As the nonprofit sector, typically a lagging economic indicator, begins to feel the effects of a slow recovery, not-for-profit organizations will need to rely on accounting firms to stay ahead of the curve in allocating shifting funds and resources, governing themselves, and possibly even consolidating.
Governance, a rising trend for nonprofits since the impact of the Sarbanes-Oxley Act of 2002 trickled down from the corporate world, has become even more of a priority, as recent cases of fraud and embezzlement in the sector make headlines.
This is evident in new legislation, like the Nonprofit Revitalization Act of 2013 in New York State, signed into law by Gov. Andrew Cuomo last December, "to reduce unnecessary and outdated burdens on nonprofits and to enhance nonprofit governance and oversight." As the first amendment to the New York Not-for-Profit Corporation Law in 40 years, the legislation does lag a bit behind that of other states in mandating governance, but it also modernizes the law regarding new technology.
The act is not only "cutting edge" in addressing issues like online fundraising, according to Candice Meth, senior manager in Top 100 Firm EisnerAmper's not-for-profit services group, but its updating should encourage new nonprofit organizations that had been previously deterred by the law's difficulty from incorporating in the State of New York.
"It's the first time ever that governance policies considered best practices were captured in the law itself and is now an arm of enforcement," Meth explained, adding that some of the act's legislation is still pending and, among other things, will address executive compensation.
STRENGTH IN NUMBERS
While good governance has long been a best practice for nonprofits, its priority is more apparent as accounting firms transition their services to a more advisory capacity. Additionally, accountants, auditors and finance professionals are increasingly populating nonprofits' boards and executive teams, according to Allan Blum, a partner at New York-based Loeb & Troper, a specialized professional services firm providing audit, tax and consulting services to the health care, not-for-profit and special needs industries.
Blum, a 24-year veteran of the industry and former New York State Society of CPAs' Not-for-Profit Organizations Committee and conference chair, was himself elected president of a nonprofit board six months ago, after serving in the more traditional role of treasurer. "The idea is that financial investments, and understanding them, is beneficial for an organization as they move forward," he explained. "Many people thought of not-for-profits as just that, not-for-profits -- but they're businesses. Unless you operate as a business, you're not going to be there going into the future. The large not-for-profits have maintained that, but at the smaller ones, people on those boards have told me, 'We're not allowed to make a profit,' and they budget in the beginning of the year as though they're not going to make a profit."
But as nonprofits follow the lead of corporations in greater governance and accountability, they have recognized a more holistic approach to internal controls that extends to budgeting limited funding for long-term success.
"Not-for-profits realize that unless they get the back office in order, they're not going to be able to service individuals going forward," Blum added.
As nonprofit boards become more financially astute, their members are seeking more complete data. "Financial committees in particular are increasingly interested, when you present them with financial information, at looking at the core," shared Charles Tate, managing partner of Washington, D.C.-based firm Tate & Tryon CPAs, which specializes exclusively in nonprofits. "They seem to be more interested in the underlying processes, the controls that support the numbers in financial statements and reports -- more of what that means, as opposed to the historical viewpoint. The end product is the financial statement, so they used to be focused on the numbers, that historical information."
The shift has begun, Tate continued, and has been accelerated by technological advances that render parts of the equation more relevant than static results. "There's information [they can find] that's much faster, so they're interested, from us, in how strong and effective are the processes that create the numbers," he said.
Tate's nonprofit clients are thus asking more questions about the emerging trend of Big Data, although, he explained, they will likely be limited to merely inquiring under current resource constraints. "There is so much emphasis on keeping not-for-profit overhead at a minimum, with watchdog agencies" and more, he said. "They don't want [nonprofits] to spend so lavishly that they don't spend on programs, so some of them pinch on overhead. Sometimes, pinching on overhead is not investing for the future."
Some nonprofits have leveraged new technology to make these investments at minimal cost.
