Why Financial Rules Are Good for You

Oh no….Marcie from accounting is again asking for receipts, signatures and other stuff. Can’t she see that we’re busy?  What’s wrong with these people?  Where do they come up with these ideas? Well….there is a reason for this apparent madness and annoyance.

Many managers indeed get aggravated with demands from the accounting/financial department.  However, nonprofits have a lot to gain by following proper accounting requirements, such as requesting proper receipts or approvals. The requirements may seem a bit burdensome, but they serve important purposes within a nonprofit organization’s operations.  These requests are not to drive you nuts.

Oftentimes requirements for certain tasks are to assure that processes flow properly with enough check and balances to avoid errors or fraud. Below are a few important reasons for nonprofits to follow accounting requirements:

1- Financial requirements may be mandatory for recipients of federal and other government funding, such as demands for certain internal controls to avoid errors and misappropriations and the use of a budget. There is really no choice — either the nonprofit follows the prescribed requirements or funding stops.

2- The IRS specifically asks about financial tasks on the tax form 990, the information return filed by many nonprofits. For instance, the return explicitly inquires about the number of items reported on the form 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 financial guidelines protect nonprofits from errors and fraud. An example would be the 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. You don’t want employees charging the nonprofit for their own tech or other personal purchases.

5- Compliance with accounting requirements, including financial processes, are often evaluated by auditors to assess the risks of nonprofits. For instance, if an accounting requires monthly cash reconciliations, 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. Even by the accounting department.

6-Financial  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 of a set order in finance. One cannot walk in and expect that a check would 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 folks from the accounting department regarding this new guideline and others coming down the pipe.

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9  -First edition nominated for a McAdam Book Award.

 

 

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