Below are a few important reasons for nonprofits to follow accounting requirements:
1- Accounting/financial requirements may be mandatory for recipients of federal and other government funding. In order to avoid errors and misappropriations, grant providers often use certain requirements and procedures, including reports. There is really no choice-either the nonprofit follows the proscribed requirements, or funding stops.
2- The IRS inquires about financial tasks on the tax form 990, the information return filed by nonprofits. For instance, the return explicitly inquires about the number of items reported on the 1096, the Annual Summary and Transmittal of U.S. Information Returns. This is usually related to reporting payments to contractors over a certain amount. To comply with this inquiry properly, the nonprofit should have financial rules to capture this information.
3- The nonprofit must also follow all local, State and federal laws. For example, employees may need to file time sheets to be paid correctly. If they don't follow this accounting rule, paychecks may be printed incorrectly, putting the nonprofit at risk for fines and penalties. So, accounting folks must require proper documentation and approvals so that this process run smoothly.
4- Following accounting guidelines protect the nonprofits from errors and fraud. An example would be the popular procedure of requiring approvals on all invoices to be paid. Usually, a supervisor approves such invoices to avoid payments for fake or wrong items or services. Compliance with accounting requirements can save the nonprofit lots of money.
5- Compliance with accounting requirements, including financial processes, are often evaluated by auditors to assess the risks of nonprofits. If an accounting requirement is for monthly cash reconciliations, for instance, but the auditors note that they are actually done once every four months, most likely the audit risk will increase along with the costs of such audit. So, accounting requirements are to be followed ALL THE TIME to avoid problems.
6- Accounting rules can help in building a nonprofit's competence, while minimizing confusion. For example, a rule to pay bills on only certain days every week may give employees the sense that there is set order and process to do certain tasks. One cannot walk in there and expect that a check be ready within minutes. Financial rules can instill confidence and controls within a nonprofit.
Accounting, taxes change throughout the years, so don't be surprised if the requirements change.
For example, starting effectively in 2018, nonprofits must prove that they can pay their bills short term. This is a new requirement of FASB, the organization that dictates accounting rules for nonprofits. So, expect some new requirements from accounting regarding this new guideline and others coming down the pipe.
Read about board issues here
Read also No more Audit Freak out
Check out the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
Also check out the book "15 Quick Tips on Becoming a Great Consultant" -- free on Kindle Unlimited