Editor's Note

This month’s issue of Nonprofit Fiscal Fitness continues our review of the 2006 Accountability Assessment — a survey that included 25 questions about organizational structure and processes related to accountability. January’s issue reviewed the responses about oversight and monitoring; this issue covers transparency and internal controls, and best practices. We hope the results are beneficial to your organization and provide a basis for comparison to other nonprofits.

Save the date for Blackbaud's conferences. This year, we're offering two great conference opportunities in both Charleston and Vancouver. Choose your destination today and mark your calendar to attend. For more information, call our events hotline at 1.866.292.4006 or email conference@blackbaud.com.

In the nonprofit world, transparency is defined as the widespread availability of relevant, reliable information about the performance, financial position, and governance of an organization. In other words, it is the amount of information that an organization tells the public about itself and how honestly and quickly it reveals this information.

The Web has changed our world dramatically, and nonprofits are experiencing this change as well. Recent studies indicate that well over 97% of nonprofits have some type of Web presence, and this survey indicates that just over 26% of respondents do not have a copy of their IRS Form 990 available on their Web site or readily available for donors. More and more donors are requesting this type of information early in their decision process to support an organization.

While delivering on their missions is paramount to nonprofits, it’s just as critical to communicate the outcomes of their actions to the outside world. Just over half of respondents indicated that they cannot quickly explain the quantitative impact of donations. Donors today want to understand the need and how you’re your organization meets that need. Being able to quantify the impact of an individual donation helps secure donors, shows transparency, and supports your organization’s overall mission.

Increased transparency on behalf of nonprofits and better information available on the Internet would achieve more confidence in the sector. Transparency works as a trust-building tool; the more accountable and transparent your organization becomes, the more trustworthy you will be viewed by the public, donors, constituents, and regulators.

Internal Controls

Internal controls are the measures that an organization takes to encourage adherence to policies and procedures, promote operational efficiency and effectiveness, safeguard assets, and ensure the reliability of accounting data. Internal controls encompass both internal administrative procedures and internal accounting procedures.

Just over 10% of respondents indicated that they do not utilize an organization-wide budgeting process. An inclusive annual budgeting process is essential to good organizational planning and results in a valuable tool to be used by the board and staff throughout the year.

Once the budget is in place, organizations need to have documented internal controls in place to ensure that all transactions are authorized, recorded, and can be reported on. Between 17% and 23% of respondents indicated that they do not have documented internal controls. Such controls are the foundation of sound financial management and protection of the organization’s assets.

Spreadsheets are a valuable tool to accounting and finance professionals, and almost 78% of respondents indicated that they routinely use spreadsheets created outside of their financial systems. One inherent weakness is that spreadsheets are prone to errors and, by design, do not reconcile back to the organization’s financial systems. A large part of internal controls and accountability rely on the controls built into your internal financial software applications. Maintaining and manipulating critical data outside your systems creates the opportunity for errors and sends up a red flag to auditors.

On a related note, over 32% of respondents indicated that they do not utilize integrated software applications for fundraising and accounting. Reconciliation of development efforts with the general ledger is critical to accountability. Hours can be wasted just getting the contributions and related restrictions entered correctly into financial systems.

Internal controls help organizations achieve their performance targets, prevent loss of resources, and ensure reliable financial reporting. They can help ensure that the organization complies with laws and regulations and therefore avoid damage to its reputation or other consequences. In sum, it can help an organization get to where it wants to go while avoiding pitfalls and surprises along the way.

One of the main priorities of nonprofits is to be responsible stewards of the funds entrusted to them. One important way to demonstrate this responsibility is through the successful execution of accounting best practices, which can ensure an organization provides accurate and timely information about how donations were used.

Sixteen percent of respondents indicated that they still do not used accrual-based accounting. The accrual basis of accounting is consistent with GAAP standards and, in most instances, more accurate than cash-basis accounting.

Just slightly more than 18% of respondents indicated that they do not have a formal process for reviewing grantor imposed requirements prior to accepting grant funds, and the same number reported that they have difficulty meeting the reporting requirements in grants. Failing to carefully review grant requirements prior to accepting funds is a potentially dangerous practice, yet it is one that is rather common in the nonprofit sector.

With the Health Insurance Portability and Accountability Act (HIPAA) and other privacy related initiatives today, guarding the privacy of donors is paramount. Over 13% of respondents indicated that they have not taken specific steps to safeguard the privacy of donors. Privacy is really the first step in accountability when dealing with donors. If donors cannot trust an organization with their personal information, how can they trust it with their funds to carry out a specific mission?

Conclusion

Nonprofits must be accountable to multiple stakeholders, including private and institutional donors; local, state, and federal agencies; volunteers; program recipients; and the public at large. Everyone who works for a nonprofit, whether as a paid staff member or a volunteer, has a role to play in ensuring the organization is answerable to its constituents. We are providing this information to organizations in the nonprofit community, hoping that the results help them benchmark their progress and ensure continued success for the future.

To review a copy of the entire results from the 2006 Accountability Assessment, click here. Feel free to share this report with your staff, board, and committees.

Latest and Greatest

You received this email because you are subscribed to Nonprofit Fiscal Fitness. If you would like to unsubscribe, please visit unsubscribe.blackbaud.com to manage your subscriptions.

If this email was forwarded to you and you would like to receive a free subscription, please visit http://www.blackbaud.com/profile/adduser.aspx and create an account. You'll be able to opt in to receive Nonprofit Fiscal Fitness and other Blackbaud publications at the bottom of the form. Once you create an account, you can manage your subscriptions at http://subscribe.blackbaud.com.

The information contained herein should not be construed as legal or professional advice. If you have questions about how this newsletter's content applies to your organization, you should seek advice from appropriate professional counsel.

© 2007 Blackbaud, Inc. All rights reserved.