:

1.     New hires
2.     Terminations
3.     Changes in salaries and pay rates (accept annual Cost of Living Adjusments)
4.     Voluntary payroll deductions
5.     Changes in income tax withholding status
6.     Court-ordered payroll deductions

New hires, terminations, and changes in salaries or pay rates shall be authorized in writing by the
appropriate Department Head, Director of Finance, or Executive Director.

Voluntary payroll deductions and changes in income tax withholding status shall be authorized in
writing by the individual employee.

Documentation of all changes in payroll data shall be maintained in each employee’s personnel file.

Court-ordered payroll deduction shall be evidenced by appropriate governmental entity documentation.

                                                      63
Payroll Taxes

The Director of Finance is responsible for ensuring all required tax forms are properly completed and
submitted, and that all required taxes are withheld and paid. The Accounting Department may utilize
the services of an outside payroll service center for the processing of payroll, as determined by the
Director of Finance.

It is the policy of Challenge Industries, Inc. to obtain an updated Form W-4 from each employee in
January of each year. Withholding of federal income taxes shall be based on the most current Form W-
4 prepared by each employee.


Preparation of Timesheets for Non-Exempt Employees

Each Challenge Industries, Inc. non-exempt employee must submit to the Accounting Department a
signed timesheet, approved and signed by their Department Head (or designated alternate) no later
than 12:00 noon on the 1st day following the close of each pay period. Timesheets shall be prepared in
accordance with the following guidelines:

1.     Each timesheet shall reflect all hours worked during the pay period (time actually spent on the
       job performing assigned duties), whether compensated or not
2.     Timesheets shall be prepared in ink
3.     Errors shall be corrected by crossing through the incorrect entry, filling in the correct entry, and
       placing the employee’s initials next to the change (i.e. employees shall not use “white out” or
       correction tape)
4.     Compensated absences (vacation, holiday, sick leave, etc.) should be clearly identified as such.

An Organization employee who is on leave, on travel, or is ill on the day that timesheets are due may
telephone or e-mail timesheet information to his or her Department Head (or designated alternate).
Time so submitted must reflect the actual time worked and the appropriate classifications. Upon return
to work, the employee must sign the timesheet submitted.


Processing of Timesheets for Non-Exempt Employees

Processing of timesheets in the accounting department is performed by the Senior Staff Accountant.
The Senior Staff Accountant checks all timesheets for mathematical accuracy. The Senior Staff
Accountant may change or correct the timesheets due to mathematical errors after reviewing the
timesheet with the employee and their Department Head (or designated alternate). When errors are
corrected, both the employee and the Department Head (or designated alternate) must initial such
corrections.

After reviewing and correcting timesheets for non-exempt employees, the Senior Staff Accountant
inputs the payroll data into the payroll system.




                                                   64
Preparation of Timecards for Hourly Employees

Each Challenge Industries, Inc. hourly employee is required to punch a time clock. Timecards are
collected and submitted to the Accounting Department by Department Heads (or designated alternates)
no later than 12:00 noon on the 1st day following the close of each pay period. Hourly employees are
required to punch timecards in and out in accordance with the following guidelines:

1.     At the beginning of each shift.
2.     At the beginning and end of meal breaks.
3.     At the end of each shift.

Hourly employees are not required to punch in or out during the fifteen minute scheduled breaks
required by DOL regulations.

Processing of Timecards for Hourly Employees

Processing of timecards in the accounting department is performed by the Accounts Payable Clerk.
The Accounts Payable Clerk checks all timecards for mathematical accuracy and timestamp errors.
The Accounts Payable Clerk may change or correct the timecards due to mathematical or timestamp
errors after reviewing the timecard with the employee and their Department Head (or designated
alternate). When errors are corrected, both the employee and the Department Head (or designated
alternate) must initial such corrections.

After reviewing and correcting timecards for hourly employees, the Payroll Data Entry Clerk inputs the
payroll data into the payroll system.

Preparation of Timecards and Production Sheets for Consumers

Each Challenge Industries, Inc. consumer is required to punch a time clock. Timecards are collected
and submitted to the Accounting Department by Department Heads (or designated alternates) no later
than 12:00 noon on the 1st day following the close of each pay period. Consumers are required to
punch timecards in and out in accordance with the following guidelines:

1.     At the beginning of each shift
2.     At the beginning and end of work floor absences for program services other than those
       performed on the work floor
3.     At the end of each shift.

Consumers are not required to punch in or out during the fifteen minute scheduled breaks required by
DOL regulations or during their half hour meal breaks.

In addition to timecards, production sheets are kept for each consumer. Production sheets will be
completed in accordance with the following guidelines:

1.     Record the work order(s) the consumer has worked on during the day, the time worked on the
       work order(s), and the pieces of work completed on the workorder(s)

                                                  65
2.     Record appropriate down time codes and amount of time consumer was without work due to
       down time
3.     Record time consumer is absent from the work floor for program services other than those
       performed on the work floor
3.     Record time for scheduled breaks
4.     Record time meal breaks
5.     Record total time (hours) for each day.

At the end of each pay period, Supervisors will match production sheets with the consumer timecards
for accuracy of actual hours in attendance each day.

Processing of Timecards and Production Sheets for Consumers

Processing of timecards and production sheets in the accounting department is performed by the
Accounts Payable Clerk. The Accounts Payable Clerk checks all timecards and production sheets for
mathematical accuracy and timestamp errors. The Accounts Payable Clerk may change or correct the
timecards and/or production sheets due to mathematical or timestamp errors after reviewing same with
the Supervisors.

After reviewing and correcting timecards and production sheets for consumers, the Payroll Data Entry
Clerk inputs the payroll data into the payroll system.

Tampering With, Altering, or Falsifying Time Records

Tampering with, altering, or falsifying time records, recording time on another employee's time record,
or willfully violating any other timesheet policy or procedure may result in disciplinary action, up to and
including discharge.

Review of Payroll

Upon production of all payroll reports and checks or return of payroll reports and checks from the
payroll service center, the Senior Staff Accountant reviews payroll prior to its distribution to employees.
The Director of Finance shall sign the payroll register, indicating approval of the payroll.


Distribution of Payroll

Payroll checks (or payment vouchers for electronic deposits) shall be distributed by the Receptionist
who does not approve time sheets, is not responsible for hiring and firing, and does not control the
preparation of payroll.

All employees and consumers are highly encouraged to have the payroll checks directly deposited to
their personal bank accounts. However, direct deposit is not mandatory.




                                                     66
             POLICIES PERTAINING TO SPECIFIC ASSET ACCOUNTS


CASH AND CASH MANAGEMENT

Cash Accounts

General Checking Account (operating account):

The primary operating account provides for routine business check disbursements. All cash and credit
card deposits received at the Challenge Industries, Inc. office are made to this account.

Cash transfers are done on an as needed basis to cover disbursements. Excess funds in this account
are transferred into interest-bearing business savings account.

Payroll Account:

The payroll account is separate from the operating account. The payroll account is used only for issuing
replacement payroll checks or when making corrections to an employee’s or consumer’s bi-weekly
payroll. The account shall not have a balance exceeding $1,000 at the end of any month after
adjustment for outstanding checks.

Transfers from the operating account into the payroll account are initiated by the Senior Staff
Accountant and processed by the Director of Finance.

Savings Account:

The Organization also maintains an interest-bearing savings account. Any excess funds as determined
by the Director of Finance not needed to meet anticipated cash flow needs of the operating checking
account shall be transferred into the Organization’s savings account. Transfers to or from the savings
account shall be initiated by the Director of Finance.


Authorized Signers

Challenge Industries, Inc. personnel authorized to sign checks drawn on the general operating account
shall consist of the following Organization officers:

       President
       Vice President

Authorized signers on the payroll account will be the same as those on the operating account.

It is the policy of Challenge Industries, Inc. to promptly notify the Organization’s financial institutions of
changes in authorized signatures upon the departure of any authorized signer.


