In late April, NPCC hosted a roundtable on nonprofit accountability. The moderators included Karen Kowgios, Partner at Lutz & Carr, CPAs, William Massey, President of the National Charities Information Bureau (NCIB), and Peter Swords, President of NPCC.
Peter Swords opened the
discussion by noting that during the past several years in his
work on accountability he has discovered various types of
accountability that he separates into three categories. Negative
accountability — so that money isn’t diverted from the
stated purpose of the nonprofit. Positive accountability —
whether nonprofit organizations are doing any good. Informational
accountability — obligations to report to various agencies.
The focus of the roundtable was on informational accountability,
especially with regard to the reporting obligations of nonprofits
to the public.
The IRS Form 990 is the basis for informational accountability.
While Swords acknowledged that the 990 is a long and difficult
document to complete, he feels that it is the “rock upon
which all accountability rests.” The 990 is a public
document and becoming even more public. On June 8, new rules were
enacted requiring a nonprofit to provide copies (for a fee not to
exceed $1 for the first page plus 15¢ for each subsequent page,
plus mailing charges) of its three most recent 990s along with a
copy of the final, approved Form 1023 (the application for tax
exemption — see page 4 for more information) and all
attachments to anyone who writes requesting them or who visits
its office. On the matter of the 990 becoming more public, Swords
believes that within four to five years it will be required that
an organization post its 990 online and, most likely, the IRS
will require all 990s to be filed electronically instead of by
mail.
Swords said, “It’s an open secret that many 990s are
filed incomplete and inaccurate.” He announced a project
called “990 New York Quality Reporting” that is being
undertaken by NPCC along with representatives from the Internal
Revenue Service, the New York State Society of Certified Public
Accountants, the Charities Bureau of the Attorney General’s
Office, and the Philanthropic Advisory Services of the Better
Business Bureau. This effort is aimed at helping improve the
quality of 990 reporting. Details will follow as the effort is
more fully organized.
Swords also announced that he and Victoria Bjorkland, from the
law firm of Simpson, Thatcher and Bartlett, are working on a
pamphlet designed to help read and interpret the 990. The
pamphlet will be a reader’s guide for those who are
unfamiliar with the 990 that will help them to understand the
numbers that appear on a 990 and what they mean.
Bill Massey feels that while the 990 is important, it is
“one” accountability tool and not “the” tool.
NCIB’s position is that the 990 should be used along with
additional supporting material such as an annual report or other
programmatic narratives. Massey noted that many donors cannot
even read their own tax forms, let alone read a 990 without
assistance. He agrees with Swords that a large number contain
errors and omissions. He does not suggest widespread fraud or
intentional misrepresentation in the 990, but that preparers of
990s need to have a heightened awareness of the consequences of
their reporting.
What
Does 501(c)(3) Mean?
Bill Massey noted that depending on where one is sitting, the
concept of 501(c)(3) is different. From the nonprofit
sector’s view it means that we work for the public; we do
societal good. From the government’s point of view it means
lost revenue from the national treasury. Donors have many motives
for giving: the majority want to see something good done;
occasionally a few may just want a deduction in their income tax
(which again means that the government gets less income.) Because
of this relationship there is an implied covenant that nonprofits
are bound to uphold: that nonprofits should be doing good.
Ultimately, Massey feels that accountability has to do with the
mission and the integrity of the organization. To uphold the
covenant between the government, nonprofits and donors, a
nonprofit should ask itself whether it is contributing to the
good and betterment of society. And if so, how is it telling the
public?
Massey noted that when something negative happens within the
sector it affects the entire nonprofit community and it affects
the public’s perception of nonprofits. Although it is
probably a small portion of the sector that is unscrupulous, 5%
or so, their actions hurt the entire sector when they are
publicly exposed. Recent studies from Independent Sector report
that trust in accountability in the nonprofit sector has eroded,
and while the decline in trust of the nonprofit sector is less so
than the public decline in trust of government and big business,
nonprofits still have to work on regaining the public’s
trust. Massey cited a recent study, Charitable and Social Change
Giving in the New Millennium, (conducted by Peter D. Hart
Research Associates) which found that there is a clear call for
greater accountability from donors of all ages. Satisfying this
requirement may be stated as “visibility equals
accountability.” He feels that a missing component to many
nonprofits’ accountability efforts is the telling of their
story and that this will help restore the public trust.
On the matter of nonprofits who balk at disclosing their 990s,
Massey noted that when anyone is forced to disclose information
it is usually implied that there is something that they are
trying to hide. He offered this with regard to the new 990
disclosure rules and cautioned that the sector should avoid being
saddled with the perception that it is reluctant to disclose
information, thereby further diminishing public trust.
