Nonprofit financial transparency is essential, both legally and ethically, for building trust and accountability to funding sources.
Nonprofits are required to publicly disclose current tax forms and financial information. But, nonprofit accountability goes beyond disclosing tax requirements. In recent years, ethical transparency is also a requirement.
Providing nonprofit financial transparency can be expensive and resource intensive. The bigger the organization, the more work goes into publicly disclosing financial transparency. Some nonprofits have moved slowly in adopting new technology and policies. However, when it comes to donating, donors want to know how their money is going to be spent.
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Financial disclosure influences savvy donors
Contributors are savvy about where they donate their money. Nonprofits are awarded a special tax-exempt status by the IRS and are required to file a financial disclosure form known as IRS Form 990. Websites like Charity Navigator and Guidestar allow you to search and review financial records of nonprofits from their Form 990. These websites rate the nonprofit by accountability and transparency. The higher the transparency and accountability rating, the more ethical and trustworthy they are.
Charity watchdog organizations, such as Charity Navigator and Guidestar, award top ratings to organizations that demonstrate:
- Accountability – an obligation or willingness to explain its actions to stakeholders
- Transparency – an obligation or willingness to publish and make available critical data about the organization.
Research supports that donors give more to transparent nonprofits and transparent organizations tend to be stronger organizations. According to a published study, earning the GuideStar Seal of Transparency has generated 53% more in contributions compared to those that did not. Other factors include: size, fundraising expenses, governance, and ratings by third parties.
Some of the benefits of financial transparency include:
- Increased Engagement: Sharing financials with all stakeholders, including donors, board, staff and volunteers breeds trust and engagement. It motivates them to stay involved longer and maker a deeper commitment.
- Increased Contributions: Earning a high rating from Charity Navigator or the GuideStar Seal of Transparency has been proven to generate more in contributions than less transparent organizations.
- Improved Donor Relationships: By going above and beyond the basic 990 and audited financials and sharing more details about your organization’s financial health helps improve donor stewardship.
5 ways nonprofits can demonstrate financial transparency
- Be honest and truthful when communicating with donors about how their donations will be used.
- Get included on the IRS Tax-Exempt Charities List.
- Get rated on watchdog sites such as Charity Navigator and GuideStar.
- Be open about the tax-exempt status of your nonprofit on your website.
- Post financial information on your website, such as a copy of your recent IRS Form 990.
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Bottom Line
Demonstrating transparency is extremely important for organizations of all sizes. Some best practices many nonprofits have adopted to ensure transparency has come from understanding the Sarbanes-Oxley Act and how they can apply it to their financial management. The Sarbanes-Oxley Act was passed in 2002 by Congress to fix some of the accounting shortcomings of publicly-traded companies.
Communication and disclosure is key to transparency. Nonprofits need to share information about their work through their websites, literature, social media and charity watchdog website profiles. With cloud-based nonprofit accounting software, such as FastFund Accounting, financial transparency has gotten a lot easier.
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