                                                      67
Bank and Investment Account Reconciliations

Monthly bank account statements and quarterly investment account statements are received and
forwarded unopened to a Director of Finance. This Director of Finance shall open the statement and
review its contents for unusual or unexplained items. Unusual or unexplained items shall be reported
immediately to the Finance Committee.

After this review is complete, the entire bank statement is forwarded to the accounting department,
where reconciliation between the bank balance and general ledger balance is prepared by someone
who is not an authorized check signer. It is the policy of Challenge Industries, Inc. to complete the bank
reconciliation process within two weeks of receipt of each bank statement.

The Director of Finance shall reconcile all investment account statement quarterly with the general
ledger balance. It is the policy of Challenge Industries, Inc. to complete the investment reconciliation
process within two weeks of receipt of each quarterly investment statement.

All bank and investment accounts reconciliations, including any adjusting journal entries resulting from
preparing bank reconciliations, are reviewed by the Director of Finance on a monthly basis.

Bank and investment account reconciliations and copies of resulting journal entries are filed in the
current year's accounting files. All canceled checks returned with bank statements shall be filed in
numerical order by bank account and month.


Cash Flow Management

The Director of Finance monitors cash flow needs on a weekly basis to eliminate idle funds and to
ensure that payment obligations can be met. Cash transfers between accounts are performed on an
as-needed basis.


Stale Checks

It is the policy of Challenge Industries, Inc. to write off checks that are more than 6 months old that
have not cleared the Organization's bank. Payees of checks written off that exceed $1,000 will be
contacted to resolve the any issues.

All stale checks that are written off within the same fiscal year as they were written shall be credited to
the same expense or asset account that was debited when the check was written, or the expenditure
incurred. For stale checks written off in fiscal years subsequent to the year in which the check was
written, the credit shall be to miscellaneous income.

It is also the policy of Challenge Industries, Inc. to comply with the New York state laws regarding
unclaimed property. Accordingly, if uncashed checks are subject to a state reporting and transfer
requirement, the Organization shall file all appropriate forms and remit unclaimed property to the
appropriate jurisdiction.

                                                    68
Petty Cash

It is the policy of Challenge Industries, Inc. to provide for imprest funds (used for payment of minor
office expenditures, not for travel or employee advances) only for valid transactions and to periodically
replenish these funds up to its authorized balance of $100. It is the responsibility of the Accounts
Payable Clerk to ensure that the petty cash fund is locked at all times.

All disbursements from the petty cash fund must be accompanied by a completed and approved petty
cash voucher. Receipts are required for all disbursements from petty cash.

The Accounts Payable Clerk shall prepare a reconciliation of the petty cash account on a periodic
basis. Petty cash reconciliations are subject to review by the Senior Staff Accountant, who may also
perform periodic surprise cash counts and reconciliations.


Wire Transfers

The Director of Finance shall be the only Challenge Industries, Inc. employees authorized to transact
wire transfers from Challenge Industries, Inc. bank accounts. To prevent anyone other than the Director
of Finance from transacting wire transfers, a system shall be employed that requires the use of
passcodes for each wire transfer. Passcodes, issued only to the Director of Finance, are assigned by
the bank.

Confirmations of all wire transfers are delivered to the Senior Staff Accountant.




                                                   69
INVENTORY
Description of Inventory

Challenge Industries, Inc. maintains an inventory of goods used for the production of microfilm and
digital and for the growing and packaging of agricultural produce.

               Unprocessed Microfilm
               Developing Solutions
               Blank Microfilm Reels
               Plant Seeds
               Plastic Clamshells
               Plastic Sleeves
               Labels
               Shipping Boxes


Accounting for Inventory

It is the policy of Challenge Industries, Inc. to account for purchased inventory items at cost, using the
[first-in, first-out] method of valuation. Unit cost shall be computed by adding freight, insurance and
other shipping costs to the actual cost of purchased inventory, dividing this total amount by the number
of units purchased.


Physical Counts

It is the policy of Challenge Industries, Inc. to perform a physical count of inventory on annual basis;
except when a significant change in process or production occurs, at which time a special inventory will
be conducted. Any inventory items that appear damaged, obsolete or otherwise unable to be sold shall
be excluded from the counts. A detailed record of the physical count shall be kept by the individuals
involved in taking the inventory.

At the conclusion of the physical count, the inventory count sheets shall be extended by applying the
most recent unit costs to the physical quantities of each item on hand. The general ledger balance shall
be adjusted to reflect the total inventory on hand as determined by the physical count.


Contributed Inventory

Inventory items donated to Challenge Industries, Inc. shall be recorded as assets of the Organization at
the fair market value as of the date of the contribution, unless the Organization is acting as an agent in
connection with a contribution by a donor through the Organization to another charity specifically
identified by the donor. Contributed inventory items shall be subject to the same physical counting and
other policies as purchased inventory items.




                                                    70
PREPAID EXPENSES

Accounting Treatment

It is the policy of Challenge Industries, Inc. to treat payments of expenses that have a time-sensitive
future benefit as prepaid expenses and to amortize these items over the corresponding time period. For
purposes of this policy, payments of less than $500 shall be expensed as paid and not treated as
prepaid expenses, regardless of the existence of a future benefit.

Prepaid expenses with future benefits that expire within one year from the date of the financial
statements shall be classified as current assets. Prepaid expenses that benefit future periods beyond
one year from the financial statement date shall be classified as non-current assets.


Procedures

As part of the account coding process performed during the processing of accounts payable, all
incoming vendor invoices shall be reviewed for the existence of time-sensitive future benefits. If future
benefits are identified, the payment shall be coded to a prepaid expense account code.

The accounting department shall maintain a reconciliation of all prepaid expenses. The schedule shall
indicate the amount and date paid, the period covered by the prepayment, the purpose of the
prepayment, and the monthly amortization. This schedule shall be reconciled to the general ledger
balance as part of the monthly closeout process.




                                                    71
INVESTMENT POLICIES
Introduction

It is the policy of Challenge Industries, Inc. to treat all assets of the organization, including those funds
that are legally unrestricted, as though they are held by Challenge Industries, Inc. in a fiduciary capacity
for the purpose of accomplishing the organization’s tax-exempt mission. As such, the policies described
in this section are to be interpreted in light of that overall sense of stewardship, and the investment
standards of Challenge Industries, Inc. shall be those of a prudent investor.


Responsibilities

The Finance Committee shall be responsible for the oversight of management and investment of all of
Challenge Industries, Inc. funds. The Finance Committee authorizes the President and the Director of
Finance to direct all short-term and long-term cash and/or investment portfolios. The services of an
investment manager may also be used as approved by the Board of Directors.

The President and the Director of Finance shall be authorized to implement and administer this policy
on behalf of the Board of Directors and manage the endowment and non-endowment reserves in
accordance with this Investment policy. The Director of Finance shall provide on a quarterly basis a
written report on the status of investments to the Finance Committee of the Board, and the Finance
Committee shall report on the same basis to the full board.

The Finance Committee shall also be responsible for ascertaining that endowment and trust funds are
invested in accordance with the Investment Goals, Guidelines and Limitations set forth in this policy
and shall report regularly thereon to the Board of Directors. The Finance Committee shall periodically
review the Investment Goals, Guidelines and Limitations and recommend any changes thereto to the
Board of Directors for approval.

The Finance Committee shall also be responsible for ascertaining that both principal and income of
gifts and trusts are used in accordance with the terms of the gift or trust and shall report thereon on a
regular basis and at least annually to the Board of Directors.

The Finance Committee, to the extent practical, shall also be responsible for the oversight of gifts made
to the Endowment Fund or other trust funds in form other than cash and shall report thereon on a
regular basis and at least annually concerning the management of such gifts to the Board of Directors.


Investment Goals

It shall be the goal of Challenge Industries, Inc. to manage its cash and reserves in a manner that will:

1.     Provide adequate liquidity and cash flow for operational requirements,

2.     Prudently balance liquidity, risk, growth and current income to meet operating needs and
       provide for long-term growth, and

                                                     72
3.      Produce a total return (current income plus appreciation) to preserve and maintain the real
        purchasing power of the principal invested.

