Financial Reporting by Non-Profit Organizations: United States Developments
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Description
Financial reporting for nonprofit organizations has undergone a sea change in the last 25 years. Pre-1980 fund accounting provided limited, and often obscure, insight into the financial position of nonprofits and the results of their operations. Recent pronouncements, primarily by the Financial Accounting Standards Board, have brought nonprofit organizations under the accounting rules applied to business enterprises. Nonprofits are now required—in conformity with Generally Accepted Accounting Principles (GAAP)—to prepare essentially the same three financial statements as those prepared by business enterprises: Statement of Financial Position, Statement of Activities, and Statement of Cash Flows. With limited exceptions, the same GAAP applies to nonprofits as to business enterprises, with the result that comparability, clarity and reliability of financial reporting have been substantially improved. Moreover, financial information about nonprofits has in recent years become much more publicly and readily available. A broad group of non-profits are required to file a federal income tax information return—Form 990—the contents of which are with limited exceptions public information. The Form 990s themselves, as well as analytical and summary data thereon, are now publicly available on a widely used website. However, the parallels between financial reporting of business enterprises and nonprofits should not be overstated. Thus, while the GAAP principles are parallel, the body of law—primarily federal law—that mandates audit, filing and public availability of the financial statements of a substantial body of the most important business enterprises does not apply to nonprofit organizations. And the federal tax reporting – informative and desirable as it is—lacks major components that assure reliability and relevance of business enterprise financial reporting, as will be noted below. Although these developments represent major steps forward in transparency and accountability with respect to nonprofits, the extension of the business enterprise GAAP accounting model to nonprofits, as well as its particular application, raises some difficult questions. Differences in the nature of the stakeholders of these differing enterprises, as well as fundamental differences in the objectives of their operations, suggest that meaningful accountability may require limitations or alterations of the accounting model for nonprofits. Among the approaches advocated in recent literature is a form of social accounting that suggests extending the boundaries of quantified financial reporting to reflect crucial inputs and outputs for nonprofits, which are not currently presented in their financial reports. Social accounting promises a broader-based, more inclusive and potentially more meaningful base for financial reporting of nonprofits. But its drawbacks and complexities – including issues of estimation, judgment variability, reliability and auditability – may outweigh its potential advantages. Neither is it clear whether broader social accounting for nonprofits would—even if feasible and practicable—be entirely desirable. Among the substantive issues that such reporting might pose are the possibilities of encouraging damaging competition among nonprofits, establishing incentives for “creative accounting” of a type recently practised by business enterprises, and posing disincentives for activities that show short-term social accounting “loss” despite their potential for longer-term social accounting benefit. Is it possible that in the world of nonprofit enterprises, social accounting may ask questions that might better be answered by commentary, rather than quantification? In evaluating financial reporting standards for nonprofits, it is essential first to clarify for whom, for what purposes, and with what objectives the financial reports are prepared. There appears to be consensus in the United States (though not necessarily in other nations) with respect to business enterprise financial reporting: it is intended primarily to provide financial information to investors and creditors for the purpose of allowing them to evaluate the amounts, timing and likelihood of future cash flows, with the object of informing their investment or credit decisions. No such clear consensus has yet developed concerning financial reporting standards for nonprofit enterprises. Early financial reporting practices by nonprofits reflected the absence of clear guidance, and proved of limited value to financial statement readers. More recent practices are clearer, more definitive, and more transparent, but fundamental questions concerning the nature of financial reporting by nonprofit enterprises remain.
Source Publication
Comparative Corporate Goverance of Non-profit Organizations
Source Editors/Authors
Klaus J. Hopt, Thomas Von Hippel
Publication Date
2010
Recommended Citation
Siegel, Stanley, "Financial Reporting by Non-Profit Organizations: United States Developments" (2010). Faculty Chapters. 1408.
https://gretchen.law.nyu.edu/fac-chapt/1408
