Clients: Not-For-Profits: Constraint of activitiesBusiness enterprises in the United States traditionally have had to deal with relatively few outside constraints in addition to those of the market (although government regulation and consumer pressure have grown in recent decades). Nonprofit organizations have been subject to a host of outside constraints for decades-requirements set by Congress, the IRS, funding sources, and state government-and such outside constraints continue to increase. Although both businesses and nonprofit organizations face numerous outside constraints, the nature of the constraints differs.
Business enterprises are generally free to sell to or serve anyone seeking their goods or services. For nonprofit organizations, however, agreements with funding sources may specify the people or areas eligible to receive goods or services when the organization carries out specific programs or activities. In the case of specific eligibility requirements, such as income, age, geographic location, or others, nonprofit organizations are required to determine eligibility before expending funds or providing goods and services. When eligibility requirements are part of a contract or grant agreement with a funding source, revenue recorded based on services provided to ineligible recipients may be unearned because the eligibility conditions were not satisfied. Funding sources may require the organization to maintain detailed documentation of recipient eligibility and may require the organization to determine its compliance in this area.
Tax exemption is a privilege granted by Congress through the IRS. In return, nonprofit organizations are subject to a range of IRS requirements different from those for business enterprises. Primary among these are requirements that a nonprofit organization's income, expenditures, and activities be substantially related to its exempt purpose; that the organization pay taxes on income from activities not substantially related to its exempt purpose; that nonprofit organizations limit lobbying activities and avoid all partisan political activity; that none of the nonprofit organization's assets inure to the benefit of a private individual; that the organization be organized and operated to provide public, not private benefit; and that specific reports be filed to demonstrate compliance in these and other areas. Most tax-exempt organizations (other than churches) are required to file annual reports with the IRS.
Funding sources often restrict the use of resources they provide nonprofit organizations. Many aspects of financial statements of nonprofit organizations are directed toward disclosure of such restrictions. Thus, in an audit performed in accordance with generally accepted auditing standards (GAAS), the auditor will pay a great deal of attention to determining the existence and nature of restrictions and their proper reflection in the statements. In addition, funding sources may impose audit requirements focusing on individual programs or grants that go beyond GAAS. The client may not be aware of such requirements, so to fully serve the client, the auditor may need to identify them and bring them to the client's attention.
Fund-raising is often an integral part of a nonprofit organization's existence, and a growing number of states regulate fund-raising activities and require regular reports.