Clients: Not-For-Profits: Accounting and control

Previous paragraphs discuss the possible negative impact of certain personnel factors on nonprofit accounting practices. A strengthening factor, however, is that nonprofit organizations often are subject to more scrutiny by outside parties than are business enterprises of similar size. Funding sources, particularly governmental funding agencies, may require periodic reporting and audits, specify monitoring and compliance practices, and reserve the right to perform audits of programs they fund. Such external influences may heighten management's consciousness of and attitude toward the conduct of the organization's operations and may prompt management to establish specific controls that might not typically be found in a similarly sized small business enterprise.

Formal budgets serve as a significant control on the activities of nonprofit organizations. Most business enterprises have some form of budget and view it as a blueprint for action and a significant means of controlling activities and measuring results. Budgets serve these same purposes for nonprofit organizations. However, budgetary accounting is crucial to many nonprofit organizations because of the restricted nature of much of their resources. This means many nonprofit organizations must prepare and closely adhere to detailed budgets for specific programs or functions. Because of funding source constraints on revenue and expenditures, budgets in the nonprofit sector are often a contractual agreement subject to limited flexibility. For many organizations, each budget is a plan for spending specific amounts of money in specific cost categories by line item to achieve specific goals within a set period of time. When a nonprofit organization wishes to modify a program budget, specific funding source guidelines and procedures may have to be followed, which often include gaining written permission from the funding source.

Many nonprofit organizations have a unique problem in the determination of a fiscal year because of their complex regulatory environment. Differing regulatory bodies and funding sources may require financial reports for a fiscal year, calendar year, or a program year different from the fiscal year of the nonprofit organization. In some cases, the organization's fiscal year may be established to coincide with the fiscal year of the major funding source, but this is often impractical for those organizations that must report to various funding sources on various accounting periods. Also, nonprofit organizations are more likely than for-profit entities to change fiscal years. This is often done to more closely match the organization's fiscal year to a major funding source's fiscal year. Changing fiscal years makes it more difficult to obtain meaningful comparative financial information.

To receive certain funds, nonprofit organizations often must provide matching resources-usually a percentage of a total program budget. Some funding sources require a cash match only, while others will accept either cash, in-kind contributions, or a combination of the two. The amount and nature of an organization's match is usually specified in the grant award agreement or the approved budget. Whether the match is in cash or in-kind, proper records must be kept.

Most nonprofit accounting has to accommodate fairly tight funding source controls on expenditures and budget flexibility. That is, the accounting records must be able to identify actual amounts expended for each budgeted expense category. In addition, different funding sources may require expenditures for basically the same sorts of items to be recorded under differing categories, further complicating accounting requirements. The elaborate account coding systems often found in nonprofit organizations reflect these complicated requirements. An expenditure may need to be coded by natural expense category (travel, supplies, etc.), program, budget category, program year, etc.

Copyright Blythe Paperless 2011