Nonprofit Questions & Answers - Accountability

How do nonprofits prepare their financial information?

A narrative discussion and additional financial reports samples can be found in the Oregon Nonprofit Corporation Handbook.

These samples were used in our Making QuickBooks Work for Your Nonprofit workshop in Portland on December 7, 2006.

Financial Report Samples

Additional Accountability Resources for Your Nonprofit

Check your organization

Do an Organizational Self-Assessment to see if you have the policies, systems, tools, and practices needed to ensure accountability.

360 Degree Nonprofit Self Assessment at www.philanthropynow.com

Other Resources

Accreditation for Nonprofits: Many nonprofits are accredited through membership in state or national associations of similar purpose organizations. Those who are not part of a sector specific accreditation process, can check out a proposed sector-wide accreditation tool at: www.standardsforexcellence.org
Also, check-out the discussion of accountability issues at www.independentsector.org and www.nonprofitquarterly.org
For a glimpse into the world of accountability for national charities and some useful ideas on how your organization "rates" as a responsible charity, check out www.charitywatch.org
For the Better Business Bureau's Wise Giving Alliance system for rating charities, check out www.give.org

Board Member Conflicts of Interest

Conflicts of Interest

For most nonprofits, public perception of conflict of interest is a bigger threat than the actuality of running afoul with the law. Compensation to board members for services or goods they provide to the nonprofits they govern may comply with the legal conflict of interest rules but still fail the “sniff test” of public perception.

The Law

Oregon law requires board members to declare any potential or real conflict of interest they may have. The law focuses on transactions where a board member could personally gain financially. Once a conflict is declared, the law permits them to participate in the discussion and even vote on the transaction. However, many nonprofits bylaws go beyond this approach and require board members to excuse themselves from both discussing and voting on the matter of conflict.

Examples

A founding board member of a nonprofit leases the use of his facilities to the nonprofit.
A board member of nonprofit A, who is also program manager for nonprofit B, participates in a board discussion of A’s strategy for responding to a County Request for Proposals. Nonprofit B submits a competing application.
A board member resigns in order to apply for a new staff position after substantial board discussion about the new position’s qualifications.

Issues to Consider

In the first example above, the board member wishing to lease his facility has a clear conflict of interest: he stands to gain income. Even if the board member/facility owner declares his conflict of interest and removes himself from the discussion and vote, fellow board members should be cautious when considering the lease proposal. They are treading close to the IRS issue of private inurement – the possibility that a charitable organization might use its resources to benefit a private individual. Board members should make certain that the proposed lease terms are in the best interest of the nonprofit and do not offer undue benefit to the landlord. They may want to obtain a professional evaluation to be certain that the lease is typical and fair to the nonprofit.

While most conflicts of interest that come up don’t involve direct personal financial gain, Oregon law also requires that board members observe the duty of loyalty — putting the interest of the nonprofit they serve above all other interests. In example two above, any disclosure of information that might help nonprofit B compete for funds could well compromise the board member’s duty of loyalty as a board member of nonprofit A.

The board member resigning to apply for a staff position poses primarily a “sniff test” issue – will the public or other staff believe that a fair judgment can be made when a candidate may well return to the board if she or he is not hired? Issues of the candidate’s friendships with board members and access to information could also be potential “hot” items.

When in Doubt, Call it Out

So how will your board steer clear of the conflict of interest realities or perceptions? One important step would be a board agreement to “when in doubt, call it out," inviting every board member to discuss their concerns about conflicts with the board chair or the full board. A second important step would be adoption of and adherence to a conflict of interest policy.

Here's an article about conflict of interest policies and a sample policy from Board Source.

Telling the Truth About Fund Raising Costs

Virtually every nonprofit organization knows that donors prefer believing that their contributions go entirely for mission-focused program activities. They also know that actual dollars will be spent to raise the funds needed to carry out valuable programs.

