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Accounting is where the nonprofit buck stops

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Todd Cohen

Fundraising, a never-ending quest at nonprofits, has become even more critical and challenging as the bottom continues to drop out of the economy.

Equally critical as times get tougher is the need to track every dollar that comes in and goes out the door.

“If you don’t know where your money is, or how much money you have, or how your money is being used, you don’t have financial accountability,” says Cynthia B. Nunn, president of the Center for Nonprofit Management in Dallas. “You have to know that.”

Accounting, experts say, gives a nonprofit an essential tool it needs to run its business, plan its future, and show donors and regulators it is spending the tax-exempt funds it receives, and keeping track of them, the way it should.

“With corporate earnings under pressure, the value of the corpus of foundations down and individuals nervous about their future, there’s just going to be less money to go around,” says Barkley Calkins, project coordinator for the Nonprofit Sector Resource Institute at Seton Hall University in South Orange, N.J. “There’s a lot of emphasis on being realistic and conservative.”

Reinforcing the central role accounting plays at nonprofits is the new Form 990 annual report they must file with the Internal Revenue Service that requires much more detailed information about organizational finances, management and governance.

So a nonprofit must be sure its “chart of accounts” provides the information the new Form 990 requires, says Bill Peeples, vice president for finance at the Center for Nonprofit Management.

The Chart of Accounts consists of accounts that constitute the organization’s balance sheet and income statement, including its assets, liabilities, equity, revenue and expenses.

Who’s responsible for what?

Good nonprofit accounting requires first of all that an organization recognize where the buck stops, literally and figuratively.

Under nonprofit law and regulation, the board ultimately is responsible for the organization and everything it does, including accounting for its money and reporting to the IRS.

While the board itself may handle accounting at a startup or tiny nonprofit, the board at a larger organization likely will delegate the hands-on accounting work to the staff, a committee of the board and an outside certified public accountant, or CPA.

But the final oversight for whoever tracks the money, keeps the books or fills out the tax returns remains with the board.

“The board is ultimately responsible,” says Nunn. “They’re the fiduciary for everything that goes on in the organization.”

Except possibly for startups, she says, nonprofits should hire an employee who is qualified to manage its finances, likely either a bookkeeper or accountant, and also should retain a CPA outside the organization to prepare tax returns and audits.

Some CPAs specialize in nonprofit work, and nonprofits typically can find those specialists through their local Society of CPAs or through programs at which CPAs teach classes in nonprofit accounting.

The board, typically in collaboration with the staff, sets the financial direction for the organization and spells out financial responsibilities of the staff.

At a tiny nonprofit, the executive director might manage the organization’s finances, while a small or mid-sized nonprofit might employ a bookkeeper or accountant, and a larger nonprofit might employ a finance director or controller.

Whoever is responsible and whatever the title, the job of the finance manager and staff is to keep the board informed about the organization’s financial position through reports that staff members produce.

Those reports include cash-flow analyses, the balance sheet, and a statement of revenues and expenses, known as the “P&L” or “profit-and-loss statement” in the for-profit world, and as the “statement of activities” in the nonprofit world.

“It’s clearly a board responsibility to make sure the financial statements are produced and that they are audited,” says Calkins of Seton Hall

Nonprofit staffers typically prepare those financial reports with the oversight of the board or its finance committee, he says.

“If you can do that well, in a way that engages the board and the staff,” he says, the budgeting process “actually can be an extremely positive experience.”

Nunn says budgets “are plans, and things can change, and when they do, you have to revisit those documents that are guiding the way you work.”

To make good decisions, she says, nonprofit leaders must have confidence in the organization’s financial information.

So those financial reports are key because it is “important to know how much money has come in, how much money has been expended, and what’s left,” she says.

Of funds flowing into the organization, for example, the financial manager must account for the dollars that are pledged and those that are cash and, of the cash, how much is restricted for a particular use and how much can be used at the discretion of the organization.

The finance manager typically produces those reports and submits them to the executive director and then to the board’s finance committee, which should question the finance manager so they understand the reports and so the board treasurer can make an informed presentation to the full board on the nonprofit’s financial position.

“Responsibility can’t be deferred,” Nunn says. “It just is.”

She says nonprofits also must set up a system of “checks and balances” designed to protect against fraud and errors by assigning the responsibility for authorizing spending, handling money and keeping financial records, respectively, to separate people within an organization.

And in the current economic crisis, Nunn says, financial managers can help their organizations develop contingency plans.

“It’s important for you to know where you are,” she says. “If where you are is challenging, you have to come up with some sort of plan to do your business in a different way, including securing more revenue, reducing costs or delaying new initiatives.

“Financial managers can really help you work through contingency plans and forecast with you,” she says, “so you make plans that make sense.”

Software and training

Once the board and staff understand their financial responsibilities, it is important to provide the training and systems they need to fulfill those duties, experts say.

That includes providing continuing training for staff, as well as the accounting software they need to do their job.

Nonprofits should build funding for training into their annual budget so financial managers can “stay in tune with current laws and trends in nonprofit accounting and can provide the best resource to the decision-making process of the nonprofit,” Nunn says. “They inform decision-making.”

Her organization, which is known as a “management support organization” and provides management support to local nonprofits, partners with the Dallas CPA Society to provide a nonprofit track as part of the annual free training the group provides for CPAs.

That track is available to nonprofit board members, treasurers, finance-committee members and nonprofit managers.

An essential tool nonprofits and their financial managers need to fulfill the accounting function is software.

Peeples says smaller nonprofits should work with their accountant to select the software they need, while larger nonprofits should form a committee to spell out specifications for their software, create a request for proposals, and then evaluate proposals vendors submit.

“As complexity increases,” he says, “so do the processes for selecting what you’re going to use.”

To handle its accounting, a small organization likely could use off-the-shelf software typically marketed to small businesses, as well as an off-the-shelf database product to track donors and contributions, Peeples says.

But as a nonprofit grows and finds itself managing more contributions and more donor restrictions on those contributions, it likely will need bigger and more sophisticated software, both for accounting and for fundraising.

Working with its vendors, the nonprofit also will need to make sure those two software systems can talk to one another.

The new Form 990

Nunn says solid accounting will be critical to provide the additional financial information nonprofits now must report in the new Form 990 they must file with the IRS.

The changes are designed to improve transparency, ensuring that “all information is there and accurate and anyone can access it,” she says, and to promote accountability, ensuring “this board should already have known about what is there, and there should be no surprises.”

Nonprofits, she says, “are holding a huge public trust given to them by government and individuals in society.”

Government recognizes that nonprofits “do work that we or business cannot or should not do,” she says, and in exchange allows nonprofits to operate generally without having to pay taxes, and allows individuals and companies to make contributions for which they can claim charitable deductions on their personal or corporate income taxes.

In return, Nunn says, government and donors expect nonprofits “will do with that money what you said you’d do.”

The new Form 990 requires that “information that is pertinent to this agency is information that can be trusted, that issues have been well vetted, that the board is informed about what is going on,” she says, and that the board has been “presented enough information to make an informed decision.”

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