Nonprofit organizations face rigorous accounting and reporting requirements. Meeting these stipulations can take time and effort, especially with limited resources.
Accounting data for nonprofits focuses on informing donors, the board of directors, and executive committee members about financial management outcomes. It can also assist with a funding stream evaluation.
Depending on the organization’s needs, a CPA may provide an audit, review, or compilation engagement.
Budgeting and Financial Planning
Your nonprofit’s budget is a critical financial planning tool that details your expenses and income over a specified period. Staff members usually create it with input from leadership or board members during the review and approval process. Your nonprofit’s budget should be updated periodically to accommodate organizational changes.
Nonprofit accounting differs from that of for-profit businesses in several ways. For instance, it must adhere to a set of guidelines called GAAP (Generally Accepted Accounting Principles) designed to ensure these organizations’ transparency and accountability.
In addition, unlike for-profit companies, nonprofits are not required to distribute their net earnings to executives and board members. However, donors must still be informed about how their funds are spent. Your organization must follow the best budgeting, reporting, and disclosure practices.
A professional CPA firm will give you an outside perspective and fresh eyes regarding your organization’s financial statements. This will allow you to identify opportunities for improvement and ensure that your organization’s finances comply with accounting standards. In addition, non profit CPA firms will also conduct an audit to ensure that your organization’s records are accurate and complete. This will help your organization maintain its tax-exempt status and demonstrate good stewardship of donor funds.
Internal Controls
Nonprofit accounting requires a system of checks and balances to prevent fraud and maintain accuracy. These internal controls are a series of procedures, protocols, and policies that help ensure the integrity of financial reports and protect resources, both tangible (such as equipment) and intangible (such as reputation). These internal control measures deter fraud and error and promote effective management of operations, efficient reporting, and compliance with laws, regulations, and policies.
To be effective, these systems must have a culture of accountability. Everyone, from board members to employees, must take responsibility for adequately implementing these controls. There must also be a system for communicating significant information upstream and down so that each person understands how their work impacts others and how they can contribute to the organization’s success.
This is especially important in nonprofits, where the responsibilities of volunteers often include bookkeeping and other administrative tasks. In these situations, it is essential to separate duties between the bookkeeper and the accountant. This helps ensure that each party fully understands the other’s work and can check for accuracy. It also helps to create a more effective workflow and reduces the risk of mistakes.
Fund Accounting
Nonprofits rely on donors and receive benefits from the government that help them avoid paying taxes, which is why they must be very transparent about how they use their funds. This transparency is the foundation of accountability and responsibility.
Non-profits need a way to track and report their financial information, which is where fund accounting comes in. This specialized method of accounting separates all incoming cash into different buckets for different purposes and tracks how that money is being used. It doesn’t focus on profits, as this is not the goal of a nonprofit, but instead on how the money is being utilized to move forward its mission.
For example, suppose a supporter donates a large sum of money to be allocated solely for scholarships. In that case, the organization can place this in its scholarship fund and ensure the dollars are only spent on qualified students. This helps build trust with the donor and maintains that the donations are being utilized for their intended purpose.
This is just one of the many services non-profit CPA firms can offer their clients. They can help with tax planning, auditing, and more. They also help set up a system of internal controls with protocols and processes specific to their client’s needs. In turn, this helps reduce the risk of fraud and mismanagement.
Auditing
An external financial audit is one of the most critical functions a non-profit CPA firm can perform for your organization. You may need an audit for many reasons, including state requirements, grant applications, or a requirement in your organization’s bylaws.
If you must do an audit, look for a firm with experience in this type of work and understands the complexities involved. They should also have a track record of working with nonprofits. It would help if you also chose an auditor with no conflicts of interest that could influence the integrity of your audit.
In addition to ensuring that the financial statements and reports you submit are accurate, an audit can help your organization improve its internal systems. For instance, an audit can uncover coding errors in the accounting services that need to be corrected. Duplicate entries, missing information, and erroneous capitalization can all create inaccurate records and statements. During an audit, you can comb through these records to ensure that the amounts designated for various assets are correct.
It’s also a good idea to communicate the results of your audit, especially any improvements you have made, with your supporters. This helps them feel confident that you take the funding they provide and your financial accountability seriously. It can also strengthen their relationship with you and encourage them to continue providing you with the support that your organization needs.