Investment Guidelines

The Finance Committee assigns authority to the President and Director of Finance for short-term (less
than one year) cash management using the following vehicles:

1.      U.S. Treasury and Agency Securities,

2.      A One/P One Commercial Paper maturing in ninety-one (91) days or less;

3.      Certificates of Deposit at financial institutions approved by the Finance Committee of the Board
        of Directors,

4.      Interest bearing deposit accounts at financial institutions approved by the Finance Committee of
        the Board of Directors, and

5.      Mutual Funds Securities consisting of U.S.Government securities.

The Finance Committee may authorize the above 1 through 5 for investment purposes as well as for
cash management.

The Finance Committee may authorize placement of funds with an investment manager to create and
manage a portfolio that meets the following criteria:

     1. The equity component of the portfolio shall not be less than 30% or more than 70% of
        the current market value of the total portfolio. The following restrictions shall apply to
        equity investments:

            a. Investments shall be diversified with representation in small, mid, and large cap
               companies, international equities, balancing growth and value disciplines.

            b. Concentration in any single industry shall not exceed 20% of the total portfolio
               market value.

            c. Concentration in any single company shall not exceed 5% of the total portfolio
               market value.

     2. The fixed income component of the portfolio shall not be less than 30% or more than
        70% of the current market value of the total portfolio. The following restrictions shall
        apply to fixed income investments:

            a. For purposes of this policy, fixed income securities shall be defined as bonds,
               convertible bonds, notes and cash invested on a short-term basis.

            b. Investments shall be limited to Federal Government and Agency issues and to
               corporate issues having credit ratings of "A" or better.


                                                   73
           c. No one fixed income issue should comprise more than 5% of the market value of
              the portfolio.

   3. Investment in international equity and/or fixed income instruments shall not exceed 15%
      of the total portfolio.

Investments may include other asset classes resulting from contributions to Challenge.

These matters will be subject to continued study by the Finance Committee.

Interfund Borrowing

From time to time, it may be necessary to borrow from the assets of the Endowment Fund to support
Challenge’s operations. The Finance Committee authorizes the President and the Director of Finance
to direct all such borrowings with the following limitations:

   1. The aggregate amount borrowed from the Endowment Fund may not exceed 25% of the
      current market value of the Endowment Fund and

   2. The amount borrowed may not reduce the current market value of the Endowment Fund
      to an amount less then the total Restricted Net Assets of Challenge Industries, Inc.

Funds shall be repaid at the rate of 1.5% of the original balance per month plus interest at the prime
rate. The Board of Directors may waive such repayment if it determines such payments are a hardship
to the organization. If excess funds become available, the Board of Directors may direct that such
funds be used as a lump sum payment to further reduce any outstanding balance.

Social Responsibility

The Board of Directors reserves the right to exclude from investment the securities of certain
corporations or industries because of concern over social responsibility issues.


Accounting Treatment

All purchased investments shall initially be recorded at cost. All investments acquired by donation to
Challenge Industries, Inc. shall initially be recorded at their fair market value as of the date of donation.
Donated investments shall be recorded as unrestricted, temporarily restricted, or permanently restricted
income and net assets based on the existence or absence of such restrictions, as defined earlier.

Subsequent to acquisition, it shall be the policy of Challenge Industries, Inc. to carry all equity securities
with readily determinable fair market values and all debt securities at their market values. Adjustments
to market value shall be made in the accounting records and financial statements of Challenge
Industries, Inc. on a quarterly basis.

Adjustments to market value result in unrealized gains and losses on investments. Such gains and
losses resulting from contributed investments (or from investments purchased with contributed funds)
shall be classified as unrestricted, temporarily restricted, or permanently restricted based on the
existence or absence of explicit restrictions on such appreciation and depreciation from the donor, as
defined earlier. Such unrealized gains and losses from investments purchased with unrestricted funds
shall be classified as unrestricted.
                                                     74
Procedures and Reporting

The following procedures will be followed to ensure that investments are properly managed and that
these investment policies are consistent with the mission of Challenge Industries, Inc. and accurately
reflect the current financial condition of the Organization:

1.     The Director of Finance shall reconcile the general ledger and with investment account
       statements on a quarterly basis.

2.     The Investment Counselor shall prepare a schedule of investments for presentation on a
       quarterly basis for the Finance Committee and on an annual basis for the Board of Directors.

3.     The quarterly investment reports shall detail the portfolio’s composition and performance for the
       quarter and year-to-date, along with a comparison to budget and to the prior year.

4.     The annual investment report shall be presented to the Board of Directors at the time the
       Challenge Industries, Inc. audit is presented, outlining in detail the investment portfolio’s
       composition and performance for the fiscal year, along with a comparison to appropriate market
       indices.

5.     Investment policies shall be reviewed annually by the Director of Finance and the Executive
       Director, working with the Finance Committee, to determine any appropriate modifications.

6.     Recommendations for any revisions or modifications to the investment policy will be made by
       the Finance Committee to the Board of Directors for their approval.


Accounting for Investments in Other Entities

Non-exempt entities in which the Organization possesses a greater-than-50-percent ownership interest
shall be consolidated into the financial statements of the Organization. A non-exempt entity as used
here means any for-profit entity that is not exempt from federal income taxes, such as corporations,
limited partnerships, s-corporations, LLPs, and LLCs, that issues ownership or profits interests.

Entities in which the Organization holds a 50-percent or less interest, but over which the Organization
exercises significant influence over operating and financial policies, shall be accounted for using the
equity method of accounting. Under this method of accounting, an asset account is maintained to track
the Organization’s investment in the entity, and this asset account shall be adjusted upwards or
downwards based on the Organization’s share of the entity’s profits or losses.

Entities in which the Organization holds a 50-percent or less interest, and over which the Organization
does NOT exercise significant influence over operating and financial policies, shall be accounted for at
the lower of cost or market value.




                                                   75
PROPERTY AND EQUIPMENT


Capitalization Policy

Physical assets acquired with unit costs in excess of $1,000 are capitalized as property and equipment
on the organization’s financial statements. Items with unit costs below this threshold shall be expensed
in the year purchased. Groups of similar items purchased at the same time at a total cost exceeding
$1,000 shall be capitalized by group.

Capitalized property and equipment additions are accounted for at their historical cost and all such
assets, except land and certain works of art and historical treasures, are subject to depreciation over
their estimated useful lives, as described later.




Contributed Assets

Assets with fair market values in excess of $1,000 (per unit) that are contributed to Challenge
Industries, Inc. shall be capitalized as fixed assets on the financial statements. Contributed items with
market values below this threshold shall be expensed in the year contributed.

Capitalized contributed assets are accounted for at their market value at the time of donation and all
such assets, except land and certain works of art and historical treasures, are subject to depreciation
over their estimated useful lives, as described later.


Establishment and Maintenance of a Fixed Asset Listing

All capitalized property and equipment shall be recorded in a depreciation schedule. This schedule
shall include the following information with respect to each asset:

1.     Date of acquisition
2.     Cost
3.     Brief Description
4.     Estimated useful life
5.     Monthly Depreciation
6.     Accumulated Depreciation

The depreciation schedule shall be reviewed annually. Any obsolete, disposed of, destroyed, or fully
depreciated (over 3 years past full depreciation) property shall be removed from the schedule and
appropriate adjusting entries to the General Ledger shall be made. All adjustments resulting from this
review will be approved by the Director of Finance.




                                                    76
Depreciation and Useful Lives

All capitalized assets are maintained in the special property and equipment account group and are not
to be included as an operating expense. Property and equipment are depreciated over their estimated
useful lives using the straight-line method.

In the year of acquisition, depreciation is recorded based on the number of months the asset is in
service, counting the month of acquisition or installation as a full month (Example: an asset purchased
on the 15th day of the fifth month shall have 8 full months of depreciation (eight-twelfths of one year)
recorded for that year.

