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The ability to efficiently oversee finances is a critical function of nonprofit boards. Such organizations face unique regulatory, accounting and reporting requirements to operate both legitimately and optimally. Adding to their list of chores, board members must also maintain their organization’s desirability and worth in order to attract new and repeat donors.
Despite the many accounting demands on a nonprofit organization, its board members aren’t typically well-versed with specific nonprofit accounting knowledge and have little experience with the distinct nuances. A CPA, however, is ideally situated to prepare board members for crucial financial roles and ensure their organizations maintain sound governance. The expertise of someone with a dedicated nonprofit accounting background to help boards fulfill their obligations puts them at a significant financial advantage.
Six strategies CPAs can use to help nonprofits are:
Financial language specific to nonprofit accounting can be intimidating or confusing for new board members who could use a crash course in terminology distinct to the landscape. Once they understand the essentials, they can better adhere to regulations and optimize funding. Nonprofit revenue recognition rules, the separation of donor-restricted funds from unrestricted ones and cost allocation methods are just a few examples of unique nonprofit accounting aspects.
Members can catch up rapidly with the help of CPA training on nonprofit accounting “101” to understand unique terminologies and ramifications. They’ll be better equipped to expertly handle the nuances surrounding nonprofit accounting aspects like restricted funds, functional expenses and footnote disclosures.
CPAs can help nonprofit boards monitor and report critical finance-related issues to remain fiscally healthy. Having user-friendly accounting software to produce meaningful reports that adhere to GAAP and IRS requirements will positively impact their success and speed.
Additionally, board members could use help organizing data to present clear and concise information to the right members at vital intervals. Applications that automate as many accounting functions as possible would be of great value (invoicing, expense reports, sending and receiving payments, etc.).
CPAs should consider setting up a convenient and adaptable chart of accounts for nonprofit boards and help them polish up financial statement formats. Lastly, they can introduce processes that ensure periodic tax payments.
Endowment law, and its regulatory framework, the Uniform Prudent Management of Institutional Funds Act (UPMIFA), might be unfamiliar to board members, despite their understanding of investments. CPAs can assist boards in fulfilling their fiduciary duties by educating them on the specifics of this endowment statute.
In addition, CPAs can prompt prudent investment recommendations so that boards keep investment expenditures below 7%. Help them build portfolios using modern portfolio theory with a mix of asset classes.
The board decides the goals, operations, and risk tolerance of their investments in a nonprofit organization. They determine how much volatility they are willing to tolerate. Board members set credit ratings, maturities and instruments allowable for short-term investments used for working capital.
In addition, investment returns and the timing and quantity of redemptions are other factors they must consider. CPAs can assist with helping the board develop a written Investment Policy Statement as an ongoing risk management tool and guide for future investment strategies.
Determining who will handle investments is a crucial board decision. It’s common for members to hire an investment manager. These experts can be outside consultants who recommend changes to the endowment portfolio or external investment companies, such as an Outside Chief Investment Officer (OCIO), who advises on strategy and makes daily investment decisions. Large endowments usually employ their own in-house investment teams in which staff purchase quality fixed-income securities for short-term funding.
There are distinct advantages and disadvantages for both internal and external investment managers. CPAs have the expertise to guide the board in weighing the pros and cons of both.
By assessing past results and monitoring current ones, CPAs can create a concept for future objectives and set attainable milestones along the path to future goals.
Nonprofit boards would benefit significantly from CPA advice and education on specialized nonprofit accounting functions. Guidance from a knowledgeable nonprofit CPA will allow them to master their unique duties. From separating donor-restricted funds from unrestricted and cost-allocation methods to particular state and federal regulations for nonprofits, CPAs can help nonprofits fulfill one-of-a-kind obligations.