With the transparency and public availability of the “new” Form 990, review of the 990 by audit or finance committees (and sometimes the entire governing body) has become a best practice adopted by most nonprofit organizations. This has been made almost mandatory because the new 990 requires a description of the review process.
As explained in our new online guide, Effective Audit Committees for Nonprofit Organizations, “In order to achieve its goal of risk management and combatting financial fraud, the audit committee must have an unwavering mandate for financial statements that transparently and meaningfully portray the organization’s circumstances.” It is also important to note that the IRS, in a preliminary study of audited charitable organizations, has concluded that nonprofits with a review process are more likely to have better tax compliance.
The following is a non-inclusive list of questions that I believe a governing body or committee should clearly be asking in its Form 990 review process:
- Is the mission statement on the 990 accurate?
- Do the program descriptions really reflect what the organization has done in the past year? Do they contain enough information so that the reader can understand the extent of the organization’s programs?
- If there are significant increases or decreases in year to year comparative line items on the Page 1 summary, what is the reason for them?
- Does the checklist of required schedules contain answers that are a surprise?
- Do the questions on governance, management and disclosure contain answers which indicate that the organization is well governed and has the proper policies in place? Are all required descriptions for this page included on Schedule O, and are they accurate and complete?
- Is the listing of officers, directors, and key or highly compensated employees complete and accurate? This list must reflect anyone who served on the governing body or as an officer at any time during the year.
- Does the overall compensation for the highest paid individuals appear reasonable and in line with your understanding of what those individuals are paid?
- Is the amount of gross unrelated business income disclosed on page one and in the statement of revenue a significant percentage of total revenue? If so, this can be a possible exemption issue and should be discussed with your financial or legal advisor.
Stay tuned for Part II of this blog post, in which I will take a closer look at questions pertaining to program service expenses, public support, uncertain tax positions, foreign activities, and other additional disclosures.
We have found that many organization boards, committees and members of management benefit from having their outside accountants present a draft of the 990 either in a live meeting or conference call. The accountants are usually very familiar with the form and the details of the various disclosures and can answer most of the questions which the participants might have.