Estimated useful lives of capitalized assets shall be determined by the Accounting Department. The
following is a list of the estimated useful lives of each category of fixed asset for depreciation purposes:

Furniture, and fixtures                                Up to 10 yrs
General office equipment                               5 yrs
Computer hardware and peripherals                      3-5 yrs
Computer software                                      2-3 yrs
Leased assets                                          life of lease
Leasehold Improvements                                 remaining lease term

Alternatively, at the direction of the Director of Finance, capitalized assets may be depreciated over
useful lives expressed in terms of units of production or hours of service in place of the preceding
useful lives expressed in terms of time.

For accounting and interim financial reporting purposes, depreciation expense will be recorded on a
monthly basis.


Changes in Estimated Useful Lives

If it becomes apparent that the useful life of a particular capitalized asset will be less than the life
originally established, an adjustment to the estimated useful life shall be made. All such changes in
estimated useful lives of capitalized assets must be approved by the Director of Finance.

When a change in estimated useful life is made, the new life is used for purposes of calculating annual
depreciation expense. In the year in which the change in estimate is made, the cumulative effect of the
change shall be reflected as depreciation expense in the organization’s statement of activities. For
example, if in the fourth year of an asset’s life it is determined that the asset will last five years instead
of the original estimate of seven years, depreciation expense for year shall be equal to the difference
between 4/5 of the asset’s basis (accumulated depreciation at the end of year four) and 3/7 of the
asset’s basis (accumulated depreciation at the beginning of the year).

See also the policy on impairments in value of capitalized assets later in this section.




                                                      77
Repairs of Property and Equipment

Expenditures to repair capitalized assets shall be expensed as incurred if the repairs do not materially
add to the value of the property or materially prolong the estimated useful life of the property.

Expenditures to repair capitalized assets shall be capitalized if the repairs increase the value of
property, prolong its estimated useful life, or adapt it to a new or different use. Such capitalized repair
costs shall be depreciated over the remaining estimated useful life of the property. If the repairs
significantly extend the estimated useful life of the property, the original cost of the property shall also
be depreciated over its new, extended useful life.


Dispositions of Property and Equipment

In the event a non-expendable asset is sold, scrapped, donated or stolen, adjustments need to be
made to the fixed asset listing and property log. If money is received for the asset, then the difference
between the money received and the "book value" (purchase price less depreciation) of the asset will
be recorded as a loss if the money received is less than the book value and a gain if the money
received is more than the book value.


Write-Offs of Property and Equipment

The Director of Finance approves the disposal of all capitalized fixed assets that may be worn-out or
obsolete. Property that is discovered to be missing or stolen will be reported immediately to the Director
of Finance. If not located, this property will be written off the books with the proper notation specifying
the reason.


Impairment Losses

It is the policy of the organization to recognize an impairment loss in the statement of activities with
respect to any property and equipment (or any other long-lived asset, including non-depreciable assets)
whose carrying amount (net book value) possesses both of the following characteristics:

1.     The amount is not recoverable and

2.     The amount exceeds fair market value.

If only one of the preceding characteristics is present, an impairment loss will not be recorded. In
determining whether a carrying amount is recoverable, all future cash inflows shall be considered,
including cash flows from operations attributable to the asset, as well as cash flows from the sale of the
asset. In cases in which no cash flows are directly attributable to an asset, the first characteristic is
considered to have been met, and the determination of whether an impairment loss has been incurred
will be based on the fair market value criterion.


                                                     78
Impairments are distinguishable from changes in estimates resulting from a determination that a
depreciable asset will be useful for a shorter period of time than the original estimate (changes in
estimated useful lives were explained earlier). When an impairment loss is incurred, the loss is
recognized in the statement of activities in the period of the loss and the carrying amount of the long-
lived asset is adjusted downward to the revised amount. If the asset is a depreciable asset, this lesser
amount shall then be used for purposes of calculating future depreciation or amortization expense.




                                                   79
LEASES

Classification of Leases

It is the policy of Challenge Industries, Inc. to classify all leases in which the Organization is a lessee as
either capital or operating leases. Challenge Industries, Inc. shall utilize the criteria described in
Statement of Financial Accounting Standards No. 13 in determining whether a lease is capital or
operating in nature. Under those criteria, a lease shall be treated as a capital lease if, at the time of
entering into the lease, any of the following factors are present:

1.     The lease transfers ownership to Challenge Industries, Inc. at the end of the lease term;

2.     The lease contains a bargain purchase option;

3.     The lease term is equal to 75% or more of the estimated economic life of the leased property; or

4.     The present value of the minimum lease payments is 90% or more of the fair value of the leased
       property (using, as the interest rate, the lesser of Challenge Industries, Inc.'s incremental
       borrowing rate or, if known, the lessor's implicit rate).

All leases that do not possess any of the four preceding characteristics shall be treated as operating
leases. In addition, all leases that are immaterial in nature shall be accounted for as operating leases.


Accounting for Leases

All leases that are classified as operating leases and immaterial capital leases shall be accounted for
as expenses in the period in which the obligation to make a lease payment is incurred. For leases with
firm commitments for lease payments that vary over the term of the lease (i.e. a lease with fixed annual
increases that are determinable upon signing the lease), the amount that Challenge Industries, Inc.
shall recognize as monthly lease expense shall equal the average monthly lease payment over the
entire term of the lease. Differences between the average monthly payment and the actual monthly
payment shall be accounted for as an asset or liability of Challenge Industries, Inc..

All leases that are classified as capital leases shall be treated as fixed asset additions of Challenge
Industries, Inc.. As such, upon the inception of a capital lease, Challenge Industries, Inc. shall record a
capitalized asset and a liability under the lease, based on the net present value of the minimum lease
payments (or the fair value of the leased asset, if it is less than the present value of the lease
payments). Periodic lease payments shall be allocated between a reduction in the lease obligation and
interest expense. The capitalized asset recorded under a capital lease shall be depreciated over the
term of the lease, using the straight-line method of depreciation.

Challenge Industries, Inc. shall also maintain a control list of all operating and capital leases. This list
shall include all relevant lease terms, including a schedule of future annual lease payments obligations.



                                                     80
Scheduled Increases in Rent Payments

Leases with fixed (determinable amounts stated in the lease) increases in monthly rental payments
shall be accounted for in a manner that results in an equal monthly rent expense being reported in each
month over the entire initial lease term. Accordingly, monthly rent expense in the first year of such
leases shall be greater than the monthly cash payment, with the difference being recorded as a liability.
This liability will be reduced in the later years of the lease when the monthly cash rent payment is less
than the monthly rent expense. To the extent future rent increase are not determinable at the beginning
of the lease (because they are based on inflation or other factors), the preceding policy shall not apply
and monthly rent expense shall be equal to the monthly cash payment, except as noted below.


Rent Abatements and Lease Incentives

Abatements of monthly rent payments, cash incentives, and other lease incentives shall be accounted
for in a manner that results in an equal amount of monthly rent expense over the term of the lease
agreement (before considering the effects of inflation-based rent increases, which will increase rent
expense over the term of a lease). As a result, incentives received up front or over the early months of
a lease, shall be established as a liability in Challenge Industries, Inc.’s accounting records (as deferred
lease incentives or some similar name). This liability shall be amortized as an offset (credit) to rent
expense over the term of the lease agreement.


Changes in Lease Terms

As described in earlier policies, leasehold improvements and deferred rent incentives are amortized
over the initial lease term. If such lease term is changed prior to the expiration of the initial lease term, it
is the policy of Challenge Industries, Inc. that such amortization be revised to reflect the remaining
lease term as of the effective date of the lease modification.




                                                      81
SOFTWARE ACQUISITION AND DEVELOPMENT COSTS


Costs to be Capitalized

Certain costs incurred in connection with the acquisition or development of internal-use software shall
be capitalized and reported as an asset of the organization. Those costs that shall be capitalized are
those that are in excess of the organization’s capitalization threshold (explained earlier) and that meet
any one of the following criteria:

1.     External direct costs (i.e. amounts paid to vendors) of materials and services for developing or
       obtaining internal-use software (“developing” to include design, coding, installation and testing);

2.     Internal payroll and related costs (employee benefit costs) for employees who are directly
       associated with and who devote time to an internal-use software project (i.e. the same types of
       software development costs described above);

3.     Interest costs incurred in developing software; and

4.     Costs associated with upgrades and enhancements when it is probable that these expenditures
       will result in additional functionality.

