Since Sarbanes-Oxley regulations went into effect for large enterprises, holding executives accountable for their company's financial records, the spotlight has been slowly turning towards nonprofits.
For example, California, Hawaii, Iowa, Maine and New Hampshire have passed new accountability legislation for nonprofits, while more states are in the process of passing some form of stricter transparency regulations. As a result, the greater focus on transparency in the nonprofit arena has resulted in a surge in the sales of nonprofit software.
"People now running nonprofits come from the for-profit world," said Liz Marenakos, product line manager for business and financial solutions at Black- baud. "They have been through implementations before and understand how a budget gets derived from software."
Blackbaud, a Charleston, S.C.-based online accounting software provider for nonprofits, reported a surge in first quarter profits, to $10.9 million, versus $4 million for the year-ago first period, while Kintera, a San Diego-based nonprofit accounting software concern, is projecting 6 percent growth, according to general manager Rhonda Shuptrine.
Jim Stone, chief operating officer at Boise, Idaho-based software manufacturer Cougar Mountain, said that he has seen high growth in the market over the past couple of years.
The National Council for Nonprofits released a document in June showing that such states as Arkansas, Colorado, Connecticut, Kansas and others all have passed legislation this year holding nonprofits more accountable for their financial data. Such added accountability includes amending "good faith" estimates to include expenses incurred by fundraising consultants and others involved in soliciting funds, restrictions on revenue spending, and even new taxes on items like "unrelated business taxable income."
More legislation may come to fruition at the national level as well, said Erica Greeley, director of strategic policy planning at the NCN. "The Senate Finance Committee, the commissioner of the IRS and a number of other folks are heavily involved in conversations this year for new regulations for the nonprofit sector," she said.
One such upcoming change for nonprofit accountability, said Greeley, is the expected revamping of IRS Form 990, the income tax return form for nonprofits. What exactly will be changed, however, is still undecided.
Yet the dreaded SOX Section 404 - which addresses internal controls and audits - looks to be losing force, said David Hardesty, CPA and author of numerous books on SOX. "Auditors are being too tough on companies," he said. "Really, people are asking them to back off a bit, not to be tougher. Enthusiasm to extend 404 isn't there. That doesn't mean it's not going to happen, but I don't see it."
Hardesty went on to say that many nonprofits are trying to self-govern and comply with Section 404 on their own accord - and most are failing miserably. Hardesty estimated that those self-governing on Section 404 produced wrong numbers three-fourths of the year - each time they completed a quarterly report. Their only saving grace has been auditors coming to fix their numbers at the end of the year, he said. This may be a reason for the loss of enthusiasm, he added.
With or without Section 404, more SOX-like legislation is being passed in nearly every state, and that means more nonprofits are buying accounting software packages. Another reason that many cited for the surge in nonprofit software sales was the type of executive now running nonprofits.
Software provider Sage Software has seen such steady growth in the marketplace that they have launched a new Peachtree product just for nonprofits.
New compliance regulations also mean changes to the features and functions offered within nonprofit accounting applications. Features like breaking a user's chart of accounts into the different tax lines required by the IRS on Form 990, as QuickBooks Premier Nonprofit Edition 2005 and FundWare by Kintera do, would require adjustments if legislation to change the form passes.
Mostly, the legislation and accountability regulations are focused on the larger not-for-profit organizations. But as many larger organizations decide to self-govern before the law demands such regulations, a trickle-down effect is forming.
Today, many smaller nonprofits are also starting to self-govern, with their first step being implementation of an accounting package. As a result, sales of accounting software systems for smaller nonprofits are not only rising, but also offer more features similar to those the larger nonprofits use.
Like all business accounting software systems, nonprofit solutions are also moving onto the Web and into application service provider models.
Blackbaud, which is already Web-based, is now offering a Net Community that combines content management and Web portal-based reporting for executives and donors.
"The online approval processes have been big in demand," said Kintera's Shuptrine. "[But] it's across the board - for all business software."
However, a study last year by Campbell Rinker, an independent marketing research company for nonprofits, showed that most nonprofits are still using accounting software systems meant for for-profit companies. The largest percentage, 14 percent, were using QuickBooks for-profit editions, while 8 percent were using Peachtree for-profit business software.
Like its competitor, Peachtree owner Sage, QuickBooks developer Intuit has produced new software targeted at small and midsized nonprofits in the last year, with the hope of giving nonprofits the features and reporting tools that they will need to be compliant in this ever-more accountable nonprofit marketplace.
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