Finer Finance Fridays #17
Leaders of nonprofits know that financial transparency will help preserve the very important trust placed in them by their donors and members. Additionally, and no less importantly, conduct that is accountable and transparent earns trust and creates a positive culture. Earning trust through financial transparency and accountability goes beyond what the law requires, but let’s start there: Nonprofits are required to disclose certain financial information to the public upon request; and board members have access to financial information in order to fulfill their fiduciary duty to the nonprofit.
What should be disclosed?
Tax-exempt nonprofits, like fraternities and sororities, are required, upon request, to provide copies of the three most recently filed annual information returns (IRS Form 990) and the organization's application for tax-exemption. To demonstrate a commitment to transparency and to make it easier for those seeking financial information to view these documents, many charitable nonprofits post these documents from a link on their websites.
Additional ways organizations can demonstrate financial transparency
Be honest in solicitation materials and truthful and clear in communications with donors about how their gifts will be or have been used. (Read about ethical practices in fundraising.)
Adopt a conflict of interest policy with a disclosure statement that all board members review annually.
Adopt an executive compensation policy to ensure that the full board is aware of, and approves, the compensation of the executive director/CEO and hired staff.
Ensure that the board of directors reviews timely financial reports and also reviews the IRS Form 990 prior to filing.
Adopt sound financial management policies, including internal controls, to ensure accountability.
Be clear about who is accountable for the nonprofit’s expenditures by adopting expense policies, such as a travel expense reimbursement policy (requiring prior approval and limiting expenditures to what is reasonable.)
Be candid about the tax-exempt status of the nonprofit on the organization’s website.
Be candid also about who is on the board of directors by publishing a list of names on the organization’s website.
Post financial information on the nonprofit’s website, such as a copy of the organization’s recent IRS Form 990, audited financial statements and annual reports, as applicable.
Respond appropriately to requests for copies of financial reports, as required by the IRS public disclosure requirements.
As a matter of being a sustainable organization, nonprofits should know what it costs to operate their programs and activities. One reason financial reports are important for nonprofits is that they are an easy way to show your board and membership the financial state the organization is in.
COMMON FINANCIAL REPORTS
Here are a few common financial reports nonprofits need to be able to prepare:
Balance sheet: This report gives a comprehensive overview of the financial state of a nonprofit organization. It will show liabilities and assets, as well as net assets.
Cash flow statement: The cash flow statement gives a summary of incoming money and how it was used.
Functional expenses statement: The functional expense statement summarizes all expenses and shows whether they were related to administration of the organization’s program or supporting activities.
Statement of activities: This document shows financial activities and presents the total income, subtracting the expenses over a specified period.
Transparency inspires confidence. Beyond what the law requires, nonprofits can demonstrate their commitment to ethical practices by being entirely transparent with financial information.
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