Costs that are capitalized in connection with the preceding policy shall be included as assets on the
organization’s property and equipment listing, and shall be amortized over an estimated useful life in
accordance with the previously stated policies on depreciation and amortization.


Costs to be Expensed as Incurred

Many costs associated with acquiring or developing internal-use software are to be expensed as
incurred rather than capitalized, including:

1.     External and internal costs incurred in the preliminary project phases, such as costs associated
       with making decisions to allocate resources to the project, determining performance
       requirements and specifications, and reviewing and selecting vendors and consultants;

2.     Research and development costs;

3.     General and administrative costs;

4.     Data conversion;

5.     Training costs; and

6.     Internal maintenance costs.


                                                    82
     POLICIES PERTAINING TO LIABILITY AND NET ASSET ACCOUNTS


ACCRUED LIABILITIES

Identification of Liabilities

The accounting department shall establish a list of commonly incurred expenses that may have to be
accrued at the end of an accounting period. Some of the expenses that shall be accrued by Challenge
Industries, Inc. at the end of an accounting period are:

       Salaries, wages, and payroll taxes
       Other expenses incurred but not paid in the operation of the Organization
       Interest on notes payable

In addition, Challenge Industries, Inc. shall record a liability for deferred revenue (revenue received but
not yet earned) in accordance with the revenue recognition policies described elsewhere in this
manual. Adjustments to deferred revenue accounts shall be made annually.




                                                    83
NOTES PAYABLE


Record-Keeping

It is the policy of Challenge Industries, Inc. to maintain a schedule of all notes payable, mortgage
obligations, lines of credit, and other financing arrangements. This schedule shall be based on the
underlying loan documents and shall include all of the following information:

1.     Name and address of lender
2.     Date of agreement or renewal/extension
3.     Total amount of debt or available credit
4.     Amounts and dates borrowed
5.     Description of collateral, if any
6.     Interest rate
7.     Repayment terms
8.     Maturity date
9.     Address to which payments should be sent
10.    Contact person at lender


Accounting and Classification

An amortization schedule shall be maintained for each note payable. Based upon the amortization
schedule, the principal portion of payments due with the next year shall be classified as a current
liability in the statement of financial position of Challenge Industries, Inc.. The principal portion of
payments due beyond one year shall be classified as long-term/non-current liabilities in the statement
of financial position.

Demand notes and any other notes without established repayment dates shall always be classified as
current liabilities.

Unpaid interest expense shall be accrued as a liability at the end of each accounting period.

A detailed record of all principal and interest payments made over the entire term shall be maintained
with respect to each note payable. Periodically, the amounts reflected as current and long-term notes
payable per the general ledger shall be reconciled to these payment schedules and the amortization
schedules, if any, provided by the lender. All differences shall be investigated.


Non-Interest-Bearing Notes Payable

As a charitable organization, Challenge Industries, Inc. may from time to time receive notes payable
that do not require the payment of interest, or that require the payment of a below-market rate of
interest for the type of obligation involved. In such cases, it shall be the policy of Challenge Industries,
Inc. to record contribution income for any unpaid interest.

                                                     84
For demand loans, recording of interest expense and contribution income shall be performed at the end
of each accounting period, based on the outstanding principal balance of the loan during that period,
multiplied by the difference between a normal interest rate for that type of loan and the rate, if any, that
is required to be paid by Challenge Industries, Inc..

For loans with fixed maturities or payment dates, the note payable shall be recorded at the present
value of the future principal payments, using as a discount rate the difference between a normal
interest rate for that type of loan and the rate, if any, that is required to be paid by Challenge Industries,
Inc. The difference between the cash proceeds of the note and the present value shall be recorded as
contribution income in the period the loan is made. Thereafter, interest expense shall be recorded in
each accounting period using the effective interest method, with the corresponding credit entry
increasing the note payable account to reflect the amount(s) that shall be repaid.




                                                     85
NET ASSETS


Classification of Net Assets

Net assets of the Organization shall be classified based upon the existence or absence of donor-
imposed restrictions as follows:

       Unrestricted Net Assets - Net assets that are not subject to donor imposed stipulations.

       Temporarily Restricted Net Assets - Net assets subject to donor imposed stipulations that
       may or will be satisfied through the actions of the Organization and/or the passage of time.

       Permanently Restricted Net Assets - Net assets subject to donor imposed stipulations that
       the Organization permanently maintain certain contributed assets. Generally, donors of such
       assets permit the Organization to use all or part of the income earned from permanently
       restricted net assets for general operations or for specific purposes. Permanent restrictions do
       not pass with the expiration of time, nor can they be removed through the organization’s actions.

Net assets accumulated by Challenge Industries, Inc. that are not subject to donor imposed restrictions,
but which the board of directors of the Organization has earmarked for specific uses, shall be
segregated in the accounting records as "board-designated" funds within the unrestricted category of
net assets.

Restrictions may be associated with either a time period (e.g. a particular future time period) or a
purpose (e.g specific programs). A purpose stipulation will be considered a restriction only if it is more
specific than the broad limits resulting from the nature of the Organization, the environment in which it
operates, and the purposes specified in Challenge Industries, Inc.'s articles of incorporation and
bylaws.


Reclassifications from Restricted to Unrestricted Net Assets

The organization shall report in its statement of activities a reclassification from restricted to
unrestricted net assets if any of the following events occur:

1.     Fulfillment of the purpose for which the net assets were restricted (e.g. spending restricted
       funds for the stipulated purpose)

2.     Expiration of time restrictions imposed by donors

3.     Death of an annuity beneficiary

4.     Withdrawal by the donor (or by a court) of a time or purpose restriction



                                                      86
If a donor stipulates multiple restrictions (such as a purpose and a time restriction), the reclassifications
from temporarily restricted to unrestricted net assets shall be reported only upon the satisfaction of the
final remaining restriction.


Reclassifications from Unrestricted to Restricted Net Assets

If the organization receives a restricted contribution from a donor who further stipulates that the
organization set aside a portion of its unrestricted net assets for that same purpose, the organization
shall report in its statement of activities a reclassification of net from unrestricted to temporarily or
permanently restricted, based on the specific nature of the restriction.


Disclosures

It is the organization’s policy to provide within its financial statements footnote disclosures that describe
the different types of temporary and permanent restrictions associated with the organization’s net
assets as of the end of each fiscal year.




                                                     87
       POLICIES ASSOCIATED WITH FINANCIAL AND TAX REPORTING


FINANCIAL STATEMENTS

Standard Financial Statements of the Organization

Preparing financial statements and communicating key financial information is a necessary and critical
accounting function. Financial statements are management tools used in making decisions, in
monitoring the achievement of financial objectives, and as a standard method for providing information
to interested parties external to the organization. Financial statements may reflect year-to-year
historical comparisons or current year budget to actual comparisons.

The basic financial statements of Challenge Industries, Inc. that are maintained on an organization-
wide basis shall include:

   1. Statement of Financial Position - reflects assets, liabilities and net assets of the organization
      and classifies assets and liabilities as current or non-current/long-term with comparison to prior
      year
   2. Statement of Activities - presents support, revenues, expenses, and other changes in net
      assets of the organization, by category of net asset (unrestricted, temporarily restricted and
      permanently restricted), including reclassifications between categories of net assets with
      comparison to current fiscal year budget and showing variance from budget
   3. Statement of Cash Flows - reports the cash inflows and outflows of the organization in three
      categories: operating activities, investing activities, and financing activities
   4. Monthly Comparison – compares statement of activities by current fiscal year month
   5. Projected State of Activities and Projected Cash Flows – projection of year end amounts
      and balances.


