Not-for-Profit Financial Reporting

By Charles Toder

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MARCH 2006 - CPAs should encourage their not-for-profit clients to make audited financial statements readily available, and should encourage clients as well as members of the public to use audited financial statements when seeking financial information about not-for-profit organizations.

Unfortunately, IRS Form 990 has become the basic public-disclosure document because organizations’ forms are generally readily available on the Internet. Form 990 has many weaknesses, however:

  • Form 990 is not audited;
  • Form 990 is not prepared in accordance with GAAP, most notably, lacking notes to financial statements and using different principles for consolidation, reporting investment transactions, and reporting special event expenses; and
  • A completed Form 990 is sometimes so lengthy (over 1,000 pages) that finding relevant information is difficult for even a knowledgeable reader.

On the positive side, Form 990 does include information that is available in the proxy statements of public companies but not included in audited financial statements, such as the names of officers and directors as well as compensation information.

Independent Sector, a nonpartisan leadership forum for charities, foundations, and corporate-giving programs, submitted a report to Congress in June 2005 recommending changes to Form 990. This report is available online at Although Independent Sector offers some constructive suggestions, including a recommendation that audited GAAP financial statements be attached to Form 990s of organizations with more than $1 million revenue, the report has a number of weaknesses:

  • The Independent Sector report recommends inclusion of only unaudited financial statements with the Form 990 of organizations with $250,000 to $1 million of revenue, and makes no recommendations for smaller organizations to make GAAP financial statements available to the public.
  • The report confuses accrual accounting with GAAP financial statements.
  • The report indicates a plan to recommend changes in accounting principles for not-for-profit organization to Congress, rather than to FASB.

The not-for-profit sector is a major part of our national economy, and the public should be encouraged to use audited financial statements when seeking financial information. The public accounting profession should seek to take a leading role in educating the public about the advantages of using audited financial statements.

Charles Toder, CPA (Retired), of New York, N.Y., is a member of the NYSSCPA’s Not-for-Profit Organizations Committee.




















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