Fiduciary Financial Management in Nonprofit Organizations
Primoff, Walter, The CPA Journal
The volunteer sendee of CPAs who join nonprofit boards and committees is central to nonprofit success; however, many volunteers arrive unfamihar with the differences between commercial and nonprofit financial environments. Organization executives running nonfinancial programs can often benefit from a better understanding of their financial challenges.
The following is a practical overview of the nonprofit financial environment and its key financial oversight challenges, which differ from those in commercial enterprises. It is intended to highlight major issues affecting most nonprofits, regardless of size or type. For readers seeking further guidance, a select list of resources is included, along with a glossary for non-CPAs.
Today, nonprofit governing boards are faced with the dual challenges of an ailing economy and the increased concern, voiced by legislators, regulators, and other stakeholders, that they are not fulfilling their fiduciary duties. As a result, nonprofits have a growing need for CPAs, attorneys, investment professionals, and other experts to provide guidance on fiduciary financial management.
This evolving area has grown in importance due to questions about the quality of board governance in general and financial management in particular. The catalyst for improved governance has been the SarbanesOxley Act of 2002 (SOX); though primarily aimed at public companies, SOX's extensive financial governance rules have been widely adapted as best practices for nonprofits.
The Madoff fraud, which severely harmed a number of nonprofit endowments, created new urgency for improved investment best practices. New York and Mississippi passed the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in 2010 and 2012 respectively, leaving Pennsylvania - which has its own mies - as the sole holdout among the 50 states. UPMIFA broadly governs the investing and endowment spending of most U.S. nonprofits, but many boards remain unaware that it applies to them.
In 2008, the IRS brought CPAs directly into the conversation with a revised Form 990 that requires many disclosures about an organization's financial and other governance. Now widely available on nonprofits' websites, Form 990 has become a document of broad public accountability.
The Nonprofit Profile
U.S. nonprofits are a major economic force. They enable the approximately 63 million people who donate their time to address a wide range of public benefit concerns. Federal, state, and local governments contract with nonprofits to benefit from their expertise. The National Center for Charitable Statistics lists some 1.5 million nonprofits with about $4 trillion in assets. Approximately two-thirds are Internal Revenue Code (IRC) section 501(c)(3) charitable, educational, religious, and similar organizations. The remainder are tax-exempt under one of the nearly 30 other IRC section 501(c) or other IRC subsections, each of which carries unique rules.
Nonprofits typically fall into one of three financial profiles or their hybrids: organizations funded largely by donations, investment income, grants, and service revenue; entities (such as charitable hospitals) whose service revenue is so great that their operations resemble their commercial counterparts; and associations, clubs, and fraternal entities funded principally by member support.
The Financial Management Environment
Although governing boards of the smallest nonprofits retain fiduciary oversight responsibility, these entities usually have few financial complexities. As nonprofits reach the $200,000 revenue or $500,000 asset threshold for filing Form 990, or as they receive endowment or noncash contributions, they face unique financial oversight challenges. These can include the following:
* Operational and regulatory issues arising from tìie sheer variety of potential funding sources, including private donations, investment income, government grants, and service revenue (e. …