Frequency of Preparation

The objective of the accounting department is to prepare accurate financial statements in accordance
with generally accepted accounting principles and distribute them in a timely and cost-effective manner.
In meeting this responsibility, the following policies shall apply:

A standard set of financial statements described in the preceding section shall be produced on a
       monthly basis, by the 15th of each month.

The monthly set of financial statements shall be prepared on the accrual method of accounting,
including all receivables, accounts payable received by the 10th of the month, and actual depreciation
expense.




                                                  88
Review and Distribution

All financial statements shall be review and approved by the Director of Finance prior to being issued.

After approval by the Director of Finance, a complete set of monthly financial statements described
above, shall be distributed to the following individuals:

1.     The Board of Directors
2.     The Treasurer and all members of the Finance Committee
2.     The Executive Director
3.     All Department Heads and any other employee with budget-monitoring responsibilities.

Financial statements may include an additional supplemental schedule prepared or compiled by the
Director of Finance. The purpose of this schedule is to provide known explanations for material budget
variances in accordance with Challenge Industries, Inc.’s budget monitoring policies described later in
this manual (under the “Financial Management Policies” section).


Annual Financial Statements

A formal presentation of the Organization's annual financial statements shall be provided by the
Independent Auditor to the Finance Committee of the Board of Directors. The Finance Committee will
vote to accept or reject the annual financial statements. See separate policies regarding the annual
audit under “Financial Management Policies.”




                                                   89
GOVERNMENT RETURNS


Overview

To legitimately conduct business, Challenge Industries, Inc. must be aware of its tax and information
return filing obligations and comply with all such requirements of federal, state and local jurisdictions.
Filing requirements of Challenge Industries, Inc. include, but are not limited to, filing annual information
returns with IRS and the New York state Charities Bureau.


Filing of Returns

It is the policy of Challenge Industries, Inc. to become familiar with the obligations in each jurisdiction
and to comply with all known filing requirements. The Director of Finance shall be responsible for
identifying all filing requirements and assuring that Challenge Industries, Inc. is in compliance with all
such requirements.

It is also the policy of Challenge Industries, Inc. to file complete and accurate returns with all
authorities. Challenge Industries, Inc. shall make all efforts to avoid filing misleading, inaccurate or
incomplete returns.

Filings made by Challenge Industries, Inc. include, but are not limited to, the following returns:

1.     Form 990 - Annual information return of tax-exempt organizations, filed with IRS. Form 990 for
       Challenge Industries, Inc. is due on the fifteenth day of the fifth month following year-end. An
       automatic 3-month extension of time to file Form 990 may be obtained filing Form 8868. Upon
       expiration of the first 3-month extension, a second 3-month extension may be requested using
       Form 8868.

2.     Form 990-T - Annual tax return to report Challenge Industries, Inc.'s unrelated trade or
       business activities (if any), filed with IRS. Form 990-T is due on the fifteenth day of the fifth
       month following year-end. An automatic 6-month extension of time to file Form 990-T may be
       obtained by filing Form 8868.

3.     Form 5500 - Annual return for Challenge Industries, Inc.'s employee benefit plans. Form 5500
       is due July 31, but a request for extension of time to file may be filed.

4.     Form CHAR 500 - Annual Filing for Charitable Organizations, filed with the New York State
       Department of Law Charities Bureau. Form CHAR 500 is due on the fifteenth day of the fifth
       month following year-end.

5.     W-2's and 1099's - Annual report of employee and non-employee compensation, based on
       calendar-year compensation, on the cash basis. These information returns are due to
       employees and independent contractors by January 31 and to federal government by February
       28.

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6.     Form 941 - Quarterly payroll tax return filed with IRS to report wages paid to employees and
       federal payroll taxes. Form 941 is due by the end of the month following the end of each
       quarter, or 10 days later if all payroll tax deposits have been made in a timely manner during the
       quarter.

7.     Form NYS-45-ATT-MN – Quarterly Combined Withholding, Wage Reporting, And
       Unemployment Insurance Return. Form NYS-45-ATT-MN is due by the end of the month
       following the end of each quarter, or 10 days later if all payroll tax deposits have been made in a
       timely manner during the quarter.

Challenge Industries, Inc.'s fiscal and tax year-end is December 31. All annual tax and information
returns of Challenge Industries, Inc. Form 990, Form 990-T, and Form CHAR 500 are filed on the
accrual basis of reporting.

Federal and all applicable state payroll tax returns are prepared by the Organization's external Payroll
Administrator.

It is the policy of Challenge Industries, Inc. to comply with all state payroll tax requirements by
withholding and remitting payroll taxes to the state of residency of each Challenge Industries, Inc.
employee.


Public Access to Information Returns

Under regulations that became effective in 1999, Challenge Industries, Inc. is subject to federal
requirements to make the following forms "widely available" to all members of the general public:

1.     The three most recent annual information returns (Form 990), excluding the list of significant
       donors (Schedule B) that is attached to the Form 990, but including the accompanying
       Schedule A, and

2.     Challenge Industries, Inc.'s original application for recognition of its tax-exempt status, filed with
       IRS, and all accompanying schedules and attachments.

It is the policy of Challenge Industries, Inc. to adhere to the following guidelines in order to comply with
the preceding public disclosure requirements:

1.     Anyone appearing in person at the offices of Challenge Industries, Inc. during normal working
       hours making a request to inspect the forms will be granted access to a file copy of the forms.
       The Director of Finance shall be responsible for maintaining this copy of each form and for
       making it available to all requesters.

2.     For all written requests for copies of forms received by Challenge Industries, Inc., the
       Organization shall require pre-payment of all copying and shipping charges. For requests for
       copies that are received without pre-payment, Challenge Industries, Inc. will notify the requester
       of this policy via phone call or by letter within 7 days of receipt of the original request.

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3.   The copying cost charged by Challenge Industries, Inc. for providing copies of requested forms
     shall be $1.00 for the first page copies and $0.15 for each subsequent page. All copies shall be
     shipped to requesters via Priority Mail, thus, shipping charges will be a standard $5.00 per
     shipment.

4.   After payment is received by Challenge Industries, Inc., all requested copies shall be shipped to
     requesters within 30 days. Making of all copies and shipping within the 30-day time period shall
     be the responsibility of the accounting department.

5.   For requests for copies made in person during normal business hours, copies shall be provided
     while the requester waits.

6.   Challenge Industries, Inc. shall accept certified checks and money orders for requests for
     copies made in person. Challenge Industries, Inc. shall accept certified checks, money orders
     and credit cards as payment for copies of forms requested in writing.




                                                92
UNRELATED BUSINESS ACTIVITIES


Identification and Classification

It is the policy of Challenge Industries, Inc. to properly identify and classify income-producing activities
that are unrelated to the Organization’s tax-exempt purpose using the guidelines described in the
Internal Revenue Code and underlying regulations. Such income accounts shall be segregated in
separate accounts in the general ledger of Challenge Industries, Inc. in order to facilitate tracking and
accumulation of unrelated trade or business activities.


Allocation of Expenses to Unrelated Activities

In addition to segregating income associated with activities that are unrelated to Challenge Industries,
Inc.’s exempt purpose, the Organization’s general ledger shall also provide accounts for expenses
associated with each such unrelated activity. These expenses shall be offset against unrelated
business revenue in arriving at unrelated business taxable income. Expenses that shall be offset
against gross unrelated business income shall be limited to those expenses directly associated with the
production of such income, including reasonable allocation of indirect costs that benefit each activity, in
accordance with expense allocation policies described elsewhere in this manual.


Reporting

It is the Policy of Challenge Industries, Inc. to file IRS Form 990-T to report taxable income from
unrelated trade or business activities. Form 990-T is not subject to any public access or disclosure
requirements. Accordingly, it is the policy of Challenge Industries, Inc. not to distribute copies of Form
990-T to anyone other than management of the Organization.

Challenge Industries, Inc. shall also report taxable income from unrelated trade or business activities
that is subject to state or local income or franchise taxes on the appropriate return Form NYS-45-ATT-
MN.




