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Nonprofit Disclosures to IRS Not Living up to Expectations

July 24, 2012

The Internal Revenue Service’s goal of improving the financial transparency of nonprofit organizations by requiring them to file an expanded Form 990 still has a long way to go, according to a new study.

The study by Tate & Tryon, a Washington, D.C.-based CPA firm, assesses the governance practices of nonprofits, following up on a similar study from 2010. To understand how nonprofits are addressing some of the more controversial disclosure and reporting requirements of the revised Form 990, the firm analyzed the financial results and responses to key governance questions from a data sample of 400 nonprofit organizations for the years 2008, 2009 and 2010.

The study found that many nonprofits have not yet adopted all of the “good governance” practices that were outlined by the IRS when the revised Form 990 was initially released. The expanded disclosure requirements in the revised Form 990 reflected the belief that certain governance practices, along with written policies, would result in compliance with the laws and greater financial transparency. However, based on the results of the Tate & Tryon study, financial transparency does not appear to have improved significantly since tax year 2008. 

Charles Tate

The study found, for example, that only 4 percent of the organizations surveyed posted their Form 990 to their Web site in 2010, the same proportion as in 2008. The reluctance to post the Form 990 could stem from the expanded compensation reporting on the form, not only for the CEO, but also for key and highly compensated employees.

However, the study found some governance improvements at nonprofits. The number of organizations providing the Form 990 to the full board of trustees is trending upward. In 2010, 59 percent provided the Form 990 to the full board before filing, up from 46 percent in 2008.

In terms of conducting a review of the CEO’s compensation by an independent body based on comparability data, 59 percent of organizations reported conducting an independent review based on comparability data in 2010, up from 48 percent in 2008 and 57 percent in 2009.

On the other hand, when the study examined approval of the compensation for other officers and key employees based on comparability data, only 36 percent of the nonprofit organizations conducted independent reviews based on comparability data in 2010. That was up from 31 percent in 2008, but down slightly from 37 percent in 2009. Approximately two-thirds of the organizations surveyed do not use independent persons, comparability data or contemporaneous substantiation when determining the compensation for their key officers and employees.

“One could therefore conclude that for the majority of organizations surveyed, staff compensation is determined primarily by the CEO,” said the report.

“The results of the study will provide interesting insight into how nonprofits are being managed,” said Tate & Tryon managing partner Charles Tate in a statement. “Financial executives and board members can use this study to specifically understand how other nonprofits are addressing key governance questions. It is our hope the study results will serve as an advisory tool for organizations across the country.”

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