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Organization Strategy

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Obligation or opportunity? Financial transparency in nonprofit financials

“Transparency. Accountability. Liability.” These words have permeated the media and our culture, and apply to government and business, as well as the important work of nonprofits. But beyond the buzz, what do these things actually mean? And how can these “obligations” turn into “opportunities” for you and your organization?

According to the Principles and Practices for Nonprofit Excellence in Colorado, produced by the Colorado Nonprofit Association, “Nonprofits have an ethical and legal obligation to their constituents and the public to conduct their activities in a transparent and accountable manner.” Constituents in this sense include members and donors, clients and service recipients, board members, employees, and even other peer nonprofits. All of these groups have an interest in your organization performing in an efficient, effective, and ethical way – and in the reporting on how this is done in a clear, concise format.

There are various components of transparency and accountability that relate to both the operations and governance of an organization. These may include guidelines for board activity and expectations, honesty and truthfulness in solicitation communication, conflict of interest and employment policies, compensation and reimbursement procedures, and many more. But of equal and possibly greater importance is how your finances lend themselves to providing transparency and accountability. How can your organization leverage audited financial statements and the IRS Form 990 to be a value-adding opportunity?

AUDITED FINANCIAL STATEMENTS

The bylaws of many nonprofit organizations require an annual audit. But why? A common misperception is that an audit is performed to prevent or detect fraud. However, a financial statement audit is not designed to detect fraud, and, while it might serve to deter someone from committing a fraud, that is not its primary purpose.  So if, however, it isn’t about fraud, why do bylaws require an audit?

An audit serves as a “stamp of approval” that the financial statements of the organization are fairly presented in accordance with the relevant accounting rules. The audit opinion also covers the disclosures included in the financial statements, evaluating whether they are neutral, consistent, and clear.  An audit includes detailed testing and verification that the systems and work performed by management are operating as intended and are producing reliable financial information. An audit also serves as an opportunity for the board and management to hear about best practices or areas of improvement over internal controls and processes.

Although the audit is performed by an independent auditor, both management and the board have a responsibility in the process. Management must attest to the auditor that all information was provided as requested, and the board must accept the audit as presented.
Another important part of “accountability” is sharing the organization’s results with the public.  Having an audit performed annually provides assurance that the financial results that are shared publicly are materially correct.  This can provide another great opportunity. How better for your organization to build confidence than to communicate audited financial information? Your donors, grantors, and other constituents are relying on your financial results, and therefore, an audit is an important component of building and maintaining their trust.

IRS FORM 990

The Form 990 is another tool used to assist in ensuring transparency and accountability.  The Form 990 is an informational return that is a public document available that must be provided by the organization upon request. This is a method of distributing timely, accurate and complete information. Furthermore, the public access to this document makes it an excellent opportunity for your organization to shine.
Making certain that Form 990 is filed in a timely manner (five months after fiscal year end, with two allowable extensions of three months each) provides the most relevant information to the public. It allows donors, recipients, and other stakeholders to evaluate applicable and comparable information between organizations.

The Form 990 is quite extensive and requires different information than is reported in the audited financial statements. Because the Form 990 may be viewed by anyone, it is important to ensure the information is accurately stated. Many users of Form 990 will use the financial information reported to pass judgment on the organization by looking at expense ratios, compensation information, and governance policies.

Your organization should make an effort to present complete information on this document as well.  The Form 990 includes information about financial results but also offers an opportunity to explain the mission and activities of the organization. Organizations should make sure that both the qualitative and quantitative information provide a complete picture of their results.

Both an annual audit and Form 990 help meet the obligation of operating in an accountable and transparent manner, but they are also opportunities to reduce risk, build confidence and highlight the positive impact of your organization.

Because the audited financial statements and the Form 990 are tools meant to enhance transparency and accountability, management and the board should ensure that both are performed by qualified certified public accountants who have relevant nonprofit industry experience and who understand both the obligation and opportunity that transparency and accountability provide.

This article was originally published in the Colorado Nonprofit Association January/February 2014 Nonprofit Colorado newsletter.