                                                     93
                          FINANCIAL MANAGEMENT POLICIES


BUDGETING

Overview

Budgeting is an integral part of managing any organization in that it is concerned with the translation of
organizational goals and objectives into financial and human resource terms. A budget should be
designed and prepared to direct the most efficient and prudent use of the organization's financial and
human resources. A budget is a management commitment of a plan for present and future
organizational activities that will ensure survival. It provides an opportunity to examine the composition
and viability of the organization's programs and activities simultaneously in light of the available
resources.


Preparation and Adoption

It is the policy of Challenge Industries, Inc. to prepare an annual budget on the accrual basis of
accounting. To prepare the Organization budget, the Director of Finance shall gather proposed budget
information from all Department Heads and others with budgetary responsibilities and prepares the first
draft of the budget. The draft budget is then reviewed by the Executive Director, Director of Finance,
and Department Heads for discussion and refinement.

After appropriate revisions and a compilation by the Director of Finance, the revised budget is
presented to the Executive Director for discussion, revision, and initial approval.

The revised draft is then submitted to the Finance Committee of the Board of Directors for acceptance,
and finally to the entire Board of Directors for adoption.

It is the policy of Challenge Industries, Inc. to adopt a final budget at least 30 days prior to the
beginning of the Organization’s new fiscal year. The purpose of adopting a final budget at this time is to
allow adequate time for the accounting department to input the budget into the accounting system and
establish appropriate accounting and reporting procedures (including any necessary modifications to
the chart of accounts) to ensure proper classification of activities and comparison of budget versus
actual once the year begins.


Monitoring Performance

It is the policy of Challenge Industries, Inc. to monitor its financial performance by comparing and
analyzing actual results with budgeted results. This function shall be accomplished in conjunction with
the monthly financial reporting process described earlier.



                                                   94
On a monthly basis, financial reports comparing actual year-to-date revenues and expenses with
budgeted year-to-date amounts shall be produced by the accounting department and distributed to
Department Heads and each employee with budgetary responsibilities. These individuals shall be
responsible for explaining significant budget variances.


Budget Modifications

At the direction of the Finance Committee or Board of Directors, the Director of Finance may modify an
approved budget due to significant changes in program revenues or expenses.




                                                  95
ANNUAL AUDIT


Role of the Independent Auditor

It is the policy of Challenge Industries, Inc. to arrange for an annual audit of the Organization's financial
statements to be conducted by an independent accounting firm. The independent accounting firm
selected by Challenge Industries, Inc. will be required to communicate directly with the Organization's
Finance Committee upon the completion of their audit. In addition, members of the Finance Committee
and Executive Committee are authorized to initiate communication directly with the independent
accounting firm.

Audited financial statements, including the auditor's opinion thereon, will be submitted and presented to
the Finance Committee of the Board of Directors by the independent accounting firm upon completion
and preparation of the audited financial statements. Upon approval of the audited financial statements
by the Finance Committee, copies will be distributed to the Board of Directors for review.


How Often to Review the Selection of the Auditor

Challenge Industries, Inc. shall review the selection of its independent auditor in the following
circumstances:

1.     Anytime there is dissatisfaction with the service of the current firm
2.     When a fresh perspective and new ideas are desired
3.     Every 5 years to ensure competitive pricing and a high quality of service (this is not a
       requirement to change auditors every five years; simply to re-evaluate the selection)


Selecting an Auditor

The selection of an accounting firm to conduct the annual audit is a task that should be taken very
seriously. The following factors shall be considered by Challenge Industries, Inc. in selecting an
accounting firm:

1.     The firm’s reputation in the nonprofit community
2.     The depth of the firm’s understanding of and experience with not-for-profit organizations and
       federal reporting requirements under OMB Circular A-133
3.     The firm’s demonstrated ability to provide the services requested in a timely manner
4.     The ability of firm personnel to communicate with Organization personnel in a professional and
       congenial manner

If Challenge Industries, Inc. decides to prepare and issue a written Request for Proposal (RFP) to be
sent to prospective audit firms, the following information shall be included:

1.     Period of services required

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2.     Type of contract to be awarded (fixed fee, cost basis, etc.)
3.     Complete description of the services requested (audit, management letter, tax reurns, etc.)
4.     Identification of meetings requiring their attendance, such as staff or Board of Director meetings
5.     Organization chart of Challenge Industries, Inc.
6.     Chart of account information
7.     Financial information about the organization
8.     Copy of prior year reports (financial statements, management letters, etc.)
9.     Identification of need to perform audit in accordance with OMB Circular A-133
10.    Other information considered appropriate
11.    Description of proposal and format requirements
12.    Due date of proposals
13.    Overview of selection process (i.e. whether finalists will be interviewed, when a decision shall
       be made, etc.)
14.    Identification of criteria for selection

Minimum Proposal Requirements from prospective CPA firms shall be:

1.     Firm background
2.     Biographical information (resumes) of key firm member who will serve on the audit
3.     Client references
4.     Information about the firm's capabilities
5.     Firm's approach to performing an audit
6.     Copy of the firm’s most recent quality/peer review report, including any accompanying letter of
       findings
7.     Other resources available with the firm
8.     Expected timing and completion of the audit
9.     Expected delivery of reports
10.    Cost estimate including estimated number of hours per staff member
11.    Rate per hour for each auditor
12.    Other information as appropriate

In order to narrow down the proposals to the top selections, the Director of Finance shall meet with the
prospective engagement teams from each proposing firm to discuss their proposal. Copies of all
proposals shall be forwarded to each member of the Finance Committee. After the Director of Finance
narrows down the field of prospective auditors to two firms, final interviews of each firm are conducted
by the Finance Committee, who makes the final recommendation to the board of directors for approval.

Preparation for the Annual Audit

Challenge Industries, Inc. shall be actively involved in planning for and assisting with the Organization’s
independent accounting firm in order to ensure a smooth and timely audit of its financial statements. In
that regard, the accounting department shall provide assistance to the independent auditors in the
following areas:

Planning - The Director of Finance is responsible for delegating the assignments and responsibilities to
accounting staff in preparation for the audit. Assignments shall be based on the list of requested
schedules and information provided by the independent accounting firm.
                                                     97
Involvement - Organization staff will do as much work as possible in order to assist the auditors and,
therefore, reduce the cost of the audit.

Interim Procedures - To facilitate the timely completion of the annual audit, the independent auditors
may perform selected audit procedures prior to the Organization’s year-end. By performing significant
portions of audit work as of an interim date, the work required subsequent to year-end is reduced.
Organization staff will as much as possible in order to provide requested schedules and documents and
to otherwise assist the auditors during any interim audit fieldwork that is performed.

Throughout the audit process, it shall be the policy of Challenge Industries, Inc. to make every effort to
provide schedules, documents and information requested by the auditors in a timely manner.

Concluding the Audit

Upon receipt of a draft of the audited financial statements of Challenge Industries, Inc. from its
independent auditor, the Director of Finance shall perform a detailed review of the draft, consisting of
the following procedures:

1.     Carefully read the entire report for typographical errors
2.     Trace and agree each number in the financial statements and accompanying footnotes to the
       accounting records and/or internal financial statements of Challenge Industries, Inc.
3.     Review each footnote for accuracy and completeness

Any questions or errors noted as part of this review shall be communicated to the independent auditor
in a timely manner and resolved to the satisfaction of the Director of Finance.

It shall also be the responsibility of the Director of Finance to review and respond in writing to all
management letter or other internal control and compliance report findings and recommendations made
by the independent auditor.




                                                    98
INSURANCE


Overview

It is fiscally prudent to have an active risk management program that includes a comprehensive
insurance package. This will ensure the viability and continued operations of Challenge Industries,
Inc..

It is the policy of Challenge Industries, Inc. to maintain adequate insurance against general liability, as
well as coverage for buildings, contents, computers, fine arts, equipment, machinery and other items of
value.


