The Value of Accurate Financial Statements
Financial statements present information about an organization’s financial resources and liabilities at a point in time, the results of its activities during a particular period, and its flow of cash during that period. In the for-profit world, these statements focus on information that is useful in making investment and lending decisions. In the nonprofit world, they are useful for lenders, donors, funding organizations, and other stakeholders to ascertain the financial viability of the nonprofit and to judge how well, or poorly, the nonprofit is being managed. In addition, the IRS requires nonprofits to report financial information to determine if the nonprofit is eligible to keep its tax-exempt status under section 501(c)(3) in the Internal Revenue Code. Having accurate financial statements is thus in the best interest of any nonprofit! What can a nonprofit do to assure that its financial statements are accurate and in good order?
Financial statements should be prepared using a set of common ground rules, which have been developed over a period of many years, and are called generally accepted accounting principles (GAAP). GAAP includes the rules and procedures that define accepted practice in the preparation of financial statements. Since the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934, the SEC has had the authority to set accounting standards for publicly held companies. However, the SEC traditionally has relied on private sector bodies such as the Financial Accounting Standards Board (FASB) to make recommendations regarding accounting standards. The FASB also sets the accounting standards for nonprofit organizations. For example, FASB Standard No. 117 established the required format and content for the general-purpose external financial statements provided by a nonprofit organization. Two objectives of the standard are to increase the comparability of nonprofit financial statements with those issued by for-profit organizations and to increase the usefulness of the statements to external users. FASB Standard No. 116 outlines the reporting requirements for contributions made to and from the nonprofit, and established three categories of contributions—unrestricted, temporarily restricted, and permanently restricted. Adhering to GAAP is one of the first steps in effective financial reporting that a nonprofit can take. [Sarbanes Oxley for Non Profits, Peggy M Jackson]
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