Not-for-profit organizations represent a significant portion of the economy of the United States. Over one million of these organizations provide almost every conceivable type of service from education to politics, from social services to country clubs, and from religious to research organizations. The number and importance of these organizations to the overall US economy continues to grow. The Financial Accounting Standards Board (FASB) defines not-for-profit organizations by distinguishing them from profit organizations. It defines not-for-profit organizations as entities that possess the following characteristics not usually found in other organizations:
Item 1 above describes transactions that are sometimes called ānonexchangeā transactions. In a typical contribution to a not-for-profit organization, the giver (donor) and the receiver (the not-for-profit organization) do not exchange items of equivalent valueāthe not-for-profit organization receives the majority of the value in the actual transaction. The donor compensates for this difference by obtaining value separate from the transaction, such as through a tax deduction that it is likely to receive recognition, goodwill, or simply a good feeling about supporting a cause that the donor believes is worthwhile.
While not-for-profit organizations share many of the same accounting principles as commercial enterprises, their accounting and financial reporting are quite unique because the focus of financial reporting for not-for-profit organizations is not on the measurement of net income. Reflecting this, and other differences, the FASB has issued some pronouncements specifically affecting the accounting and financial reporting of not-for-profits. In addition, the application of the FASB's other accounting standards to not-for-profit organizations typically requires some modification for applying those standards to not-for-profit organizations because the primary focus of financial reporting for not-for-profit organizations is not on the measurement of net income or comprehensive income.
Typically, not-for-profit organizations are controlled by boards of directors composed of individuals who generally volunteer their time. The size of not-for-profit organizations varies greatly. A small not-for-profit organization may have no paid staff; all functions may be performed by a governing board and volunteers. On the other hand, some not-for-profit organizations are quite large with hundreds or even thousands of employees, such as a university, a health-related research association, or a large cultural organization such as a museum. When a small, newly formed organization becomes large enough or complex enough in operation to require it, the board may delegate either limited or broad operating responsibility to a part-time or full-time paid executive. This executive may be given any one of many alternative titlesāpresident, executive director, administrator, manager, etc. Regardless of the size of the not-for-profit organization, the board will usually appoint one of its own part-time volunteer members as treasurer. In most cases, the treasurer is second in importance only to the chairperson of the board because the ability of the organization to carry out its programs is based upon strong oversight and administration of its finances.
Every board member has a fiduciary responsibility for all of the affairs of the organization, including finances. While the treasurer may be charged with paying special attention to this area, this does not excuse any board member from exercising diligent oversight in the finance, as well as all other areas of operation. The governing board's involvement with setting appropriate levels of executive compensation is an area that has come under closer public and regulatory scrutiny in recent years, and is an important area for consideration in fulfilling these fiduciary responsibilities.
In many instances, the board member designated as treasurer is a businessperson who is active in both professional and community affairs and has only a limited amount of time to devote to the organization. Therefore, financial awareness from the rest of the board is necessary as is the appropriate development of a financial function within the organization that has the appropriate skill set given the size of the organization.
The treasurer has significant responsibilities, including the following:
- Keeping financial records;
- Preparing accurate and meaningful financial statements;
- Budgeting and anticipating financial problems;
- Safeguarding and managing the organization's financial assets;
- Complying with federal and state reporting requirements.
While this list certainly is not all-inclusive, most of the financial problems the treasurer will face are associated with these five major areas.
In the public company commercial accounting environment, the role of the board of directors (including board members who are part of an organization's audit committee) has been under close scrutiny. This scrutiny has a number of different causes, but certainly the inappropriate (or perceived inappropriate) application of accounting principles by a number of these public companies can be described as one of the more important factors leading to this scrutiny.
While the circumstances receiving public attention relate primarily to public companies, not-for-profit organizations are not immune to the misapplication of accounting principles. Boards of directors, management, and independent auditors of not-for-profit organizations must be vigilant to ensure that accounting principles used are appropriate and are appropriately applied. In addition to meeting the āletter of the lawā as found in various accounting standards, not-for-profit organizations must ensure that the application of generally accepted accounting principles to their financial statements results in statements that truly do present fairly the activities and financial position of the organization. Further, some states have enacted legislation which defines certain responsibilities for boards of directors, including audit committees, covering areas such as the relation...