Coverage Guidelines

As a guideline, Challenge Industries, Inc. will arrange for the following types and levels of insurance as
a minimum:

Type of Coverage                              Amount of Coverage

Property Insurance                            Amounts as determined by Building, Personal Property,
& Business Income                             and Business Income Values each year (90%
                                              coinsurance)

Comprehensive Liability                       $3,000,000 General Liability Aggregate
                                              $3,000,000 Product Liability Aggregate
                                              $1,000,000 Personal Liability & Advertising Aggregate
                                              $1,000,000 Each
                                              $100,000 Damage to Leased Premises
                                              $5,000 Medical Expense Payment (per Person)

Automobiles Liability                         $1,000,000 Combined Single Limit

Professional Liability                        $3,000,000 Aggregate / $1,000,000 Each

Employee Benefits Administration              3,000,000 Aggregate / $1,000,000 Each
Errors and Omissions

Sexual Abuse                                  $1,000,000 Aggregate / $1,000,000 Each

Excess Liability                              $2,000,000 Aggregate / $2,000,000 Each ($10,000
                                              retention)

Employee dishonesty/bonding                   $200,000 for all accounting department employees
                                              and the Executive Director

                                                    99
Theft                                       On premises $10,000 / Off premises $10,000

Inland Marine Coverage                      Amounts as determined by values of computers and
                                            periferals, valuable papers, and miscellaneous items

Directors and Officers                      $1,000,000 (with D&O $2,500 retention and EPL $10,000
and Employment Practices Liability          retention levels)

Workers' Compensation                       To the extent required by law.


Annual Review
Each year the Director of Finance will review insurance coverage with Challenge’s Insurance Broker at
least 30 days prior to renewal. The review shall include, but not be limited to:

           •   Review of property values.
           •   Review of personal property values.
           •   Review of covered vehicles.
           •   Review of liability limits.
           •   Review of policy coverages.
           •   Review of any required riders and endorsements.
           •   Review of additional insureds and loss payees.

In addition, policies will be reviewed to ensure they meet any special requirements of the New York
State Office of Mental Retardation & Developmental Disabilities, Office of Mental Health, and State
Education Department are required by any contractual agreement.




                                                 100
RECORD RETENTION

Policy

It is the policy of Challenge Industries, Inc. to retain records as required by law and to destroy them
when appropriate. The destruction of records must be approved by the [Director of Finance], and
logged into the Organization’s [Destroyed Records Log]. The formal records retention policy of
Challenge Industries, Inc. is as follows:



Accident reports/claims (settled Cases)              7 Years
Accounts payable ledgers and schedules               7 Years
Accounts receivable ledgers and schedules            7 Years
Audit reports                                        Permanently
Bank reconciliations                                 3 Years
Bank Statements                                      3 Years
Chart of Accounts                                    Permanently
Cancelled Checks                                     7 Years
Contracts, mortgages, notes and leases:
 Expired                                             7 Years
 Still in effect                                     Permanently
Correspondence:
  General                                            2 Years
 Legal and important matters only                    Permanently
 Routine with customers and/or vendors               2 Years
Deeds, mortgages and bills of sales                  Permanently
Depreciation schedules                               Permanently
Duplicate deposit slips                              3 Years
Employment applications                              3 Years
Expense analyses/expense distribution schedule       7 Years
Financial statements:
 Year end                                            Permanently
 Other                                               Optional
Garnishments                                         7 Years
General ledgers/year end trial balance               Permanently
Insurance policies (expired)                         3 Years
Insurance records (policies, claims, etc.)           Permanently
Internal audit reports                               3 Years +
Internal reports                                     3 Years
Inventories of products, materials and supplies      7 Years
Invoices (to customers, from vendors)                7 Years
Journals                                             Permanently
Minute books of directors, bylaws and charters       Permanently
Notes receivable ledgers and schedules               7 Years
Payroll records and summaries                        7 Years
Personnel records (terminated)                       7 Years
Petty cash vouchers                                  3 Years
Physical inventory tags                              3 Years
Property records (incl. depreciation schedules)      Permanently
Purchase orders:

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 Purchasing department copy                      7 Years
 Other copies                                    1 Year
Receiving sheets                                 1 Year
Retirement and pension records                   Permanently
Requisitions                                     1 Year
Sales records                                    7 Years
Subsidiary ledgers                               7 Years
Tax returns and worksheets, examination reports
 and other documents relating to determination
 of income tax liability                   Permanently
Time sheets/cards                                7 Years
Trademark registrations and copyrights           Permanently
Training manuals                                 Permanently
Voucher register and schedules                   7 Years
Withholding tax statements                       7 Years




                                              102
FUNCTIONAL EXPENSE ALLOCATIONS


Overview

As one of its financial management objectives, Challenge Industries, Inc. strives to determine the actual
costs of carrying out each of its program service and supporting activities. In this regard, it is the policy
of Challenge Industries, Inc. to charge expenses to the appropriate category of program service or
supporting activity. Expenses that serve multiple functions or are not readily identifiable with one
function shall be allocated between functions whenever possible.


Direct Charging of Costs

Certain internal costs shall be directly charged to the appropriate Challenge Industries, Inc. function
based upon underlying documentation. The following costs shall be directly charged based on the
documentation or factor listed next to each:

       Cost                                   Basis For Charge
       Salaries                               Departmental Allocation
       Occupancy (facilities) costs           Actual square footage used by each function
              (including Depreciation)
       Equipment Depreciation                 Functional usage
       Contractual Expenses                   Actual, per invoice
       Supplies                               Actual, per invoice
       All Other Expenses                     Actual, per invoice

With the exception of salaries, which are recorded with each payroll cycle, all other costs identified
above shall be initially charged to the program or supporting services when recorded in the accounts
payable subsidiary of the General Ledger.


Allocation of Administrative Costs

On an annual basis, an allocation of administration to each program service shall be calculated by the
New York State Consolidated Fiscal Report. No journal entry is made to record this allocation. Costs
included in administration to be allocated include all costs associated with salaries and expenses of
administrative staff, building occupancy costs, general transportation, and any other cost that benefits
all functions of the Organization.


Accounting for Joint Activities That Include Fund-Raising

Challenge Industries, Inc. engages in certain activities that simultaneously accomplish a programmatic
purpose and a fund-raising purpose. It is the policy of Challenge Industries, Inc. to account for such
activities in accordance with the AICPA’s Statement of Position 98-2.

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One hundred percent of the costs of each such activity shall be accounted for as fund-raising costs
unless all three of the criteria described in SOP 98-2 are met with respect to that individual activity. The
three criteria that must be met are:

1.     The purpose criterion

2.     The audience criterion

3.     The content criterion

A complete explanation of these criteria goes beyond the scope of this policy statement. However,
generally, the purpose criterion involves a call for programmatic action by the recipient (beyond simply
making a donation to the Organization), as well as a “compensation” test and a “comparison” test. The
audience criterion requires that if the audience includes prior donors or is otherwise selected (even in
part) based on a perceived ability or likelihood to make a contribution, the audience must either have a
need for or use of the call to action described in the purpose criterion or have the ability to take that
action (i.e. the audience criterion necessitates that proper targeting of a message to individuals). The
content criterion is met if the call for action helps to accomplish Challenge Industries, Inc.’s specifically
stated tax-exempt mission by benefiting either the recipient or society.

It is the policy of Challenge Industries, Inc. not to apply the provisions of SOP 98-2 to activities or
communications that are predominantly programmatic or management and general in nature, with only
an incidental element of fund-raising.

For joint activities that meet all three SOP 98-2 criteria, the Organization shall identify costs as 1)
exclusively associated with the programmatic portion of the activity, 2) exclusively associated with the
fund-raising element of the activity, or 3) joint costs of the joint activity. For all joint costs associated
with a joint activity, the Organization shall develop and utilize cost allocation methods that are
appropriate for the nature of the cost and activity involved. One example of a joint cost allocation
method used by Challenge Industries, Inc. is the physical units method, in which joint costs are
allocated between program and fund-raising costs in proportion to the number of units of output that
can be attributed to each purpose.




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