Academic journal article Academy of Accounting and Financial Studies Journal

The Quality and Reliability of Form 990 Data: Are Users Being Misled

Academic journal article Academy of Accounting and Financial Studies Journal

The Quality and Reliability of Form 990 Data: Are Users Being Misled

Article excerpt


IRS Form 990 is the primary instrument for public accountability by tax-exempt organizations and its data are used not only by the IRS, but also by donors, grant-makers, watchdog agencies, the media, sector advocates, State Attorneys General, and local taxing authorities. Many argue, however, that the form is a poor vehicle for clear reporting of financial information and that its data are often inaccurate and misleading. To assess the quality and reliability of the Form 990 data, we compare the financial disclosures on the form with those in audited financial statements for 39 environmental organizations over their three most recent fiscal years ending in 2000. This comparison reveals numerous problems with the Form 990 data, including inconsistencies in revenue and expense recognition, incongruities between the reporting of gains and losses on investments and portfolio holdings, misstatements of functional expenses, discrepancies in the disclosure of program services, and errors attributable to differences in IRS Form 990 rules and not-for-profit GAAP. The usefulness of the data is further compromised by filings that are often one or two years out of date. Employment of an outside preparer, such as a major CPA firm, does not mitigate these reporting problems.


No longer a mere information return filed with the IRS, Form 990 (Return of Organization Exempt From Income Tax) has become one of the most important financial reporting, marketing and public relations documents for tax-exempt organizations. With the widespread availability of the form on the Internet at the websites of GuideStar and the National Center for Charitable Statistics (NCCS), Form 990 is the primary instrument for public accountability by nonprofits, used for public policy purposes, comparative statistics for governance and management, sector advocacy, research, and marketing products and services by and to the sector (Quality 990, 2005b). Data on the form are used by donors, grant-makers, watchdog agencies, the media, and sector advocates. Additionally, the form is used by the 1RS, State Attorneys General, and local taxing authorities in determining whether exempt organizations are in compliance with applicable laws and regulations.

Some members of the public rely on the 1RS Form 990 as the primary or sole source of information about a particular organization. How the public perceives an organization in such cases may be determined by the information presented on its 1RS Form 990 (Washington Secretary of State, 2005). In addition, many donors look first to page 1 of the 1RS Form 990 in order to calculate the use of funds ratio; that is what part of a charity's expenses goes toward its actual services, versus how much goes to fundraising and general management of the organization (Charities Review Council, 2005). The significance of funds ratios is well documented in the Not-For-Profit literature. The Form 990 is also a crucial document in academic research. See Gronbjerg (2002) for the role of 990 in Nonprofit databases.

Unified Financial Reporting System for Not-for-Profit Organizations (2005) outlines five key roles the 1RS Form 990 plays in Financial Reporting. First, Form 990 must be filed if a not-for-profit organization wants to retain its tax-exempt status. Second, Form 990 serves as the basic annual report to over thirty-five state charities offices. Third, Form 990 serves as the fundamental data source for not-for-profit sector research, and it provides data in a relatively uniform, consistent format. Fourth, the 990 provides information not found in audited financial statements of not-for-profit organizations. It covers both qualitative and quantitative data and, when prepared accurately, completely, and truthfully, is a treasure trove of information. Finally, Form 990 is a public report and potentially a powerful means of ensuring and demonstrating accountability. Not only must not-for-profit organizations file this report with the 1RS, but they are also required to make it available to anyone who demands to see it. …

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