I was in yet another conversation with some funders this week as they lamented the shoddy accounting practices that the recession is bringing to light in so many nonprofits and are concerned that board and even staff leaders don't understand what they are ignoring, or even condoning.
Disclaimer - I am not an accountant or attorney, so please take my comments as motivators to ask questions and gain clarity, not as specific financial or legal advice.
The concept of restricted or designated funding - Many board members, accountants, and even staff leaders do not fully understand that in the nonprofit environment, a significant amount of your revenue arrives with specific directions about how and when it will be spent. The organization is required to spend it in that way and often report the results back to the donor or funder. An example would be a foundation that provides a grant for $50,000 for a youth serving organization to conduct a summer camp.
When cash gets tight - If that $50,000 summer camp grant arrives in January, it can be tempting to use the money to pay current bills, but it is the obligation of the organization to ensure the funds are available to hire staff, buy supplies, and rent the camp for the summer.
We have a mission to accomplish - I am surprised by how casual some Executive Directors are about ignoring the concept of restricted or designated funding. While the outside world, including funders, are given the impression that their grant funds are being appropriately managed, in reality, the funds are spent as soon as they come in the door, often on non-program expenses, and that summer camp was likely paid for by the funds from a later grant intended for the next tax prep season. If the next grant doesn't come as expected, the house of cards begin to crumble, and becomes very public when the organization reaches a point where it can't make payroll yet is obligated to still provide months of services it has accepted funds to deliver.
Board member understanding - Sometimes board members are told that borrowing into future program funds is "just the way nonprofits run" and sometimes they are not told at all.
Role of the Finance Committee - The Board Treasurer and Finance Committee really need to take the lead role in stating expectations and understanding where the organization currently stands in this area. If poor practices have been used in the past, acknowledge it, make some changes and start working your way back. If staff is reluctant or evasive about sharing this information, assure them that the intent is to ensure the organization can continue its work, not to find people to blame.
Role of the Auditor - Boards heavily rely on outside auditors to reassure them that everything is "OK". However, I am hearing increasing complaints about audit firms who do not identify issues around restricted funding, other than listing it in the financial statements. It seems you would not have a difficult time finding nonprofits who have spent months ahead in restricted funds who are receiving clean audits.
Role of the Accounting Staff - The accounting staff can be in a tough position on this issue, which is why the board needs to step up and understand it. In some organizations, current bookkeeping or accounting staff do not have professional accounting backgrounds, so they may not have a clear idea of what is appropriate and what is not. In other cases, staff leadership may prohibit them from being candid with the board.
Role of the Accounting Contractor - The Finance Committee needs to ensure that they have a communication channel built with any outsourced bookkeeper or accounting contractor that will allow issues similar to this to be raised. It is part of the "trust and verify" approach that boards need to take.
Wrap-up - If you are board or staff of a nonprofit that needs to make some improvements in this area, please put the focus on the issue and reduce the tendancy to point fingers. In most cases, though the problem is being uncovered on your watch, it has evolved over a period of time and a series of short-term decisons made by a number of people. Funders know this is happening, and may even be aware your organization is doing it before the board is, so include them in the conversation if you see a way they can help.