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What the watchdogs see

For a number of reasons, it’s become more critical than ever for nonprofits to be aware of the agencies that keep tabs on our efforts. In particular, we should be prepared to meet more stringent donor standards (spurred by easy online access to our financial and governance data) and a better-equipped IRS unit.   

At GCN’s free October member event, Nonprofit Watchdogs: Who are the nonprofit evaluators and what are they looking for?, Mauldin & Jenkins CPA partners Jeff Fucito and Aleisa Howell revealed how sector oversight works today: what the watchdogs look for and how they find it, the trends influencing their present and future concerns, and what nonprofits can do to make the best impression.

The priorities of each watchdog can be different, said Fucito and Howell, but can largely be answered with the same two working principles: transparency and accountability. “The board is responsible for that – not only maintaining financial accountability, but also the results of the mission, and getting them out into the public,” said Howell. “That’s a concern which is becoming more and more prevalent.”
 
That’s why, said Fucito and Howell, lack of board training is often at the top of the list when the Secretary of State gets involved. One simple, effective strategy for transparency and accountability that boards should be practicing: Documenting the minutes of every board meeting, including in all committees. (“You can always go into a closed session, it just needs to be indicated in the minutes,” said Fucito.)
 

One simple, effective strategy for transparency and accountability: Documenting the minutes of every board meeting, including in all committees.

If you do get into trouble with the state, said Fucito, “What they’ll be looking for is proper governance, controls, stewardship of money, and that the organization is doing what they said they’d be doing.” The secretary’s office will refer your nonprofit to the state attorney general’s office, which will work as the head of the investigation in close coordination with the IRS; if you’re receiving federal funding, further agencies will be involved. “It’s definitely not a pleasant experience to go through but, on the positive side, they are easy to work with.”

In Georgia, Howell noted, there is a state statute regarding reviews and audits, depending on the size of the organization: Contributions over $1 million must prepare audited financial statements prepared by an independent assessor, while those with between $500,000 and $1 million must submit reviewed financial statements. “A lot of people aren’t aware of this requirement,” said Fucito.

For years, budget cuts at the IRS meant that its tax-exempt unit was severely limited in its ability to investigate and audit nonprofits. Starting this year, said Fucito and Howell, that’s changing: The IRS tax-exempt unit has been allocated more resources for conducting audits, and now has the ability to run each 990 through a 200-point query to determine whether an audit is appropriate.

The IRS tax-exempt unit has been allocated more resources… and now has the ability to run each 990 through a 200-point query to determine whether an audit is appropriate.

Donors and members themselves serve as watchdogs as well: “Remember that you’re under an obligation to satisfy donors’ wishes, and that’s really what the financial statements are all about,” said Howell. As the basic standard of information on each nonprofit, the 990 is a constant among all the watchdogs out there, including the increasingly-popular donor-facing rating services like Charity Navigator and Guidestar. Not only do they base their ratings systems in large part on what they find in the 990 – especially the ratio of mission-related spending to other costs – they make the last several years of 990s available to download for anyone with a free account. (Many more years of 990s can be accessed by anyone who pays for a “professional” account.) In addition, these services check federal audit reports, and make them available, for any organizations that receive federal funds.

Your nonprofit’s web page is another major source of information for each of these evaluators. For instance, the IRS might check your website for:

  • advertising, a possible source of non-mission-related income (now taxed at the corporate rate);
  • your board structure, to check for multiple instances of the same name, which could indicate a family-run organization and a subsequent conflict of interest; and
  • your mission, to check whether it lines up with the information they have on file.
How are accountability and transparency rated?

Accountability means explaining your actions to stakeholders; transparency means publishing and making available critical data about your organization. Though standards and priorities differ, here are a few typical indicators:

• Board independence, allowing for full deliberation and diversity of thinking on governance and other matters.
• Material diversion of assets, meaning resources are used only for authorized purposes.
• Audited financials prepared by independent accountant with an audit oversight committee.
• No loans to or from related parties, such as key officers, staff, or board members. (Not illegal, but a red flag.)
• Documented board meeting minutes, including committee meetings.
• Provided copy of Form 990 to the organization’s governing body in advance of filing.
• Conflict of interest policy in place.
• Whistleblower policy in place.
• Process for determining CEO compensation in place.
• CEO listed with salary.
• No board compensation. (Not illegal, but a red flag.)

Besides enforcement, however, the IRS is also making a strong good-faith effort to ensure tax-exempt standards are clear and accessible, which is part of their new strategic plan. Currently, reported Fucito and Howell, they’re putting together toolkits that explain requirements for nonprofits and help them apply best practices for meeting them.

Private services like Guidestar are also becoming more transparent about their assessment criteria, providing a lot of guidance about how expenditures are classified (program costs vs.  fundraising costs vs. overhead), how they calculate scores like “fundraising efficiency” and “program expense growth,” and more. They’ll also work with organizations to clear up discrepancies or mistakes, should you determine you’ve been rated unfairly. Another helpful development: Guidestar now allows nonprofits to add information to their profiles detailing aspects like the mission, board governance principles, and impact.

“More and more donors are going to be using these resources, and there’s a lot you can do to be proactive and improve your rating,” said Fucito. In addition, they pointed out, the changes you make to improve your score can actually improve conditions like governance – and you can use both (improved governance and higher ratings) to market yourself.

Mauldin & Jenkins is an accounting firm that’s served nonprofits and other businesses across the Southeast for 100 years. For more information on nonprofit watchdogs or any aspect of them, contact Mauldin & Jenkins here.

Marc Schultz is communications editor at the Georgia Center for Nonprofits.

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