Serving the community, environment, or other social or special need is at the core of almost every non-profit organization. For those who work in any such organization, it’s clear that most focus on investing as much funding to expand or enhance existing or create new programs. While this certainly seems like the right thing to do with donations and other funding provided to the organization, if there is not a balance in focus with other mission critical administrative and financial functions, issues will arise. A recent study entitled, Accounting Errors in Nonprofit Organizations, published by the University of Notre Dame has uncovered an alarming trend in public charities and other nonprofits. The study shows that these organizations make almost twice as many accounting errors as their for-profit counterparts.
The focus of the study was to determine whether or not public charities and other nonprofit organizations had a higher error rate than other companies (privately and publicly held). To find the answer the group examined the disclosures of corrections, financial statements and accompanying footnotes of 5,511 organizations focused on years 2006-2010. The results found these organizations had an error rate 60% higher than same size SEC registered companies and almost double of similar privately-held companies. The most common type of mistake uncovered in the study was failure to properly record transactions such as revenues, expenses, liabilities and assets. While they may seem minor in nature, such errors can create significant issues in the financial reporting process.
Often omission errors are common in organizations because the sophistication of the accounting staff is not very advanced. The main reason for this is that most organizations don’t invest heavily in administrative functions because of their focus on improving services and programs. While it makes sense to ensure donor money is going right into the field, it’s equally important to ensure the financial reporting and accounting controls are producing accurate information. An interesting trend identified in the study was that when an organization worked with an experienced nonprofit audit firm, the number of errors was significantly less. Accounting firms such as the Big 4, regionals and specialist firm do a much better job of identifying and resolving accounting issues before the financial statement is issued. This is an important note because it clearly demonstrates the value of working with a firm that understands the nuances of nonprofit audits.
Impact of Poor Accounting
The impact of poor accounting and ineffective systems is profound. When an organization publishes a high number of correction disclosures, it sends signals to both the IRS and potential donors. Recurring issues with financials invites the IRS to take an additional look at the organization and results in attention that most prefer to avoid. For donors, it creates the image that the organization has poor financial management and sends the message they don’t know what they’re doing. The result is donors being dissuaded from supporting the organization and looking to place donations elsewhere. If there are others in the marketplace serving the same mission, it’s possible critical funding will be lost to others.
Shift in Thinking
While spending the majority of your funds on mission-related activities may appear to be the right thing to do for your nonprofit organization and the donors who back you, employing trained, qualified accounting staff and working with an experienced audit firm will ensure appropriate compliance. The investment in retaining qualified accounting professional is generally much cheaper than the long term cost of repeated financial statement errors and issues.
Ensuring your organizations financial statements properly represent the organization is critical. Consistent errors in reporting means you need to examine your internal staff, as well as your audit firm, to identify whether a change needs to be made. If you have questions or would like additional guidance with your nonprofit’s accounting needs, JLK Rosenberger wants to help! For additional information please call us (949) 860-9902 or click here for email. We look forward to speaking with you soon.