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Four Ways Nonprofit Leaders Can Approach Compliance Challenges

When it comes to operating a nonprofit, it’s seldom as straightforward as simply giving back.

When it comes to operating a nonprofit, it’s seldom as straightforward as simply giving back. These special organizations face a number of challenges from a regulatory and tax standpoint, which can be burdensome without the right guidance and support.

Some of the matters always on the minds of nonprofit leaders include concerns about fundraising, accounting, and record-keeping. But there are a few core ways nonprofit executives and board members can set up their organizations for success. This will ensure they can focus on what truly matters – their mission.

Be strategic about record-keeping.

Record-keeping for nonprofit organizations aligns with the priorities of other enterprises. Records need to be in a uniform location and readily accessible. They need to be thorough and account for information like meeting minutes, financial records, annual reports, incoming gifts, donations and financial benefits, outgoing grants, and any periodic evaluations performed.

The records don’t need to be public unless required from a legal or compliance standpoint, but making them as public as possible will help build transparency and trust. It can also be beneficial to account for special situations, like trademarks and copyrights the nonprofit owns, which need to be thoroughly recorded.

Know what to do in the event of an audit.

Nonprofits who received and spent $750,000 or more in federal funding are subject to the “single audit,” under the terms of the Single Audit Act of 1984. In recent years, many nonprofits have been caught off guard by unexpected audits and compliance requirements due to receiving funds related to or resulting from COVID-19.

What constitutes federal funds can be broad, including monies received from a federal agency and funds that originate from the federal government but pass through a third party, like another nonprofit organization.

Single audits determine if the nonprofit complies with the specific rules and regulations applicable to the specific funding stream, as well as have a strong Internal Control Structure regarding accounting data and asset safeguarding. Triggers of this kind of audit include loans, interest subsidies, grants, and even insurance policies.

Single audit requirements don’t apply beyond that high threshold. Nonetheless, nonprofit leaders might use the requirements to build broader audit preparedness protocols if the audit threshold evolves in the future.

Consider whether, and what, to outsource.

Nonprofits with lean budgets – just about all of them – should consider whether it is structurally and financially advantageous to engage a third party to perform their compliance and human resources work.

Managing a small team is difficult enough and, regardless of size, you are expected to maintain compliance with regards to how you treat your employees and maintain your finances. Outsourcing can be especially beneficial for organizing and filing annual reports and Form 990s, managing tax exemptions, keeping a close eye on charitable donations and philanthropic inflows, and managing the complexities of operating as a nonprofit in multiple states.

However, nonprofit leaders should take care when choosing an outsourced partner. They should ensure that the company to whom they have outsourced is experienced in the nonprofit realm and the complexities surrounding their unique needs. A partner with a large book of nonprofit clients can also bring a wealth of perspective and experiences along with best-in-class solutions for what your peers may be doing to overcome challenges.

Do more than the minimum.

Most nonprofits probably already are doing more than the minimum, but we encourage you to do more than what the law requires. As unfair as it may seem, nonprofit executives carry the burden of expectation. Compliance casts a wide net, though. Because they often support important causes, nonprofit organizations are expected to be managed to the highest standards, operate on par with their peers, and set an example for those up-and-coming. The good news is that ensuring everything is in order internally means that high performance will follow and in most instances your board will be supportive of things being done right even if it means incurring some expense.

State regulations, at least, have high expectations of nonprofit boards and operations, including minimum numbers of board members and high standards for duty of care, which can vary from place to place. Nonprofits are tax-exempt and essentially regulated and supervised from a considerable distance by state officials who will only step in after clear evidence of wrongdoing.

In other words, with great operational freedom comes great responsibility. Be honest about what the organization could be doing better in its internal management processes, and reach out for help, including through a process audit, when an outsider’s perspective is needed.

Proactivity around compliance can be your greatest protection, ensuring that you are actively reviewing all internal policies, processes, and controls.

This column was written by Trevor Benitone and originally appeared on Momentum Nonprofit Partners.



Adams Keegan

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