NCIB’s
Indicators of a Successful Organization
Massey explained that NCIB has for the past eighty-one years
reviewed national charities in order to determine “best
practices.” NCIB’s purpose is to help donors make
better informed decisions about giving. NCIB does not judge an
organization’s mission or any such matter; they report on
whether or not an organization meets each of a set of thirty
standards called the NCIB Standards in Philanthropy. Annually,
they analyze around 300 charities that solicit funds from
individuals nationally and publish the findings in their
quarterly, Wise Giving Guide.
The NCIB standards fall into nine categories, such as use of
funds, board governance, and financial support. Massey noted that
if an organization meets all of the governance standards, about
90% of the organizations meet all of the other standards as well.
He noted that the NCIB standards are designed for national
organizations and that some of the criteria will not apply to
locally-based organizations. However, he suggested that it would
be worthwhile for any nonprofit to review the standards to see
whether any of them might apply.
Annual
Reports
Karen Kowgios said that she would like to persuade more
organizations to publish annual reports. It is estimated that 80%
of 990s are prepared by auditors, many of whom are not well
versed in nonprofit practices and therefore a lot of incorrect
and misleading figures are available for interpretation and
possible negative publicity. She feels that if an organization
supplied an annual report along with its 990 it would help clear
up any confusion about its 990. She also noted that grant reports
often contain incredibly valuable narratives that no one ever
sees but the funder and suggested that an organization may want
to adapt these narratives for an annual report.
Massey suggested using narrative to tell the story about how the
organization’s money is spent. One of his concerns is that
people don’t know how to read the 990 and to help remedy
that problem he feels that it is the work of all nonprofits to
help tell the truth honestly and in writing. Kowgios suggested
that, as a starting point, the narrative section of page 2 of the
990 is an example of text to consider using in an annual report.
Kowgios urged organizations not to make an annual report out of
only numbers but to include narrative that will help guide and
explain the nonprofit to the reader. An annual report does not
necessarily have to be a time-consuming, expensive, glossy
four-color publication. It can be a simple, photocopied document.
But you do need to decide how much information you’re going
to give out and how you are going to present that information. It
also depends on who you are providing the information to. She
said, “It’s not that you’re trying to hide any
information, rather, it’s that you need to think about what
it is that you want the reader to get out of the annual
report.”
Form
990
With all of the extensions allowed, the 990 can be filed almost
one year after the end of a fiscal year. Kowgios encouraged
organizations to question whether or not they really want old
information going out to the public, especially as 990s become
more easily available to the general public.
She also noted that most 990s used to be signed on the last day
before the filing deadline and that in the old days most
executive directors hardly ever reviewed it. Massey echoed her
thought, asking, “Do your board members know what the 990
says? Not just the finance committee, but the entire board?”
He encouraged people to think of it not as just another thing to
add to your to-do list, but as an opportunity to teach the board
how to tell your story.
There is still a great deal of confusion within the nonprofit
community itself about the 990. For example, many organizations
still think that when they submit their 990 to the public that
they must include the public donor information and that the home
addresses of their board member have to be included.
Audits
& Financial Statements
Kowgios urged people to prepare more detailed financial
statements which may produce a more informative audit that may
then result in a better 990 (and more useful for public
accountability). An organization whose total support and revenues
exceed $150,000 is required by New York State to have an annual
financial audit. She listed the three documents necessary to
prepare for the audit: a statement of financial position
(formerly the balance sheet), a statement of activities (income
and expense statement), and a cash flow statement. These
financial statements should be done internally (not by the CPA)
and she encouraged people to include footnotes to help make the
statements more useful to the readers. These financial statements
are the basis for the CPA to prepare the audit and then prepare
the Form 990.
She warned that many organizations allow their CPA to prepare
their audits year after year in the same way, just plugging in
the new information into the same presentation. She cautioned
that this may not be the best way to present your organization
— its growth, its financial status, etc. — and instead
encouraged people to think about how to use the financial
statements to help tell their organization’s story along
with the narrative of an annual report.
Kowgios noted that it’s
not business as usual and that nonprofits must simply adjust to
increasing scrutiny. The IRS is restructuring its nonprofit unit
and adding more staff. States' Attorneys General are
strengthening and uniting. Intermediate Sanctions has been
implemented. 501(c)(3)s must adapt to more reporting and tougher
standards. She pointed out that private foundations that file
990PFs have always had huge reporting requirements and 501(c)(3)s
are merely catching up with the private foundation world. She
also noted that the IRS has taken a stance that they are going to
audit nonprofits. They are starting with the $150,000-200,000
organizations in order to train their agents, and will then move
on to larger organizations once they are ready.
Karen
Kowgios, Partner with Lutz & Carr CPAs, can be reached at
212/697-2299. Bill Massey, President of National Charities
Information Bureau, can be reached at 212/929-6300.
NCIB’s Standards in Philanthropy can be viewed at their web
site at www.give.org
Copyright 1999 Nonprofit Coordinating Committee of New York