Many nonprofit organizations have limited resources and often the finance team also supports the general operations. The accounting system is the basis for reports that must be provided to grant agencies, prospective donors, lenders, its independent auditors, tax preparers, the Board of directors and management. 

Frequently, while cash transactions are usually recorded timely, account balances are not analyzed, reconciliations are delayed, work papers that provide the details of account balances are not readily available, audit adjustments are not entered properly, or improper account classifications are not corrected. Further, many essential schedules are not provided to the auditors timely. Accurate and timely financial statements are vital to making informed business decisions. Training and adopting best practices will help alleviate these issues.  

This should be an area of concern and awareness to an organization’s board members and management as well as the accounting personnel. Following is a listing of some financial reporting and compliance best practices that nonprofits should consider.

  • Bank reconciliations should be performed timely, i.e., at least monthly and reviewed by someone who is not involved in the receipts and disbursements processes. 
  • Accounts receivable balances in the general ledger should be reconciled to the subsidiary ledger monthly. The organization should have a policy of reviewing past due balances each month and following up on its collection. For reporting purposes, an appropriate reserve for amounts deemed uncollectible should be reviewed and created annually. Account balances that are considered to be uncollectible should be written off after approval by a manager not involved in the recording and collection process.  
  • There should be a written policy for capitalization of assets and depreciation methods. Placed in service dates should be ascertained from operations staff to calculate depreciation properly. Approval should be obtained for disposals and accounting records should be updated timely to reflect such transactions. Fixed assets schedules should be reconciled to the general ledger at least annually. 
  • Accounts payable cut-off procedures are critical for proper accounting on an accrual basis. The accounting department should provide instructions and reminders to other departments so that information is available for adequately recording the liabilities at the end of each reporting period. The schedule should be periodically reviewed so that accruals that are no longer necessary could be reversed timely. 
  • Grant activity should be recorded thoroughly. A separate cost center should be set up in the accounting system for each funding source. Reports to grant agencies should agree to the supporting data generated from the accounting system. They should be reviewed for accuracy and submitted timely and to ascertain compliance with the terms of the grant. 
  • If there are any loans or borrowings, reviews at least quarterly should be made to determine compliance with loan terms and covenants. 
  • Year-end adjusting journal entries should be reviewed to make sure they are posted timely and accurately. All entries over a predetermined amount should be reviewed by someone not involved in the activities the journal entries apply to. 
  • There should be a review of all digital and print materials, e.g., website, brochures and promotional information, to determine that the organization is adhering to its mission and that it is reflected properly in such materials. 
  • Management and board members should consider reviewing IRS Form 990 tax filings for similar and competitive organizations. Searches can be made at CharityNavigator.org or Guidestar.org. While on those sites also check your organization’s filings. 
  • Management and board members should become familiar with IRS and State reporting requirements including due dates. 
  • An annual review should determine if there are any unrelated activities or business revenues that need to be segregated and reported to the IRS on Form 990-T: Exempt Organization Business Income Tax Return. 
  • There should be a review of the current listing of officers and directors and compensation and benefits paid to them, and all payments are properly authorized. 
  • Budgets and projections should be reviewed and compared to actual results. 
  • The organization’s minutes should be reviewed for actions that might need to be reported in the financial statements or to interested parties such as those making grants. If no minutes have been prepared, a suggestion is that they be done at least annually. 
  • All contracts should be periodically reviewed to ascertain compliance. 
  • Determine if there are any lawsuits where the organization is the defendant. To facilitate the review all invoices from and payments to attorneys should be reviewed in addition to speaking to the executive director or general manager. 
  • If there is no internal audit personnel, arrangements should be considered for an independent accounting firm to perform an annual internal audit not necessarily as part of or in conjunction with the annual audit. A memo of all findings should be prepared and presented to the board of directors. 
  • If an annual independent audit is performed, ask the auditing firm to provide a management letter along with the audit report that includes suggestions of ways to overcome any deficiencies, no matter how inconsequential they might seem. 

None of these best practices are difficult or time-consuming, yet they are essential for the proper reporting of a nonprofit organization’s activities. This listing is certainly not complete, but it is a good start to better financial reporting and control.

This listing was primarily prepared by Asha Ganesh, CPA, CFE, Manager in Withum’s Not-for-Profit Services Team, who has expertise with not-for-profit financial reporting. Asha can be reached at [email protected].

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