 Oversight and monitoring is a process used by an external or internal supervisor that involves evaluating the performance of a specific person or organization. It is a system that addresses potential problems by implementing guidelines, regulations, or other structural policies. This concept typically refers to the oversight by the IRS of exempt organizations at the federal level. One way the IRS accomplishes this is by requiring nonprofits to file Form 990.
Interestingly, 12.6% of respondents indicated that they do not participate in audits conducted by outside accounting professionals. While annual audits consume time and resources, they are also a way for organizations to learn and improve their current processes. In many instances, an annual audit is a necessity rather than a luxury, since many funding organizations, including most government entities, typically require audited financial statements as a condition of funding. For this reason alone, the vast majority of responding organizations already perform annual audits.
While the vast majority of organizations indicated that they track income and expenses by core activity, just over 11% of respondents indicated that they do not. When tracking income and expenses for areas like grants, endowments, programs, projects, and events, Generally Accepted Accounting Procedures (GAAP) require conformity. Expense information must also be tracked this way for audits and for the IRS Form 990. Aside from the compliance requirements, this accounting approach best reflects the way nonprofits communicate their programs and accomplishments, which indicates that functional tracking is a useful management tool for board reporting.
Managing restricted contributions is one of the trickiest parts of nonprofit financial management, and just over 23% of respondents indicated that they do not have a consistent method for tracking restricted donations. Today, it seems donations come with more and more strings attached. If your organization is not able to demonstrate that it has complied with the wishes of the donor, it not only jeopardizes its relationship with the donor but could also be putting its 501(c)3 status at risk. Many states are also considering related legislation; therefore, it is wise to have these processes in place.
Just over half of respondents indicated that they do not currently have an audit committee. In our December 2006 issue of Fiscal Fitness, we discussed in detail the structure and process for establishing an audit committee. This should serve as a great reference tool for those just beginning to investigate establishing an audit committee.
In Our Next Issue
In the next issue of Fiscal Fitness, we will review the results from the remaining three sections of the 2006 Accountability Assessment: transparency and communications, internal controls, and best practices.
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Accountability in the nonprofit world means always being open and ready to answer to those who have invested their trust, faith, and money in your organization. In general, organizations that demonstrate accountability are likely to raise more money and make processes more effective, ensuring their long-term health and well being. The 2006 Accountability Assessment covered a broad range of topics; the questions were grouped into four relevant areas:
