Armanino Blog

Nonprofits: Seeing Your Way Through Transparency

December 05, 2013

Transparency. To most nonprofits the term connotes the need to make financial statements more readily understandable, and suggests being open about all aspects of their operations. Since the IRS revised Form 990 over five years ago to require the disclosure of a gamut of information, transparency has taken center stage with nonprofits. So, is transparency actually a good thing? And how does an organization reveal its inner workings without inviting misunderstanding or drawing criticism?

Why Embrace Transparency?
Your nonprofit’s reputation is its most important asset. With today’s immediate and widespread access to information on the Internet, a positive image can turn negative overnight. Major funders and individual contributors will run from a nonprofit with a less than stellar reputation. And no one in the community — or in the organization itself — wants to be connected to a nonprofit that isn’t aboveboard in all its dealings.

Transparency helps you protect your organization from a public perception that you have something to hide. A nonprofit that discloses its financial results and information about its governance is less likely to attract criticism and media scrutiny. And potential donors will be put at ease by learning that your organization is well managed and has strong board oversight.

Your Website: A Good Place to Start
Think of it as a key transparency tool. Post the organization’s annual audited financial statements on your website as soon as they’re approved by the board of directors. The audit process might entail a four- to six-month lag between the end of the year and final board approval. But such a delay is less than the nine to 11 months typically needed for nonprofits to complete and file their Form 990 and then have it posted on GuideStar, an online site that, among other things, facilitates research on nonprofits by providing information to the public.

Posting the financial statements on your own website (or elsewhere) doesn’t guarantee that the public will understand them. Consider using tools such as financial pie charts, Frequently Asked Questions (FAQs), third-party testimonials and informational brochures to make the numbers digestible. Translating financial results into program outcomes can be particularly effective.

Also post on your website any of the board’s policies and procedures that demonstrate strong governance. This includes your nonprofit’s conflict of interest statement, whistleblower policy, political activities policy and your process to determine compensation.

Approaching Form 990
When addressing transparency, disclosing salaries of the nonprofit’s directors and officers (a Form 990 requirement)  and salaries of any other employees with compensation over $100,000 is often the first thing that comes to mind. Salary and benefits information can be sensitive material that may draw public scrutiny.

Often you can prevent salary-related criticism by explaining how salaries at your organization are set. Schedule O, “Supplemental Information to Form 990 or 990-EZ,” provides space to explain any of your answers, making it an ideal place to describe the steps taken to determine key individuals’ salaries. Your nonprofit, for example, may have conducted an areawide or national salary survey of similar positions at like-size organizations.

Form 990 also requires nonprofits to disclose the nonmonetary benefits it provides to key individuals — for instance, free housing or the use of a car for a university chancellor. In the “age of transparency,” nonprofits need to be aware that such “perks” might draw public ire.

Even if a compensation package is deemed appropriate by the board after it performs the required due diligence, it’s important to consider how a potential contributor or funding source might view it. Funding has been pulled from some organizations because the funding sources disagreed on compensation levels. A preventive measure might be to offer a rational explanation on Schedule O of why the benefit was provided — or to eliminate the benefit altogether.

It’s important to remember that your Form 990 will be available to the public on GuideStar. These days, potential donors are frequent GuideStar users. 

When Explanations are a Must
Sometimes explanations to Form 990 answers aren’t only desirable — they’re necessary. For example, a question in the form’s Governing Body and Management section asks if the organization has become aware of a significant diversion of assets, which includes embezzlement or theft. If you answered “yes” to this question, you need to explain this event and describe the steps you’ve taken to prevent such frauds from occurring again.

Also, Form 990 asks several questions about having particular policies in place, even though there’s no legal or IRS requirement to have them. In some cases, there may be a sound reason why your nonprofit lacks a certain policy. An organization exempt from tax under IRS Code Section 501(c)(5) — a labor union, for example — would follow federal laws regarding conflicts of interest rather than have its own conflict-of-interest policy.

Transparency is Here to Stay
All signs indicate that nonprofits may want to provide even greater transparency in the future. Annual reports can be used not only as a tool for donor acknowledgment, but also to provide details on the organization’s financial position. 

Nonprofits also can provide information including management’s discussion and analysis of significant events, such as new programs or funding sources. They might want to offer explanations of operational changes — for example, hiring 10 employees or opening a new location. The explanations can help to explain fluctuations in account balances from one year to the next.

Seize the Day
Transparency as the norm, rather than the exception, presents some challenges, including making the information your nonprofit presents accurate, understandable and consistent. Transparency also is an opportunity to present your organization in the best possible light as the public gets to know “what makes you tick.”

December 05, 2013

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