Nonprofit accountability and transparency are at the forefront of accounting. The IRS is a powerful institution in this regard since it can impose penalties for nonprofit organizations that do not comply with their obligations under the Internal Revenue Code (IRC). Nonprofit transparency is critical for your board of directors as well as your donors because consistent and accurate financial reporting is the best way to maintain donor trust. Nonprofit transparency involves more than just good business practices, however; it also includes ensuring that your organization’s finances are up to date.
In this article, we will look at transparency in nonprofit organizations, and what you and your staff can do to make sure it always remains a top priority.
Why Nonprofit Transparency Matters
Transparency and accountability are vital for any nonprofit organization. Nonprofits are increasingly being held accountable for their financial reporting obligations, which will be discussed in more detail below. The IRS has the power to impose penalties on nonprofits that do not comply with their obligations under the Internal Revenue Code (IRC). For example, you can be fined up to $10,000 for failing to comply with public disclosure requirements.
Donation Abuse Is A P.R. Disaster
Donations are essential for any nonprofit. Sadly, some organizations misuse their funds, and their public image suffers as a result. Not every nonprofit is careful with the donations they receive. Situations where nonprofits had some serious problems with using donations improperly led to major disasters in terms of public relations. Misappropriation of funds is the fastest way to lose trust with your donor base and cause irreparable damage to your organization.
Transparency in nonprofits fosters confidence, which leads to increased donations. Transparency is essential to the success of any nonprofit. An increased sense of trust from donors will lead them to donate more, which equates directly with an organization’s financial stability and sustainability.
Since most nonprofits are required to publicly disclose current tax forms and other financial information, it’s important that you stay up to date with your nonprofit organization’s legal responsibilities. Legal transparency doesn’t only matter to board members and the IRS. It also matters to your supporters and donor prospects. People must be able to trust where their money is going, so following the basic legal responsibilities is just the beginning.
The Internal Revenue Service requires the following disclosures:
- Annual returns, including Form 990 (or 990-EZ or 990-N), for up to three years after the due date
- All 990 schedules, including attachments and supporting documents (minus parts of Schedule B)
- Tax-exempt application (Form 1023) and all required documents
- A letter from the IRS indicating that your nonprofit organization has been classified as a public charity
- Acknowledgment of donation receipts
- Declarations of any quid pro quo exchanges
The IRS has created standards of ethics that organizations must follow, and these standards go above and beyond just taxes. Ethical transparency holds various meanings across different sectors, but one thing remains constant: organizations need to be transparent so they can effectively meet their missions. The Council of Nonprofits explains some of these ethical transparency best practices. In the early 2000s, community groups organized to lobby for the passage of legislation. They wanted a law that would set up guidelines and standards defining how charitable nonprofits should be run. These guidelines include the “public benefit” obligation, which states that any type of nonprofit organization must contribute something to society and not benefit private interests.
Nonprofits have to balance the urgency of maintaining documents with personal privacy. For example, the Sarbanes-Oxley Act of 2002 prevents nonprofits from destroying records related to a criminal investigation, but it protects an individual’s right to privacy by preventing retaliation for whistleblowing. To ease the public’s concern, nonprofit organizations have to answer several questions that demonstrate their accountability and transparency on IRS Form 990. The IRS Form 990 contains a list of questions throughout Section VI that ask about governance practices in place, such as a conflict policy, an executive compensation approval process, and document retention procedures.
A nonprofit’s annual report is a window into its financial and organizational health. It should include public legal disclosures as well as more detail on how donations are being used to further the organization’s charitable mission. Annual reports also demonstrate transparency to your board members and other stakeholders in your nonprofit, such as government agencies or private donors.
Fairness And Equity Practices
Nonprofits must ensure the provision of nondiscriminatory and confidential service to constituents, staff, board members, and all other stakeholders. Procedures are required for responding to violations that are relevant to each organization. Nonprofit organizations have a responsibility to ensure that their services are provided without discrimination or bias. They also need to make sure they uphold confidentiality where necessary, with procedures available to the public about how to best respond when faced with such an issue, while upholding neutrality toward their clients according to law.
The relationship between nonprofit organizations and their donors is one of trust. Nonprofits collect a lot of personal information from the people they’re trying to help as well as from their supporters, donors, and volunteers. That means they have access to an immense amount of sensitive data that needs protecting. The leaders who run nonprofits are tasked with maintaining privacy while still getting donations so they can keep operating, which requires a lot of responsibility.
Accountability and transparency matter for nonprofits. It’s important to be transparent with your donors because it fosters confidence in the nonprofit, which leads to increased donations. There are a variety of ways that nonprofits can make themselves more accountable for their actions by practicing legal, ethical, and reporting transparency. All of these help create an environment where donors feel confident about donating money and know they’re supporting a cause aligned with their values.
If you’re the executive director at a nonprofit, and you don’t have procedures in place to ensure proper accountability and transparency in your organization, you may be opening yourself up to liability, fraud, and misrepresentation. We recommend that you talk with a nonprofit consultant for more information about how your organization can ensure proper accountability and transparency in line with the law and best practices.