Are more nonprofits slowly adopting certain traits of for-profit companies?The short answer is yes.
Management at the nation's nonprofit entities is becoming decidedly more corporate as an increasing number of for-profit executives are making their way onto boards and staff.
Meanwhile, many NFPs are also reacting to the impact that Sarbanes-Oxley has had on for-profits, and as a result, are implementing similar compliance and governance provisions - albeit voluntarily - to encourage best practices.
"SOX does not technically apply to not-for-profits, but what we're seeing is several of the board members of nonprofits we work with have had experience with public companies, whether they were employed or served on boards there," said Tommye Barie, CPA and director of auditing at CPA Associates in Bradenton, Fla. "So they feel like it's responsible to voluntarily adopt some of the provisions of Sarbanes-Oxley."
That extra expertise helps, since new standards and fiscal pressure, paired with increased donor demands, are changing the expectations and workload at many nonprofits. Governance issues continue to take center stage for these entities, and CPAs are being sought to help them align themselves with the latest standards.
"There's a marked increase in regulation and oversight of the industry," said Brenda Blunt, a tax director at CBiz Accounting Tax and Advisory Services, who works with roughly 200 nonprofit clients in the metropolitan Phoenix area. "It's coming from the voluntary disclosures that have to be made in the [Form] 990. It's coming from the increase in the audit requirements for those organizations that have to be audited and it's coming from an increase of consistent Internal Revenue Service enforcement."
Experts such as Christopher Petermann, co-director of the private foundation practice at O'Connor Davies Munns & Dobbins LLP in New York, say, for example, that not only are more nonprofit organizations creating audit committees, but there is more interaction between these bodies and the management of the organization.
"Ten years ago, not as many nonprofits even had audit committees. Maybe you dealt with a finance committee," Petermann said, pointing out that now, in many cases, there are pre-audit meetings, as well as the typical post-audit meetings. "Their structure closely resembles more of a publicly held company. The audit committees are taking charge, broadening their knowledge and asking better questions."
The role of the audit committee, according to Barie, is to fulfill the oversight responsibility, which includes making sure that the auditor is competent, is performing in accordance with the standards and is independent. Some organizations are also adopting an audit partner rotation.
"We have that quite often, where the client is happy with the services we're providing, but they want a fresher set of eyes overseeing that process," Barie said, adding that a partner change can happen every three to four years. "We're fortunate that we're a large enough firm where we can provide that. Some of the smaller firms cannot provide that, so they either have to contract with another firm to do it or they lose the job for a period of time."
"SOX took a lot of qualified accountants out of all the other sectors so they can implement the rules in the publicly traded companies," Blunt added. "There's a general accountant shortage, whether it's for me trying to provide services to nonprofit entities, or whether it's nonprofit entities trying to find chief financial officers and controllers to take care of their finances."
YET MORE REGULATION
The American Institute of CPAs also introduced 12 new standards that will affect the nonprofit world. One major change, according to Barie, is Statement on Auditing Standards No. 112, which has to do with assessing risk and internal control deficiencies. Smaller organizations, especially, have to worry about whether their CFO or financial director has the expertise to understand and manage their financial statements.
"Not-for-profits are typically sensitive to the percentage of costs that are administrative," Barie said. "That pressure comes from public and funding agencies. They're reluctant to incur the costs that are required to pay for the expertise in the financial area. That can have a domino effect, where they won't have the necessary personnel to segregate duties, which would allow them to have proper internal controls."
Some nonprofits rely on their accounting firm or outside auditor to draft the financials if they do not have the expertise in-house to draft those statements themselves, including the disclosures, Barie said. That could be considered a significant deficiency that the auditors would need to report in writing to management. The written notice is different from the previous process of being able to communicate the news through a conversation.
"It's not a penalty," Barie continued. "It's just a document that goes to the board. From our perspective, the education process and the way we communicate that to the client and the board makes a big difference on how it's received and whether or not they perceive it as a penalty or a slap on the wrist. And that's a very delicate conversation."
On the tax side, a significant revision of Form 990 is in the works, according to Gordon Siess, partner-in-charge of not-for-profits at Holtz Rubenstein Reminick LLP in Melville, N.Y. Siess said that the revamp, as it is currently drafted, will provide a front summary page including an organization's financial, operational, compensation and government information.
