As recent events have made abundantly clear, a nonprofit organization can live or die based on how seriously it takes fiscal responsibility. Given the highly publicized risks of failure in this arena, it is imperative that organizations have systematic and methodical practices in place to ensure their lasting fiscal health. This means making sure that an organization’s board is as educated and informed as possible.
For most charitable organizations, fiscal responsibility is enacted through a collaborative effort that involves its Board of Directors – generally through a finance committee chartered by the Board – the Executive Director and its Chief Financial Officer. In the latter’s case, title is not as important as function; organizations assign their day-to-day accounting duties to a controller, chief operating officer, or business manager. Regardless, the buck stops with the board, which must ensure appropriate oversight.
If a board is going to adequately exercise its oversight function, it must be fully informed and fully engaged with the organization’s operations. One of the essential elements to properly overseeing accounting and financial reporting is establishing a framework that will enable timely and accurate internal financial reporting from management staff to the board.
Ultimately, the board is charged with the governance of an organization, and the board will not be able to discharge its fiduciary responsibilities without proper financial information. In order to carry out this charge, the key elements of a successful internal financial reporting framework must be in place so that accurate information can be reported to the Board in a timely manner.
Accuracy of the internal financial reporting to the board can be measured on a consistent basis by comparing the internal financial information management presents to the board by management against the year-end audited financial statements certified by an independent CPA. This requires reconciling the income reported internally by management with the actual audited income reported in the audited financial statements. Surprisingly, this kind of reconciliation is not often prepared or presented to the board.
A financial reporting timeline is also critical for any organization, with the clear objective being that essential information must be presented to its board as quickly as possible. The board can only make timely decisions if it is working with relevant and complete data. The best practice is to prepare internal financial statements on a monthly basis, and review the data with management and the treasurer at a quarterly or bi-monthly meeting. Following this practice will allow the board to review the operational results regularly and completely.
But above all, it is the actual content of what is reported to the board that makes the reporting relevant. Obviously, accuracy and timeliness will serve no purpose if the content is not meaningful, so the basic financial statements must include a statement of financial position (the balance sheet), the statement of activities (the income statement), and the cash flow statement. When all of this information is presented, it should include current year-to-date information, and previous year year-to-date information (for comparison purposes). Also, a separate report should be included to show the budget versus actual information in an effort to monitor the revenue and expenses throughout the year.
Another important, but often overlooked tool is presenting the operations of an organization by program. This division is often referred to as “profit and loss by program” and depicts income and expenses for each major program. This type of reporting is key in identifying the programs that are consistently generating losses and may be affecting the financial strength of the organization as a whole. An important note: this type of reporting is especially useful for social service sector organizations that receive government funding to operate various programs. However, an organization that receives a substantial portion of its revenue through public contributions might consider it irrelevant.
Once a proper framework is established, an organization must make sure it has an accounting system that is capable of generating reports that are meaningful for its users. Any nonprofit accounting system must be able to generate basic financial statements, budget to actual variance reports, and profit and loss by program statements, with minimal edits done outside of the accounting system. It is important to keep in mind that outdated accounting systems can result in poor internal reporting, leading to poor decision-making, and even the failure of an organization.
Finally, an organization’s board needs to be trained to understand the financial information that is presented to it so that it can ask relevant questions and hold management accountable. This also raises an important question: Does the board include a member who is an accounting or finance professional, for example a CPA? Including a true financial professional can only strengthen a board’s ability to provide meaningful oversight.
But in the end, keeping the board informed really is the responsibility of management, who often wonder how much information is too much and how much is too little. The answer: it depends on the size, complexity and nature of an organization. Unfortunately there is no one size fits all.
While the specifics are not replicable, the method most definitely is. And with limited resources and increasing demand for services, nonprofits absolutely must find efficiencies when managing their resources and be well informed when budgeting, monitoring and making strategic decisions that will sustain and grow their organization. Without a proper internal financial reporting framework, an organization simply cannot successfully manage its resources – and by extension – achieve its mission.
Sibi Thomas, CPA, CFE, is a Senior Manager at Marks Paneth LLP and an Adjunct Faculty at NYU. Sibi specializes in audit, advisory and tax services for nonprofits in New York and neighboring states.