Monday, February 16, 2009

It's Never Good to Play With the Tax-Man

Nonprofits throughout the United States are in audit season, getting ready for their 990 filings in May. This time of year always reminds me of a nonprofit I interviewed with a few years ago.

Being the kind of due diligence gal that I am, before the interview I asked for three years of audited financial statements. Financial statements give you a good snapshot of the organization such as: where the revenue comes from; what programs cost; how much is spent on administration vs. program; are there problem areas or could there be belt tightening; etc. I hope there are no potential executive directors out there that would take a job without looking at the financials. Even if the organization is in financial difficulty, you need to know that so you can intelligently decide whether or not to take the position.

I didn’t get audited statements, instead I got Quickbooks Profit and Loss statements. A part of me thought maybe the board members didn’t understand what I was asking for and I could make it clear during the course of the interview.

The interview itself went swimmingly until we turned to the subject of finance. I again, politely requested three years of audited financials. At that point I was told by the board chair that the organization, that had been in existence for over fifteen years, had never had an audit conducted. I was a bit surprised and I think I said something like “You might want to consider having an audit done.” I mentioned that it didn’t necessarily have to be every year but perhaps at least every two or three years.

I brought up Sarbanes-Oxley, the law that had been passed after the Enron scandal that was supposed to bring transparency to a corporation’s financial operations. A result of that law is that nonprofits now have stricter standards that they have to meet, such as setting up audit committees and getting audits. I was summarily told that they didn’t believe Sarbanes-Oxley required audits, it just suggested audits.

Still curious as to why there was such resistance to having an audit, I said something like “Well what about your funders or potential grantmakers?” I was told that they had never had a problem since their large donors were businesses they dealt with regularly.

Realizing I was getting nowhere, I moved on to a line item that I had questions about. That item was a type of commission they had set up with equipment suppliers, in other words, when those suppliers sold equipment as a direct result of being present at their conference or through advertising in their newsletter, the organization would receive a modest commission on the sale.
The Treasurer then informed me that they preferred not to call them commissions, but rather donations as they didn’t want to have to pay Unrelated Business Income Taxes or UBIT.

I have no clue what expression must have swept across my face, I’m sure it was odd, since I immediately visualized my having to sign a 990 that had false information in it. I stopped asking questions about the financial statement and began wrapping up the interview with “Thank you so much for your time, it was great to meet you,” or something like that.

The next day I called and removed myself from the running. It wasn’t so much that their shady practices made me nervous as it was I sensed a complete unwillingness to clean up their behavior and a resistance to my advice.

Whatever you do nonprofits, don’t play fast and loose with the Internal Revenue Service, it ain’t a good idea. There are consequences that include loss of your exemption, heavy penalties and even jail for the person who signs the 990. In simple parlance, falsifying a tax return is fraud.

While audits can make some nervous, there's nothing like getting a clean management letter. You can proudly take that to funders and members as your report card that you are managing the organization with care and responsibility. I know that smaller organizations often don’t feel they have the money to be audited every year, but certainly should make sure they have the money to be audited every couple of years. It is also highly recommended that you set up an audit committee, even if it’s only three people, just to make sure that money is being accounted for correctly and that the organization’s finances are transparent.

Managing a nonprofit, whether as the chief officer or board member, requires ethical practices and stewardship. After all, people give their money charitably in the belief that their money will be well spent.


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