So, the challenge of defining what is and is not included in the category "fund raising cost" goes far beyond the realm of accountants, into the magic kingdoms of marketing and public relations. Fortunately, or unfortunately depending on your point-of-view, the accounting profession has created fairly specific guidelines to answer many of the most frequently asked questions about fund raising costs. Statement of Position (SOP) 98-2 has been in effect for more than three years, but actual practices in nonprofits still vary widely.

The "confusion" about fund raising costs is heightened by IRS Form 990 directions that haven't quite caught up with GAAP. The IRS is much more liberal in its approach to allocating the joint costs of activities carried out for both fund raising and program purposes, for example - newsletters which both address program issues and ask for contributions. As a result of the differences between GAAP and the IRS, and the pressure to minimize fund raising costs experienced by most nonprofits, the reporting of fund raising costs on the Form 990 is alarmingly inconsistent, and comparing the percentage of dollars raised used for fund raising among organizations is almost always misleading.

How should your nonprofit define fund raising costs?
Here are a few suggestions:

Set up a fund raising cost center in your chart of accounts and track fund raising expenses throughout the year.
Identify all the ways your nonprofit seeks contributions - direct mail, special events, major donor compaigns, foundation proposals, etc.
Identify all the costs associated with these efforts, including the cost of staff time to organize events, send out mailings, coordinate volunteer solicitors, etc.
Check to see if any of the activities fit an "exception" from being considered fund raising costs. SOP 98-2 provides an exception for the cost of exchange transactions - for example, the cost of hotel food service at a fund raising event. Since the purchasers of tickets to the event are not allowed to include the fair market value of the dinner as a charitable gift, you do not need to consider the actual cost of purchasing their dinner as a fund raising cost.
Remember that fund raising costs refer to soliciting contributions. In many cases, "grant proposals" are prepared in response to a request to submit a proposal. You may be responding rather than soliciting.
Check out 98-2 to understand how to discern whether an activity should be considered as a fund raising purpose rather than programmatic or administrative. The key elements of the distinction are: purpose, content, and audience. If you've chosen who will recieve a letter or other invitation based upon their ability to contribute or past history of giving, you are engaged in fund raising even if the letter or event contains a tremendous amount of program information.

Need more help? Check with your auditor or submit your question to us. We can also refer you to fiscal consultants who can help you set up the systems and policies you need to "do the right thing" about fund raising costs.

Basic Protection from Fraud and Mis-Management

A large part of nonprofit accountability is minimizing your risks. Read our tips on protecting your nonprofit from fraud and mis-management in the risk management section of Helpline Online. We provide tips on board oversight, strong fiscal management and financial policies to help you reduce your risk.

Common Errors and Omissions of Form 990

Accountable Nonprofits Check Their 990’s Before Filing
Nonprofits are fully responsible for the information they submit to the IRS on Form 990. Every national study of 990’s has found alarming error rates, even in reports prepared by professionals.

In May, 2004, Reed Drew, Charitable Audit Coordinator with the Charitable Activities Section of the Oregon Department of Justice forwarded these tips about the five most common 990 errors to Public Accountants throughout Oregon.

Underreporting of gross contributions and related fundraising expenditures
Many organizations solicit contributions themselves or engage outside professional fundraising firms to solicit on their behalf. Instead of reporting the gross contributions collected in the charity's name, many Form 990 tax returns incorrectly report only the net contributions. Organizations are required to report gross contributions on Part I; Line 1a - 'Direct Public Support', regardless of whether the contributions are collected by the charity itself or its professional fundraiser. The related fundraising expense incurred by the organization and/or fees paid to its professional fundraiser are to be reported on Part II; Column (D) -'Fundraising Expense'.
SOP 98-2 as it relates to fees paid to professional fundraising firms
If an organization allocates joint costs for a combined educational and fundraising solicitation for book purposes in accordance with AICPA Statement of Position 98-2 'Accounting for Costs of Activities of Not -for-Profit Organizations and State and Local Government Entities That Include Fund Raising', it must also make the same allocation on its tax return. Many organizations fail to properly allocate joint costs amongst the program service, management & general, and fundraising expense columns on page 2 of the Form 990. A common mistake is not allocating to fundraising expense 100% of fees paid to a professional fundraiser when those fees are calculated as a percentage of contributions raised.
Reporting of bingo and raffle activity
Many tax exempt organizations utilize bingo and raffle gaming as a means of raising funds for their charitable programs. Regulation of nonprofit gaming is the responsibility of the Department of Justice and we require those organizations exceeding certain minimum levels to obtain a license. Many organizations fail to properly report their bingo and raffle activity correctly on their Form 990 under Part I; Line 9 -'Special Events'. The gross revenue from gaming activities is to be reported on Line 9a without reduction for cash or noncash prizes, cost of goods sold, and compensation. The related expenses of conducting the bingo or raffle event must be reported on Line 9b. The corresponding net profit raised is then to be reported on Line 9c.
Failure to report lobbying activity

