The California Association of Nonprofits (CAN), CompassPoint Nonprofit Services, and the Urban Institute are concerned about the state of financial reporting in the nonprofit sector and believe there’s room for improvement. Now that the information reported in the IRS Form 990s is widely available to donors and is a primary source of information about the sector as a whole, nonprofits need to be very conscious about the accuracy and quality of the data they submit. Further, many nonprofit leaders express frustration about the amount of staff time it takes to meet funders’ unique financial reporting requirements. This can be a significant issue when an organization receives numerous grants and contracts. These groups are ultimately concerned that multiple reporting requirements and difficult-to-retrieve internal data combine to leave many leaders unable to account efficiently for the total costs of their programs, hampering their ability to plan and manage effectively.
One way to address these concerns lies within the foundation of all financial reporting—the chart of accounts. If you are a bit vague on what the chart of accounts actually is, you may not realize the power that it has. In short, a chart of accounts is a system for classifying transactions in a consistent way across an organization, typically via a numerical coding system that follows a formal structure, roughly akin to the Dewey decimal system used by libraries.
Its primary purpose is to enable the production of accurate financial reports as required (and desired) by government agencies, funders, board members, and managers. Think of the chart of accounts as your framing financial document—the place where financial transactions are classified and therefore the “driver” of your financial reporting, budgeting systems and an invaluable resource for making strategic management decisions.
“Despite its importance, however, almost no information exists about how to set up a nonprofit chart of accounts, what to include, and how best to reflect an organization’s work in the coding system,” says Jeanne Peters of San Francisco’s CompassPoint. “We worked with Bill Levis, the early champion of providing the sector with a single chart of accounts format, and Russy D. Sumariwalla to publish their guidebook, Unified Financial Reporting System for Not-for-Profit Organizations, which includes a Unified Chart of Accounts (UCOA).” Levis was deeply involved in the development of a UCOA in the state of Tennessee, which he characterized as the parent of the general guidebook. The book is the result of several years of work by many groups, including CAN, the California Society of CPAs, the Urban Institute’s National Center on Charitable Statistics (NCCS) and others, refining the concept and content of a single chart of accounts structure that would respond to IRS Form 990, GAAP, and other financial reports.”
Florence Green of CAN, who has been pursuing the concept of a unified chart of accounts for a decade, believes that “people are desperate for a chart of accounts that makes sense to them and has a basic commonly understood rationale. It is a tool that is flexible enough to be used by organizations of very different sizes, that have different numbers of funders and groups to which they owe accountability.”
“The way it is designed,” Green explains, “it can easily accommodate any funding source to which you have to report. It creates columns for the different types of reports that must be produced—yet all lead across to the reporting that you have to do on your Form 990.” To get an idea of what such a chart of accounts might look like, see the ucoa Web site (www.ucoa.org/chart).
“This has the additional benefit of reducing the time it takes to do financial reporting and it greatly compresses the time it takes to do a 990 because every financial report will be connected to all other financial reports,” continues Green. “In this way it reduces the costs of reporting, particularly when the nonprofit has multiple funders for which it has to do multiple reports—and at the end you produce data that has some commonality to it.”
Green and Peters have been working closely with the California Society of CPAs to fine-tune and field-test the unified chart of accounts. A similar effort is underway in Washington, D.C., where the Urban Institute and the Support Center are promoting use of UCOA among individual nonprofits and major groups of organizations headquartered in D.C.
This effort could produce benefits on a number of levels, its advocates point out; some are system-wide. “One of the larger picture benefits of the unified chart of accounts is that as more people begin to use it, we will begin to call things by the same name,” states Green. “One of the problems with a multitude of charts of accounts is that the words we use mean different things to different people. When we make our information more commonly understood it will have more meaning and we will be better able to act on it.” This may have implications for the chronic problems of the under-capitalization and inattention to core costs of nonprofits by funders. The sector as a whole needs to be much clearer and aggressive about stating its actual costs; it can only do that if organizations know what those costs are.
Over the next year, CAN and CompassPoint plan to publish resources for nonprofits to make it easier to consider the benefits of converting to UCOA as well as tips for actually converting. UCOA is currently available online at (www.CAnonprofits.org) and (www.ucoa.org); CAN and CompassPoint will enhance these sites with a short manual on implementation. This will be fully downloadable and compatible with QuickBooks, which is one of the software packages more commonly used by small and mid-size nonprofits. Other software companies such as American Fundware, Araize, Blackbaud, Grants Management Systems, MIP, Shelby Systems, and USL Financials are also being encouraged to provide UCOA as the sample nonprofit chart of accounts in their future versions.
A longer and more detailed hard copy manual is also in the works; this publication will look more broadly at finance issues and will refer people to a variety of other resources on budgeting. The long-term objective is to offer separate manuals for each area of the sector, such as arts, environmental, human services and so on.
In general, a system based on too many inexplicit assumptions is always vulnerable to mistakes. As Peters points out, “We want to open this area of management up and give nonprofits the control over their financial reporting which has often been elusive.”
This feeling may be intensifying as unified reporting through the IRS Form 990s becomes more readily accessible. Because our end-of-year information is now posted on the Internet by both the IRS and Guidestar, we are more exposed. Flo Green comments that “increasingly, as stories are written about nonprofits that are singled out for scrutiny, it is common for parts of their 990s to be printed in the paper as an example of how the organization is either falsifying records or is not producing adequate information.” It is in our best interests to ensure that this data accurately reflects the work that we do in our communities.
Green continues, “Research has shown that errors on the 990s are many types—some of these are errors of omission, some of misinformation and some of simple addition or subtraction—but all of these errors promise the possibility of putting your organization at risk at least in terms of public perception.” Green goes on to say that, “the unified chart of accounts will help improve the quality of information in the form 990 because it makes it easier to figure out how all financial information relates to and fits into the form 990. With the unified chart of accounts it is a very systemic flow to the 990.”
“Whether we like it or not,” Peters concluded, “the IRS Form 990 is becoming a major way that nonprofits are held accountable. UCOA is an important new tool available to nonprofits of all sizes and missions to help them reconsider—or consider for the first time—their ability to produce useful financial information for themselves and their constituents. We want to integrate financial reporting so that 990s are simply a reflection of year-round quality reporting by nonprofits.”
See (www.CAnonprofits.org) or (www.UCOA.org) to download the unified chart of accounts (a short manual will be available this summer). For nonprofit training resources contact Jeanne Peters at CompassPoint at ([email protected]). Sumariwalla, Russy D. and Wilson C. Levis. 2000. Unified Financial Reporting System for Not-for-Profit Organizations. San Francisco, CA: Jossey-Bass. For more information about quality reporting, see (http:\\Qual990.org).