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Unified Financial Reporting System for Not-for-Profit Organizations
A Comprehensive Guide to Unifying GAAP, IRS Form 990 and Other Financial Reports Using a Unified Chart of Accounts
By Russy D. Sumariwalla Wilson C. Levis John Wiley & Sons
ISBN: 0-7879-5213-3
Chapter One
The Pivotal Role of IRS Form 990 in Financial Reporting IRS FORM 990 is central to this guide-for several reasons. First, it is the information return that all not-for-profit organizations (except those with under $25,000 in annual gross receipts, churches, and certain other religious organizations) must file with the IRS annually. It is one of the reports required by law, with penalties for those who neglect to file. The law does not require typical annual reports from not-for-profit organizations. Even financial audits by independent accountants are not required by law except in special circumstances. But Form 990 must be filed if a not-for-profit organization wants to retain its tax-exempt status.
Second, Form 990 serves as the basic annual report to over thirty-five state charities offices. Prior to the 1980s, most states required a separate report to be filed with state charities regulation offices, and states used different forms to obtain similar information. The IRS, state charities regulators, and representatives of the not-for-profit sector collaborated in an effort to promote changes to Form 990 so that states would accept it in lieu of their own informationreturns. This effort was most beneficial to not-for-profit organizations who raised funds across the nation and had to file different returns in different states.
Third, Form 990 serves as the fundamental data source for not-for-profit sector research, and it provides data in a relatively uniform, consistent format. Most of what we know about America's not-for-profit sector is based on information from Form 990. It is the only information available on many not-for-profit organizations.
Fourth, the information contained in Form 990 is mostly consistent with GAAP. In addition, it provides information not found in audited financial statements of not-for-profit organizations. The information in Form 990 is different from that found in GAAP reports and is used for different purposes. It covers both qualitative and quantitative data and, when prepared accurately, completely, and truthfully, is a treasure trove of information. It is conceptually comparable to the reports that registered for-profit corporations are required to file with the Securities and Exchange Commission.
Finally, Form 990 is a public report and potentially a powerful means of ensuring and demonstrating accountability. Not only must not-for-profit organizations file this report with the IRS, but they are also required to make it available to anyone who demands to see it. On June 8, 1999, new IRS regulations regarding not-for-profit organization disclosure came into effect, making Form 990 even more public, and copies of some not-for-profit organizations' Forms 990 are now accessible at the click of a mouse, on the organizations' Web sites. In the foreseeable future any interested party will also be able to obtain a copy of the Form 990 of any not-for-profit organization from a Form 990 Web site.
For all of these reasons it makes sense for not-for-profit organizations to use a unified financial reporting system aligned with Form 990 and GAAP as promulgated by AICPA and FASB.
Awareness of Form 990's importance and of problems associated with Form 990 returns has increased over the years. In 1998, recognizing the pivotal role of Form 990 in public disclosure and accountability, the Greater Washington Society of CPAs (GWSCPA) and the California Society of CPAs (CalCPA) adopted a "Quality Form 990 Resolution." This resolution was reviewed and edited extensively by more than fifty sectorwide participants at the 1998 Annual Form 990 meeting. It urges key constituencies to take action to improve the quality of information reported on Form 990, reflects on the current state of Form 990 returns. Several other CPA societies and major national organizations are considering adoption of this resolution. The full text of the resolution is presented in Exhibit 3.1.
EXHIBIT 3.1 Quality Form 990 Resolution
Co-sponsored by The Greater Washington Society of CPAs And the California Society of CPAs.
October 14, 1998
"Quality" means readability, reliability, comparability, consistency, completeness, accuracy, timeliness, decision-usefulness, accessibility, and cost-effectiveness.