"I'm seeing clients very interested in social media, making sure they have a universal message and linking all accounts in to it," shared EisnerAmper's Meth. She estimates that between 50 and 60 percent of her clients -- which include private foundations and organizations in independent school arts and social services -- are using the typically free (or low-cost through various dashboard applications) services. "Some are gearing up and exploring it. And one thing I can say, Web sites have definitely become more robust. Not-for-profits are investing in making sites more of a marketing tool."
Those organizations are also using their Web sites and Facebook pages as vessels for online fundraising, Meth continued. The global reach of this tactic requires her clients to register with different states to fundraise online. Meth advises those clients on the practicality of that added step, as well as on the growing trend of contributions via text message, for which cell phone carriers have created a cap to prevent fraud.
Her clients' growing preference for digital means they expect to view EisnerAmper proposals and presentations electronically and on their own devices, Meth added.
Peter Stam, president of nonprofit accounting software provider AccuFund, has also tracked an increase in nonprofit clients using portable devices to "interact with their financial systems ... to have access and to query their financial data status. It works on the fundraising side as well. I see a desire to have access, through mobile devices, to fundraising data, increasing significantly."
This more instantaneous exchange of data also means consumers expect greater transparency, though, according to Tate, that already characterizes the sector.
Nonprofits "tend to talk amongst themselves; it's a very congenial environment," explained Tate, who has worked in the industry for more than 30 years. "They are driven by the idea of transparency and optics - many follow Sarbanes-Oxley-like principles, and most work is driven by a formal RFP process. There is a pretty active board and audit committee involvement."
Like Tate & Tryon, most accounting firms with large nonprofit clientele have long been entrenched in that world.
"Because the sales cycle in the nonprofit industry is probably a bit longer than other industries, it's a close-knit community and takes many years to build a reputation in that industry," Tate continued. "Whether you're a bank or any service provider."
While some firms used the economic downturn to pick up off-busy-season work with nonprofits, Tate anticipates that those firms will move back into their previous niches in the recovery.
Firms that continue to offer traditional and core services to nonprofits operate in a very competitive market, but gain an advantage in catering to the industry's nuances.
"Being collaborative gives you a leg up," Tate explained. "We spend a lot of money and time on branding to distinguish from pure selling. We have a weekly and monthly newsletter, and client seminars. Staff, beyond the partners, speak at national and local CPA conferences. And we encourage all of that as part of our branding mechanism. If you're educating, you're selling. The hard-sell approach is not going to work with not-for-profits. It's a more subtle industry that needs education and lacks resources. Firms that can provide that are viewed very highly."
This collaborative spirit might also become necessary between nonprofits, according to Blum, who expects that some will need to seek corporate affiliations and consolidate with each other.
In New York, he explained, "You walk down the block and run into five different not-for-profit organizations within a one-block radius; similar not-for-profits doing similar things, providing to similar consumers. Do we need all of those not-for-profits? Funding is only going to get tighter. They need to think about affiliating to increase efficiencies, whether reducing back-office costs or to spend money better on the consumers themselves."
Because of the very nature of nonprofits, established by founders with a specific mission but limited resources to fulfill it, these mergers can be a delicate proposition.
"No one walks into a room saying, 'I'm ready to give up my organization,'" Blum continued. "They don't see the benefit of what they can do if combined. It's corporate versus nonprofit, where the CFO or CEO is going to lose their job and they may not keep everyone on board. There are pains with any kind of affiliation or merger. [Organizations] need to dip their feet in the water to understand it a lot better ... . There is a movement toward this type of affiliation, and hopefully we will see more of it going forward because it's necessary."
Along with advising on such consolidations and affiliations, other opportunities are developing for accounting firms to provide less traditional services to nonprofits.
"In the last few years, [not-for-profit clients have been asking], 'What else can you tell us about industry trends? Where is it going? What are some risks you've seen?' From an environmental and business-services perspective," Tate explained. "They're beginning to lean more on accounting firms, more than they did post-Sarbanes-Oxley. Boards are more willing to use accounting firms for nonfinancial services."
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