"It will make it easier for donors," he said. "It will probably be more work for the organization in pulling together the information. It will certainly provide more information to potential donors."
The form is the annual report that most charities have to file with the Internal Revenue Service. The new version, stemming from the Pension Protection Act of 2006 and effective for 2008 returns, will address more relevant questions that the public, Congress and the IRS want to know about the organizations, Blunt explained. One way that CPAs can help their clients in this area is by encouraging organizations to put these forms on their Web site, as an alternative to GuideStar.org, an online informational hub for donors.
"There is going to be a lot of work around that," Blunt said. "I am drafting a letter to all of my clients letting them know about the changes. There's going to be a lot of education that my clients are going to need, as well as my staff, to make sure we can gather all the information that this new form is asking for. It's asking for new information that some of my clients I know aren't even currently collecting, so they are going to have to change their process to make sure they are collecting the right information they're required to file."
Small organizations with gross revenues normally less than $25,000 and that have never filed a 990 are going to have to file a similar form electronically called the 990N, according to Blunt. "It's going to require just a minimal amount of information and we haven't seen the form yet," she said. "It's brand-new, and if these small organizations don't file it for three years in a row they will lose their tax-exempt status."
GROWTH BRINGS SCRUTINY
According to a 2007 audit risk alert for not-for-profit organizations published by the AICPA, a study by the National Center for Charitable Statistics at the Urban Institute reported that the total number of not-for-profits recognized by the IRS increased by 27 percent between the years 1994 and 2004.
During that time, assets also increased by almost 91 percent. Additionally, the study found that contributions to these groups in 2005 topped $260 billion, and 65 million people in the U.S. spent time volunteering at nonprofits. As of September 2006, there were 1.6 million not-for-profit organizations registered with the IRS.
"I think it gets down to somebody understanding their business, who understands their funding sources, how they operate and how they bill for services, and that would vary from social service agency to social service agency, depending on who's funding them," Siess said of his firm's growth in the nonprofit sector. "We've had a lot of growth, not because there are more not-for-profit agencies, [but because] we have developed expertise we've been able to offer."
It may be just a buzzword within the nonprofit community, but financial reporting transparency can sting if not addressed properly.
Donors increasingly want to know how their money is being spent, and to ensure that it's being appropriated according to their wishes. Blunt, for example, said that in the last couple of years, she has experienced three different instances where a donation of more than $1 million was asked to be returned.
"It's something donors are asking for," Siess said, referring to transparency. "In response to that, I think more organizations can put their 990 on their Web site just to make it easier for potential donors. In addition to the regulatory requirements of filing, the 990 also tells the story of who they are and the types of programs they offer, so if that's worded properly, it certainly helps as a fundraising tool."
Although donation dollars are competitive and being better accounted for, donors still seem to have money to give.
CPAs who work with nonprofits anticipate that in the next few years, a large transfer of wealth handed off by the Baby Boomers will continue to drive the nonprofit world, according to Petermann.
"We see wealthier individuals forming their own private foundations today, because of the money that has been made on Wall Street with the hedge funds and alternative investments," said Thomas Blaney, who, along with Petermann, is private foundations co-director at O'Connor Davies Munns & Dobbins. "A few years ago, the same was true with all the money that was made with technology. So you have a double hit. The technology boom is now over, and obviously you have your Gates Foundation that came out of that. Now you have the newer foundations that are being formed - [for example] the hedge fund people."
"I think people are still giving. Post-9/11 there was a hiccup in giving, but I think we're giving back," he said.
BRINGING IT ALL TOGETHER
The implementation of more standards and regulation in all areas of accounting has authoritative bodies busy working on updating resources to help those in the entire profession stay on top of the game.
The Financial Accounting Standards Board, for example, is working with the AICPA and other governing bodies to codify all accounting literature into one centralized, electronically filed place, according to Jeff Mechanick, FASB's project manager for not-for-profit organizations.
"Right now you can find the literature, but it's not quite as easy, especially for folks who don't work with this stuff all the time, to find what exactly is relevant accounting practice," he said, adding that a version of this initiative will be released to the public in a few months for a year-long verification and comment period.
"That's an important thing, especially as we and the AICPA continue over the years to refine things and issue more guidance as necessary," he said. "Now, we are going to have it all in one easily searchable electronic place."
