Untangling nonprofits

Regulations, tight budgets pose challenges for the sector


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Tightening federal regulations for nonprofits, coupled with a weak economy that has led to funding uncertainties, have meant greater opportunities for accounting professionals serving nonprofit clients. With those opportunities do come some challenges, but also a reward that many say reaches far beyond any revenue gains.

The nonprofit sector is vast - ranging from educational institutions and religious organizations to museums and libraries to human and social service organizations - and clients' needs will vary depending on their specific focus. However, there's a common thread among them - they are mission-driven, and they've likely under-invested in their financial management and need help.

Many CPA firms are heeding the call and, if they have not already done so, are looking to bolster their nonprofit business, such as SC&H Group, which increased its nonprofit practice by about 30 percent last year and is looking for a similar percentage boost in 2011, according to Mike Young, a director with the firm.

Partner Insights

In fact, according to the findings of the Accounting Today 2010 Top 100 Firms survey, nearly 70 percent of the participating firms reported increasing their business in the nonprofit arena - coming in at No. 2 in the fastest-growing client categories, just behind midsized businesses.


Largely serving as the catalyst for this increased focus is tightening federal regulation. Today, perhaps more than ever, nonprofit groups need to show accountability in all facets of their financial and program management, and firms are seeing an increased need to help nonprofits navigate such governance-related issues.

"I think accounting firms are evolving and changing their role as not just number crunchers but number communicators," said Patrick Pruett, executive director for the National Association of Nonprofit Accountants & Consultants, a nationwide affiliation of independently owned accounting firms that provide financial and consulting services to nonprofit organizations.

Firms are looking to add value to nonprofits, and one factor fueling the need for additional consulting services is the new Form 990. "With the new Form 990 that went into effect for the 2009 year, some of our organizations have either asked us to prepare that for them or have asked us to review it prior to their submission to the Internal Revenue Service," said Anna Swenson, a partner at Padgett Stratemann & Co., a CPA and business advisory firm that is based in San Antonio with an office in Austin. "It is longer and more complicated than it was in the past, so they were seeking additional help in getting that completed."

The redesign - the first major revision of the 990 since 1979 - is meant to enhance transparency and promote compliance. According to the IRS, changes include "a front-page summary that provides a snapshot of key financial and operating information, a governance section, and revised compensation and related organization reporting. ... The new form replaces existing 'unstructured attachments' with formal schedules. ... Other schedules were added for reporting foreign activities, non-cash contributions, hospitals, and tax-exempt bonds."

"There's a continuing focus on dealing with the IRS's reporting regulations and assisting nonprofits with best practices and governance-related issues that have risen out of the new Form 990," added Sanders Davies, a partner at O'Connor Davies Munns & Dobbins, which serves more than 1,000 nonprofit clients, with the sector accounting for almost 40 percent of the firm's practice.


Susan Kirsch, shareholder of tax advisory at Schneider Downs, said that the firm is also doing a lot of follow-up work and client monitoring to ensure that nonprofits are in compliance with the redesigned Form 990. "We continue to engage in dialogue with clients to ensure they are meeting tax compliance regulations," she said.

Many accounting professionals have also seen an increase in service requests due to the 403(b) changes. A 403(b) plan, or tax-sheltered annuity plan, is a retirement plan for certain employees of tax-exempt organizations.

Historically, 403(b) plans operated under a specific set of rules that differed from the rules for other plans such as 401(k)s. However, major changes came to the forefront with the IRS's issuance of Final 403(b) Regulations in 2007. Plan sponsors had to ensure that their 403(b) complied with final regulations before Jan. 1, 2009. Some of the required changes include a written plan document, distribution limitation and universal availability of employee contributions.

"One regulatory change can lead to 100 different questions," said John Null, shareholder in audit and assurance services at Schneider Downs.

The firm is also beginning to see an increased need to help nonprofits remain competitive and retain staff following the spate of salary suppressions and cutbacks due to the recession, Kirsch said.

Serving its more than 400 nonprofit entities is a significant year-round practice at Schneider Downs. The firm has created a nonprofit industry group to collect the combined insights of professionals from several firm disciplines, such as tax and audit, and to position itself as a full-service firm providing assurance, tax, advisory and technology consulting services, including nonprofit fund accounting software, to nonprofits and their boards.

"This nonprofit industry group continues to be a strategic initiative for the firm," Null said.

For Schneider Downs, Kirsch believes that the nonprofit sector has created professional opportunities for growth for its associates. "We believe that providing those opportunities has really enhanced our business," she said.


Additional trends within the nonprofit landscape include human resource consulting and stimulus-fund-related audits.

"We've seen state and federal auditors come in regarding various HR issues, such as I-9s, and reviewing those more and scrutinizing that information more, so we're seeing an upswing in some of our HR consulting work," said Padgett Stratemann's Swenson, whose firm serves about 40 nonprofits. "We've also seen an increase recently with the stimulus funds that some organizations have received. When you receive a certain amount of federal funds, you are required to have an audit done. ... A lot of the organizations who didn't normally meet that threshold met that threshold in the current year, so we had to perform some additional services for them on the stimulus money they received."


The soft economy has impacted all types of businesses, and nonprofits are no exception. Because of funding uncertainties, many nonprofit groups are doing more with less and are understandably hesitant about expenditures. While this can mean challenges for CPA firms, it can also present opportunities. The key: Help nonprofit clients understand the value you can provide.

Many firms recognize the challenge and, despite the uphill battle of the budget, have found ways to bolster their nonprofit practice, such as SC&H Group, which currently serves about 60 nonprofits and works to drive business by boosting market share and audit efficiency.

Young acknowledged that there's not a significant opportunity to raise fees because nonprofits have limited budgets and they are generally not significant buyers of consulting services; however, through networking within the industry, calling nonprofits that meet the firm's criteria and referrals from existing clients, the firm has grown its nonprofit practice by about 30 percent.

"They are looking at us to be more of an advisor in this difficult economy," Young said.

"What we have done to deal with the fee pressure is to remind partners and senior staff to spend more time with their clients and make sure they understand the issues they are facing," said ODMD's Davies. "At the end of the day, clients will pay for services they feel provide value to them."

To help cash-strapped nonprofits find creative solutions, Davies may, for example, recommend zero-based budgeting or a mission alignment assessment project.

Zero-based budgeting is when budgeting starts from scratch or a "zero base" and each function within an entity is analyzed for its costs and needs. The budgets are then constructed around what is needed for the upcoming period. "It forces the organization to think why they are structured the way they are structured," Davies said.

Another tool is a mission alignment assessment, whereby the firm and the client will assess the impact of a given program on the organization's resources and evaluate how the program aligns with the group's mission. This accomplishes several things, including helping participants better understand the mission of their organization.

Wegner CPAs & Consultants partner Glenn Miller said that his firm has increasingly helped nonprofits weather the cash-collection slowdown by working on cash-flow projections and helping them secure lines of credit and other borrowings. The Madison, Wis.-based firm works with about 550 nonprofit clients primarily in southern Wisconsin.


There are several resources available not only to nonprofits but also to the CPAs who serve them, such as the new Sage Nonprofit Online Community and the Certified Nonprofit Accounting Professional credential, which is sponsored by member firms of the National Association of Nonprofit Accountants & Consultants.

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