For many nonprofit organizations, it may be easy to create and tell a story that pulls on potential donors’ heartstrings to encourage an initial donation. However, keeping them engaged and donating in the future requires trust; one of the best ways to ensure trust is through financial transparency. Sure, there are some financial transparency requirements set forth by law that nonprofit organizations must abide by. However, there are additional things nonprofits can do to bolster trust and keep a donor active and engaged.
Let’s take a look at the things that are required, as well as more ways to provide transparency:
The Internal Revenue Service (IRS) regulates financial transparency in nonprofit organizations to some extent. Essentially, there are two main items that the IRS requires be available to the public upon request.
- An exempt organization must make available for public inspection its exemption application, along with the supporting documentation and any letter or document issued by the IRS concerning the application.
- In addition, an exempt organization must make available for public inspection its annual return, typically the form 990.
In order to demonstrate a commitment to transparency, many nonprofits post a link on their website to these documents. Not only does this make it easier for potential donors to verify that the organization they’re donating to is a nonprofit organization, but it also lets you showcase your financials by providing easy access to documents, such as the 990. A nonprofit’s 990 contains a lot of information, such as who is on the board, the major program accomplishments during the previous year, and how many dollars were spent on program, administrative, and fundraising during the period.
Additional Ways to Provide Transparency
Even though the required items above may seem to fulfill the transparency requirements, there are additional things to consider when committing to financial transparency, such as:
- Develop a sound and consistent method for allocating costs between program, administration, and fundraising, which are reported on the form 990. If you aren’t digging into your administrative costs and allocating them appropriately to the various programs, then it may appear that your administrative costs are high or too low. The key here is to make them as accurate as possible.
- Develop and maintain sound financial management policies, including internal controls, to ensure accountability. Employing these practices ensures consistency within your financial reporting.
- Consider posting financial information on your website, such as a copy of the organization’s recent form 990, audited financial statements, and annual report, as applicable.
Transparency in the nonprofit sector is becoming more and more important. If you can demonstrate a commitment to the availability of consistent and accurate financial information, you can more easily engage stakeholders, including donors. When stakeholders grasp and understand the financial picture of the organization, they will become more connected and committed to its success. At TDT, we understand the challenges of transparency and are here to help you every step of the way.
Dan Montgomery, CPA and Partner at TDT, discusses financial transparency and how it can help attract and retain potential donors. With more than twelve years of experience, Dan specializes in audits of nonprofits, governmental entities, and employee benefit plans. Dan is a member of the American Institute of Certified Public Accountants and the Iowa Society of CPAs and serves nonprofit clients across all TDT office locations.