This past year, nonprofits have continued to be a lagging economic indicator, adopting several strategies from their leading for-profit counterparts to survive a slow and delayed recovery.
"Nonprofits lag about a year," explained Eileen Heisman, CEO of Jenkintown, Penn.-based independent public charity and philanthropic-service provider National Philanthropic Trust. "Fundraising didn't drop off until about a year after the economy plummeted. Things are looking up, as we hit bottom a couple of years ago."
Despite the optimism, a small number of nonprofits are still seeking stability through transactional activity - merging with other nonprofits or consolidating activities with for-profit or related nonprofit entities in financial reporting. "There are a lot of not-for-profits in existence, competing for contribution dollars, and some of them do similar things," explained Judy Murphy, partner-in-charge of St. Louis-based Top 100 Firm RubinBrown's Not-for-Profit Group, and a partner in its Assurance Services Group. "In some of the mergers I've seen, they weren't doing the exact same thing. But combining two organizations provides for more people and can be more efficient."
In the past month, James Larson, audit partner at Bethesda, Md., accounting firm Gelman, Rosenberg & Freedman CPAs, has discussed transactional possibilities with three of the firm's more than 600 nonprofit clients. Two would survive their potential mergers, while the third would become a program of a larger organization, Larson shared.
The Internal Revenue Service's 2008 reformatting of the Form 990 and the Sarbanes-Oxley Act of 2002 also continue to be a factor for nonprofit organizations, leading to another recent trend of consolidation for the purpose of financial reporting. Nonprofits that go this route either acquire an ownership interest in a for-profit entity or become related to other nonprofits, according to Murphy, and U.S. GAAP differs for each.
The complexity of these rules complicates an already heterogeneous sector composed of 28 different types of 501(c) organizations.
"There are multiple nonprofits in every kind of discipline," Larson said. "Dollars are shrinking, and less and less are going to these places."
One discipline that has seen an overall increase, from a contribution standpoint, is the charitable organization. Overall, total estimated charitable giving in the United States increased 4 percent in 2011 from 2010, to $298.42 billion in contributions (0.9 percent adjusted for inflation), according to Giving USA's 2012 Annual Report on Philanthropy for the Year 2011. Individual contributions represent the bulk of this wealth, rising an estimated 3.9 percent to $217.79 billion in the same time period.
With such a large stake in turbulent economic times, individual givers demand transparency and, according to Larson, they're getting it. "The last number of years, nonprofits are making sure what they're doing is documented and well-reported," he elaborated. "Over the last couple of years, more of our clients are posting their annual report on their Web site, and a lot more are posting financial statements. Sometimes it's a full-blown audit report or 990 on the Web site."
Consequently, both board members and individual givers are more financially astute. "Boards have become more sophisticated," Larson continued. "Ones that haven't before, want to learn what financial statements and 990s mean. Everybody is much more aware of the duties and roles of what a board member really is. Before, they would pick a cause and then, 'Let's join the board.' As Sarbanes-Oxley and other things came into play, there was some responsibility to being on the board instead of just saying 'I give money to x.' There's more awareness, actually; now everyone is talking about [these regulations and responsibilities] all of the time."
With the numbers now a steady part of the conversation, board members are less accepting of subpar service from their accounting firms, said Heisman, whose charity, in its advisory role, represents more than 25,000 charities. "Sometimes [charities] are given a less sophisticated professional and are not considered as important to a client because what they're paying the firm is not quite as much," she continued. "The nonprofit sector makes up 2 percent of GDP, and when you have more sophisticated people working [on the financial reports], you get better advice and outcome ... . [Accounting firms] should make sure they don't treat [charities] as second-class citizens. I always tell people, 'Don't take pro bono professional services.'"
NEW ON THE SCENE
Larson, who has worked with nonprofit clients for his 15 years with Gelman, Rosenberg & Freedman, has witnessed competitors clamor into the market during two separate downturns.
"Lots of firms come into the nonprofit sector when the economy goes down," he observed. "They lose government contracts and regulatory contracts. For medium or small-sized firms, the base dries up and things change, so they try the nonprofit sector. But you need to know what you're doing."
For these firms, Larson recommends a "champion on organizations who wants to grasp and understand it, and not do it as a sideline job."
With nonprofits -- both charitable and trade associations -- composing about 75 percent of Gelman, Rosenberg & Freedman's business, the commitment level is high, with staff having traveled to more than 70 countries since the firm's founding in 1981 to provide financial statement and compliance services for clients' international and relief work.
But just as the recession prompted fewer contracts for accounting firms' for-profit clients, nonprofits have likewise seen the well of government funds dry up. "Organizations are very dependent and aware of what is going on with the government budget," Murphy said. "There's an uncertainty, waiting for the election and other issues on the tax side, uncertainty with the tax rules expiring at the end of the year. Organizations are continuing to evaluate the viability of the organization."
That endurance extends to human capital, as nonprofits struggle with another big issue plaguing corporate America: succession planning. Here, too, nonprofits have to weigh the benefits of continuing on, as the next 10 years will see a demand for talent to take over positions vacated by Baby Boomers.
"Someone said to me about their charity, where they have been for around 25 to 30 years as a part-time director, that they were a very 'gray' charity," Heisman shared. "They meant gray hair. The part-time chief executive wants to retire, and they're having a hard time raising the money. From everything he told me, I said, 'Maybe it's time to close your doors.'"
Accounting firms, certainly no stranger to this concern, benefit from strong recruitment of younger staff to match the eventual de-graying of the nonprofit clients that do survive. Fortuitously, the promise some of these clients offer of overseas work and the chance to help "do good" remain an attractive lure for Millennials.
"We have 100 people, and recently hired five staff auditors right out of school," Larson said. "We have from that age to 67 years old. In general, the profession is pretty good with the idea of college grads finding jobs... . [Our firm], we offer a unique thing, and give people the ability to travel some."
In the meantime, the nonprofit sector, like the rest of the economy, remains in a state of cautious optimism. "The question is how fast are we recovering; some people say it's fine and some people are frustrated and want it to be a little faster, but we can't do much about it," Heisman mused, adding, "We are on an upswing."
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