Whereas there is broad nonprofit sector support for public disclosure and accountability; and
Whereas while audited financial statements of nonprofit organizations provide comprehensive financial information and disclosures and offer the highest level of assurance by independent auditors, many nonprofit organizations that must file Forms 990 with IRS do not have their financial statements audited, and, consequently, the data source that provides the broadest and most accessible base of information about the nonprofit sector is Form 990; and
Whereas federal and state laws require (a) public disclosure by way of the uniform federal/state Form 990 and other reports; (b) that Forms 990 be prepared in accordance with the instructions; and (c) that nonprofit organizations make their Forms 990 readily available to the public; and
Whereas many of the nonprofit sector standards and codes of ethics require compliance with the law; and
Whereas fiduciary duties imposed by state law on board members require compliance with the law; and
Whereas for over 30 years, leading nonprofit sector groups have lobbied in support of federal and state public disclosure laws including the 1996 amendments to federal law requiring increased accessibility to Forms 990 (widely-available provisions) and increased penalties for non-compliance with the Form 990 instructions and/or disclosure requirements; and
Whereas Form 990 is increasingly becoming the primary instrument for public accountability by nonprofits especially via the Internet (e.g., as a way of meeting the new IRS widely-available disclosure regulations); and
Whereas nonprofit organizations need their Forms 990 to present their organizations as fairly, accurately, and completely as possible, especially to prospective contributors; and
Whereas Form 990 is the principal source of data on the nonprofit sector that is used for (a) public policy purposes of all kinds, (b) comparative statistics for governance and management, (c) sector advocacy, (d) research of all kinds, and (e) marketing useful products and services by for-profit and nonprofit organizations to the sector; and
Whereas reports by users of Forms 990 and studies of the quality of Forms 990 filed with IRS and state charity offices indicate that numerous errors are made by nonprofit sector organizations and their accountants in the preparation of Forms 990; and
Whereas there is extensive noncompliance with respect to the disclosure requirements of Section 6104(e) of the Internal Revenue Code which requires nonprofits to make their Forms 990 readily available to the general public;
Therefore, let it be resolved that, to improve the quality of Form 990 reporting and reduce the cost and burden, the sponsors of this resolution make 12 quality Form 990 recommendations:
1. That the accounting profession employ the necessary quality assurance procedures to be able to prepare Forms 990 efficiently, accurately, completely, consistently, and on a timely basis; and establish procedures that assure the proper and timely disclosure of Forms 990;
2. That nonprofit organizations assure that their Forms 990 are prepared by competent professionals accurately, completely, consistently, and on a timely basis; have their Forms 990 reviewed, before they are filed, by officers or a committee of their board of directors and, when there are significant changes from prior Forms 990, by knowledgeable legal counsel; have their boards of directors learn how to read and understand Form 990 and use it as an essential internal control document for fulfilling fiduciary duty; and implement procedures to assure proper and timely disclosure of their Forms 990;
3. That national, state, and local nonprofit sector and subsector organizations, umbrella groups, and other associations of nonprofit organizations, as part of their ethics, standards, accountability, and public policy programs, encourage their respective constituents to prepare their Forms 990 accurately, completely, consistently, and on a timely basis, and to properly disclose their Forms 990 by adopting and implementing those parts of this Quality Form 990 Resolution that are relevant to them;
4. That IRS pursue electronic filing of Forms 990 and placing of all the public sections of Forms 990 for all filers on an IRS Form 990 Web Site and promote its use world wide;
5. That IRS and state charity officials seek the participation of the nonprofit sector and professional groups in federal and state efforts to identify and publicize common reporting errors and to enforce compliance with public disclosure laws related to Forms 990;
6. That accounting software suppliers develop and provide software products and services, including implementation of the model chart of accounts for not-for-profit organizations, that enable users of their software to prepare Forms 990 accurately, completely, consistently, and on a timely basis;
7. That nonprofit academic centers and technical assistance providers develop and provide educational and training tools and services that enable their nonprofit financial management students and clients to be able to prepare Forms 990 accurately, completely, consistently, and on a timely basis, and to understand and comply with the requirements for proper and timely disclosure of Forms 990;
8. That institutional donors (e.g., corporations, foundations, United Ways, federal and state government agencies) include Forms 990 (along with audited financial reports when available) in their application guidelines and grant reporting requirements and encourage their grantees to comply with Form 990 reporting and disclosure requirements;
9. That charity review groups request and use copies of Forms 990 as a routine part of their review, evaluation, and reporting activities and encourage the nonprofits they report on to comply with Form 990 reporting and disclosure requirements;
10. That information centers-via the Internet and otherwise-request and use copies of Forms 990 as a routine part of their data collection and reporting activities, and encourage the nonprofits they report on to comply with the Form 990 reporting and disclosure requirements;
11. That national, state, and local nonprofit sector advocates of ethical practices and full public disclosure and accountability, together with their public policy counterparts, organize Quality Reporting Collaboratives-by state and by subsector-that involve the accounting, legal, and fund-raising professions, technical assistance providers, academic centers, software suppliers, charity review groups, grantmakers, state charity officials, nonprofit database developers and users, and groups interested in assuring that Forms 990 are reliable and comparable, are prepared consistently, completely, and accurately, and are properly disclosed to the public in a timely fashion; and
12. That corporate and foundation funders interested in and concerned about nonprofit accountability, ethical behavior, public policy, and/or oversight consider funding programs and projects that implement various aspects of these recommendations for improving the quality and reducing the cost and burden of Form 990 reporting.
Source: Copyright (c) 1998, The Greater Washington Society of CPAs and the California Society of CPAs. Reprinted with permission.
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Excerpted from Unified Financial Reporting System for Not-for-Profit Organizations by Russy D. Sumariwalla Wilson C. Levis Excerpted by permission.
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