Nonprofit Accounting Basics

Key Considerations for Audit/ Finance Committee Review for Form 990

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With the transparency and public availability of the “new” Form 990, review of the Form 990 by audit or finance committees (and sometimes the entire governing body) has become a best practice adopted by most nonprofit organizations. This is almost mandatory with the Form 990 requiring a description of the review process. It is also important to note that the IRS, in a preliminary study of audited charitable organizations, has concluded that nonprofits with a review process are more likely to have better tax compliance. It is also important in the eyes of the IRS that the review include at least a committee from the governing body, rather than just management and/or legal counsel.

The following is a non-inclusive list of questions we believe a governing body or committee should clearly be asking in its review process:

  • Is the mission statement on the Form 990 accurate?
  • Do the program descriptions really reflect what the organization has done in the past year? Do they contain enough information so the reader can see the extent of the organization’s programs?
  • If there are significant increases or decreases in year-to-year comparative line items on the Page 1 summary, what is the reason for the changes?
  • Does the checklist of required schedules contain surprising answers?
  • Do the questions on governance, management, and disclosure contain answers which indicate the organization is well governed and has the proper policies in place (i.e. mostly yes answers)? Are all required descriptions for this page included on Schedule O and are they accurate and complete?
  • Is the listing of officers, directors, key, and highly-compensated employees complete and accurate, reflecting anyone who served on the governing body or as an officer at any time during the year?
  • Does the overall compensation (including benefits and retirement) for the highest paid individuals appear reasonable and in line with your understanding of what those individuals are paid?
  • Is the amount of gross unrelated business income disclosed on page one and in the statement of revenue a significant percentage of total revenue? If so, this can be a possible exemption issue and should be discussed with your financial or legal advisor.
  • If the nonprofit is a Sec. 501(c)(3) or Sec. 501(c)(4) organization, does the total of program expenses in relation to total expenses create the appearance of a well run organization which efficiently utilizes its funding on its mission? Are fundraising expenses too high in relation to program expenses? Or do fundraising expenses appear too high or too low in relation to the amount of contributions reported?
  • If the nonprofit is a Sec. 501(c)(3) publically supported organization, is the public support percentage on Schedule A comfortably above the 33 1/3% level required to maintain public charity status? Has it shown a dramatic decline from the prior year? If required to complete Schedule A, Part III, is investment income percentage well below the required 33 1/3% level?
  • If your organization receives audited financial statements, is the note from the financials about uncertain tax positions included in Schedule D, Part IV? Does the note contain any disclosure of uncertain tax positions or just state there are not any? If uncertain tax positions are disclosed, they obviously raise a significant “red flag.”
  • If your organization is involved with foreign activities or grant-making, has Schedule F been prepared and does it look reasonable? Is there a note that describes a good monitoring process for foreign grants, if applicable?
  • If you know of any transactions between the organization and various insiders or their companies, has Schedule L been prepared to disclose these transactions?
  • In addition to various required notes on Schedule O, do you feel there are any additional disclosures that should be made on this schedule to further explain any items on the return? Schedule O may be used for any note your may wish to include.
  • Is there any disclosure anywhere on the return, including attachments, that contains personal information about individuals, including Social Security numbers? The IRS has reported a fairly high percentage of Forms 990 have been found to include such information.

Of course, there may be many other questions a board or committee member may wish to ask about the Form 990, depending upon the organization’s circumstances and the information presented on the form. We have found many organization boards, committees, and management benefit from having their outside accountants present a draft of the Form 990 either in a live meeting or conference call. The accountants are usually very familiar with the form and the details of the various disclosures and can answer most of the questions participants might have.

The following links contain further information about review of the Form 990 including some checklists:

www.journalofaccountancy.com/Issues/2010/Sep/20102725.htm

apps.americanbar.org/buslaw/committees/CL580000pub/newsletter/201104/sydnor.pdf

www.healthcarereforminsights.com/2010/02/01/a-board-member%E2%80%99s-guide-to-reviewing-the-form-990/

www.networkwilliamsburg.com/images/990%20review%20-%20checklist%5B1%5D.pdf