Seeing Your Way Through Transparency

by Amanda Meko, CPA | Partner, Audit and Other Assurance Services and Team Leader, Not-for-Profit Services Group |
Angela Crawford, CPA | Team Member, Not-for-Profit Services Group

Transparency. To most nonprofits the term suggests the need to make financial statements more readily understandable and being open about all aspects of their operations. Since the IRS revised Form 990 over four years ago to require the disclosure of a gamut of information, transparency has taken center stage with nonprofits.

Why embrace transparency?

Your nonprofit’s reputation is its most important asset. With today’s immediate and widespread access to information on the Internet, a positive image can turn negative overnight. Major funders and individual contributors will run from a nonprofit with a less than stellar reputation. And no one in the community — or in the organization itself — wants to be connected to a nonprofit that isn’t above board in all its dealings.

Transparency helps you protect your organization from a public perception that you have something to hide. A nonprofit that discloses its financial facts and other information about its governance is less likely to attract criticism and media scrutiny. And potential donors will be put at ease by learning that your organization is well managed and has strong board oversight.

Your website: A good place to start

Think of it as a key transparency tool. Post the organization’s annual audited financial statements on your website as soon as they’re approved by the board of directors. The audit process might entail a six-month lag between the end of the year and final board approval. But such a delay is likely less than the nine to 11 months typically needed for nonprofits to complete and file their Form 990 and then have it posted on GuideStar, an online site that, among other things, provides copies of 990s to anyone who registers.

Posting the financial statement on your website doesn’t guarantee that the public will understand it. Consider using tools such as financial pie charts, Frequently Asked Questions (FAQs), third-party testimonials and informational brochures to make the numbers digestible. Translating financial results into program outcomes can be particularly effective.

Also post on your website any of the board’s policies and procedures that demonstrate strong governance. This includes your nonprofit’s conflict of interest statement, whistleblower policy and political activities policy.

Approaching Form 990

Many nonprofits view the Form 990 as a necessary evil. However, in the electronic age, your nonprofit’s 990 is available to anyone, anywhere, anytime on Guidestar. Instead of dreading the checklist your accountant sends you, view filling it out it as free advertising for your organization. Answer questions fully and utilize schedule O to highlight your organization’s successes and strong governance.

Form 990 requires disclosure of salaries of the nonprofit’s highest-paid employees and is often the first thing that comes to mind with the form. Salary and benefits information can be sensitive material that may draw public scrutiny and criticism.

Often you can prevent salary-related criticism by explaining how salaries at your organization are set. Schedule O, “Supplemental Information to Form 990 or 990-EZ,” provides space to explain any of your answers, making it an ideal place to describe the steps taken to determine key individuals’ salaries. Your nonprofit, for example, may have conducted an area wide or national salary survey of similar positions at like-size organizations.

Form 990 also requires nonprofits to disclose the nonmonetary benefits it provides to key individuals — for instance, free housing or a free car for a university chancellor. In the “age of transparency,” nonprofits need to be aware that such “perks” might draw public ire.

Even if a compensation package is deemed appropriate by the board after it performs the required due diligence, it’s important to consider how a potential contributor or funding source might view it. Funding has been pulled from some organizations because the funding sources disagreed on compensation levels. A preventive measure might be to offer a rational explanation on Schedule O of why the benefit was provided — or to eliminate the benefit altogether.

Transparency is here to stay

All signs indicate that nonprofits may want to provide even greater transparency in the future. Annual reports can be used not only as a tool for donor acknowledgment, but also to provide details on the organization’s financial position.

Nonprofits can also provide information including management’s discussion and analysis of significant events, such as new programs or funding sources. They might want to offer explanations of operational changes — for example, hiring 10 employees or opening a new location. The explanations can help to explain fluctuations in account balances from one year to the next.

Seize the day

Transparency presents some challenges, including making the information your nonprofit presents accurate, understandable and consistent. However, it is also an opportunity to present your organization in the best possible light as the public gets to know “what makes you tick.” Take the opportunity to put it all out there. What have you got to hide?