While 501(c)(3) public charities may engage in some limited lobbying (i.e. attempting to influence legislation), they may not engage in any political activities (i.e. supporting or opposing any candidate for public office). Any lobbying activity must be at an insubstantial level or else the organization's tax exemption status will be endangered. Many organizations fail to properly report all their lobbying activity on Schedule A, Part VI-A/Part VI-B. Which part of the schedule is to be completed depends on whether the Form 5768 election has been made. Due to the importance of completing this section accurately, please review with your clients what lobbying was performed during the year. This activity should then be reported in sufficient detail to describe all the organization's lobbying performed by its directors, employees and volunteers even if certain of those activities did not involve the expenditure of funds. This may require the preparation of a detail schedule. If the organization had no lobbying activity then questions should be answered as 'No' or '$0' instead of as 'N/A'.

Failure to answer questions and attach schedules
There is a general failure to answer all questions completely and to attach all required supporting schedules. We ask that you follow the instructions to ensure an accurate tax return is filed.

How Can My Board Practice Accountability?

Thoughtful Boards can adopt far more useful policies and practices to ensure accountability, including:

Create of an independent audit committee with at least one financially expert member. Independent means that no staff members serve as voting members and that all committee members serve as uncompensated volunteers.
Have the audit committee select the auditor and communicate directly with the auditor before, during, and at the conclusion of the audit.
Require the Executive Director/CEO and the Fiscal Manager/CFO to take direct responsibility for the accuracy, completeness, and fairness of the financial statements and 990, and to state directly that the organization has adequate internal controls.
Establish procedures for staff and interested parties to report accountability concerns anonymously and ensure that all reports are fully investigated and resolved.
Pay close attention to auditor independence which requires that auditors not provide bookkeeping, financial systems implementation, appraisal, or certain other services for audit clients.
Adopt a conflict of interest policy for Board, management, and staff.
Review accounting and records retention policies
Let the public know about your commitment to accountability and the policies and practices you have adopted.

What is Sarbanes-Oxley?

Sarbanes-Oxley Act is legislation passed in 2002 in response the corporate accountability scandals in which corporate boards failed to protect the interest of investors, top management practiced unimaginable deceit in preparation of financial statements, and “independent” auditors appeared to be more interested in protecting lucrative consulting relationships with clients than in providing truly independent judgment about the degree to which readers should rely on management’s financial info.

Sarbanes-Oxley addresses corporate governance, financial disclosure and the practice of public accounting in the for-profit world. With two limited exceptions, it does not apply to nonprofits. And while proposals have been introduced in other states to extend its provisions to nonprofits, Independent Sector and other well respected nonprofit leadership groups have made it clear that little will be gained by wholesale adoption of provisions that do not speak directly to the big issues of the nonprofit sector.

Gary McGee, CPA focuses his CPA practice entirely on nonprofit organizations. At the 2004 Oregon Society of CPA's Not-For-Profit Conference, Gary shared his insights about Sarbanes-Oxley and his suggestions for how nonprofits can adapt the concepts behind the federal legislation to increase their own accountability. Read excerpts from his article here.