Monday, January 25, 2016

Three Pressing Issues in the Nonprofit Sector that Need Accounting Input

A multi-year effort to revise accounting standards for nonprofits culminated in an exposure draft that instituted a variety of changes to nonprofit financial statements.  The modest nature of the changes shows the careful and deliberate approach of standard setters but also reveals the rift between changes accountants are willing to make and the drastic shifts under way in the sector.  As I see it, there are three major issues surrounding performance measurement that desperately need the expertise and involvement of accountants:

(1) Accounting for impact investments.
Impact investing is a still nascent practice, but one sure to continue growth in the coming years. At its core, impact investing is about directing investment funds in a way that helps promote a mission objective in addition to returns (as opposed to a singular focus on maximizing returns).  The dual nature of impact investments presents an accounting conundrum: should these investments be treated as investments, program efforts, or both?

(2) Following the money trail through multiple organizations.
Since nonprofits don't have owners, identifying the "consolidated" entity among intertwined organizations has dogged accountants of nonprofits for some time.  This problem isn't going away any time soon and actually forms the source of much confusion about reported spending by nonprofits.  Currently, accounting reports provide a snapshot of where one organization's funds are spent, but do not go the extra step of reporting how recipients of these funds spend them.  The consequence is that an organization may report substantial grants and little "overhead", but this means nothing if the grant recipients are themselves bloated with overhead.

(3) The development of alternative metrics of performance.
This issue goes one step beyond the money trail.  For many years, the public has relied on accounting measures of how money was spent to evaluate nonprofits. The percent of funds going toward programs has had substantial staying power as a performance measure, but a seismic shift moving beyond where the money went to examine what the money accomplished is no doubt underway.  The question is whether accountants will enter the fray and, if so, what other measures of performance can be developed that maintain consistency, comparability, and verifiability, key hallmarks of accounting.

In the coming weeks, I will elaborate more on each of these issues. While I don't think answers are apparent, I do hope to highlight the importance of considering them.

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