When it comes to nonprofit accounting standards, ignorance can have very serious consequences.
Take the the case of the Maine Lobster Festival, a nonprofit organization that holds an annual event where the proceeds are donated to local civic projects. The 68-year-old, all volunteer organization had assumed that it was exempt from sales taxes. After decades of not paying taxes, they discovered that sales taxes were required as well as a sales tax certificate. Ignorance in this case cost them thousands of dollars in back sales taxes which had a severe impact on their mission.
Knowing nonprofit accounting standards is key to survival.
A thorough understanding of tax requirements, proper reporting and transparency are critical for a nonprofit organization’s survival. It’s safe to say that without ongoing, proper accounting practices, your nonprofit may be in danger of fulfilling its mission. In order to make informed decisions, management and funding sources must follow specific nonprofit accounting practices to provide accurate records of how money is received and spent. As donors become more savvy, nonprofits need to provide more relevant information in order to become more accountable and transparent.
Nonprofits make more accounting errors than for-profit businesses.
In a recent study, an alarming discovery found that nonprofit organizations make accounting errors at a relatively high rate compared to for-profit businesses. Jeffrey Burks, associate professor of accountancy at the University of Notre Dame who led the study, attributes this to not devoting a high percentage of their funding to administrative costs. Furthermore, his team discovered that the rate of accounting errors at nonprofits is nearly double that of for profit businesses of similar sizes.
Low administrative costs that nonprofits cite to attract donors may actually be contributing to their high rate of accounting errors.
Jeffrey Burks, Associate Professor at University of Notre Dame
Many nonprofit organizations under-value the importance of financial accounting and reporting. They spend little or no money on nonprofit accounting professionals whether in-house or an outside firm. I’ve been working with nonprofits for over 30 years and I often see nonprofit organizations hiring individuals with little or no education or training in accounting as their de facto fiscal director.
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Common mistakes made by nonprofit accountants
Here are some examples of mistakes made by accountants and bookkeepers in nonprofits that I have had to correct for various organizations that I work with:
- Recording vendor invoices as debit to cash and then when the bills were paid, cash was credited. The problem with this is that there were no expenses on the books and cash was overstated.
- Not reconciling bank accounts.
- Both the fiscal and executive director thought they were exempt from paying payroll taxes.
Nonprofits risk solvency at the expense of overhead costs
Nonprofit accounting is much more complicated than for-profit accounting, yet nonprofits invest very little in their accounting functions compared to for-profit businesses. Some of the above examples happened in organizations with budgets of over half a million dollars! The primary reason many nonprofits delegate accounting to untrained personnel ties back to funding and the overhead myth. Without realizing it, nonprofits who fall into this trap can put their solvency and mission at risk.
Another huge problem with nonprofit accounting is that most nonprofits use accounting software that is not designed for nonprofit accounting. As a result, their financial statements need to be generated outside their accounting system. This leads to errors and introduces potential internal control deficiencies. When nonprofits try to cut corners with low-cost, off-the-shelf software for untrained bookkeepers, they end up costing the nonprofit far more in the long run.
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How to prevent disastrous nonprofit accounting errors.
A good solution for nonprofits who cannot hire experienced, knowledgeable bookkeepers or in-house accountants is to find someone to simply enter the basic data and then hire an outside accounting firm that specializes in nonprofit accounting to oversee financials on a monthly basis. This will keep costs down and prevent serious errors down the road.
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Accounting is too important for a nonprofit to leave in the hands of someone who does not even understand a debit or a credit. An investment in your fiscal personnel is an investment in your organization’s overall well being. Do you agree that understanding nonprofit accounting is critical to the survival of your nonprofit organization? Your opinion matters.
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Lezlie Maret says
Great article. We are a very new non-profit. Im forming my board carefully. My top priority is either bringing a CPA on board or hiring someone to do the finances. Im educating myself continually about all the pitfalls in the early days of a non-profit. Thanks for the info .
Donna Dudley says
I would just like to caution that a CPA designation is not an indicator of any degree of experience or understanding of non-profit/fund accounting. Non-Profit Accounting is not a requirement of most undergraduate or graduate accounting programs, and there is no dedicated part of the CPA exam to non-profit accounting. If you can get a CPA whose experience is with non-profit, great, but without that, you are not going to get what you need.
Steven W. Fuller says
This is a great article. I will definitely look for more articles in this area as I am volunteering for a non-profit and do not want to make these mistakes. I have years of experience as a Senior Accounting Manager but I am still cautious we report our financial statements correctly.