I spent the first twelve years of my professional career working for a charitable organization. Now, Harvard University and especially its Business School, where I spent six of those years, doesn’t immediately leap to most people’s minds first and foremost as a public charity, but it certainly fits the Attorney General’s designation as “engaging in charitable work or fund-raising in this Commonwealth.”

As the head of the B School’s fund-raising operation for half my time there, I was fully aware that the Mass. Division of Public Charities has more than an academic interest, you might say, in how any group goes about its charitable business. That interest includes a registration requirement (copy of the charter, articles of organization, by-laws, etc.) plus the filing of an annual financial report, the Form PC. This is a 13-page questionnaire which requires answers to very specific questions about responsibilities for the structure, management, and control of the organization, as well as details about its solicitation and use of funds. It is not a report to be completed by a clerk.

So it was with some sympathy for his potentially daunting task that I responded to the call from the Moderator of our church, Dennis Brown, a few weeks ago. In considering the Church Financial Scrutiny Bill, Dennis hadn’t even gotten as far as the Form PC: he knew that we had a potential crisis.

According to the DPC website, up ’til now “organizations which are primarily religious in purpose are exempt from the registration and filing requirement of the Division.” Senate Bill S1074 was going to change that, not only by requiring submission of the Form PC but (for charities between $100-500,000 in gross support and revenue) a CPA’s Review Report as well, at an expense of perhaps $10,000.

Having served for 20 years on the Finance Committee for the Church, I have some perspective on the problems that this would create for our church and most other churches. Beyond the challenge of collecting and reporting organizational information every year, almost every church in the state would have to improve its financial management.

Unlike many non-profits, our church handles the financial basics – budgeting, accounting for, and reporting our revenues and expenses – well. But most non-profits lack the experience and the administrative resources to do an effective job of financial control. This involves things like segregating responsibilities, holding people accountable, tracking donations, establishing and maintaining cash collection procedures, and so on.

The problem is compounded by volunteerism: donors, members, friends all have a stake in the organization. Sometimes their enthusiasm translates into very effective pro bono work for the group. Often it does not, and when significant amounts of money are involved, the consequence of amateur management can be embarrassment or even malfeasance.

What can board members, non-profit professionals, volunteers, members, and donors do to make sure that their financial interests are protected in the administration of their organizations? The following elements tend to characterize fiscally responsible and responsive non-profits:

1. At least one active board member is a finance/accounting professional.

2. An outside CPA has been involved to lend continuing expertise.

3. A least one member of the organization has an understanding of fund accounting (see following).

4. The organization operates with a budget and reports its results regularly against the budget.

5. The books and records – including fund-raising records – are maintained on an accrual basis using software specific to non-profits.

6. Donations are promptly deposited, acknowledged, and accounted for.

7. Restricted gifts are segregated from general funds, used only for their restricted purposes, and appropriate stewardship is provided to the donors.

8. Endowment funds are invested conservatively with annual draw-downs in the current environment not exceeding 5%.

9. There is a division of responsibility in the financial area so that no one person handles receipts, disbursements, and reconciliations.

10. There is regular (at least every five years) turnover – at the Board level and among the staff – in both oversight and administration of the accounting and financial management.

Prior to the House vote on the issue, Dennis asked for my point of view on S1074. In responding, I thought about some charities whose fund-raising and administrative expenses are reported to be disproportionate to the good that they do. I considered the absence of strong fiscal discipline in many non-profits of my experience (but not the Harvard Business School!). I told Dennis that the Legislature should require that information-gathering get started. People should be told that accountability is going to be phased in during the next five years.

Despite my sense that churches simply would not comply with this massive reporting requirement imposed on them all at once, everybody should be informed and aware of what’s going on right at home, in their own churches. The fact that they’re religious or spiritual organizations doesn’t guarantee integrity in their ends or their means.

Lead time is necessary to inform and train people, to gently move aside genial Mr. Smith or Mrs. Jones (who’s been doing the books ineffectively for years), to identify and install computers and useful software, and to commit to a reporting and control system that reassures members and friends that their contributions are doing what they intended.

S1074 was not the right bill. But it was the right instinct. Think about it the next time that you pass the collection plate.

Alligator Bites

Familiar with running their companies on the basis of a single income statement, many business people are uncomfortable with the concept of “fund accounting.” But, as cpafinder.com observes, “The concept of separate record keeping for separate funds is not exceedingly difficult, but care must be taken that fund accounting-based financial reports are presented in a straightforward manner, since separate reporting on a large number of separate “funds” quickly becomes confusing.

“For instance… a local YMCA organization may have a capital project fund, a special program fund, a scholarship fund, and an office and operations fund.” In this case, contributions to each fund must be segregated from general operating funds and pay only for expenses directly related to that fund’s purpose. “Within this concept, an individual fund becomes an accounting entity unto itself, and financial records and controls are established with a specific fund focus…

” In fund accounting, it is standard practice to distinguish between a general fund and special purpose funds. The general fund normally provides the resources required to operate the unit or agency on a day-by-day basis. The wages of employees, building maintenance and general office expenses are items that are then chargeable to a general fund. By contrast, special funds are established to yield accountability for separately identifiable activities which make individual control procedures necessary or desirable.”

Draining the Swamp

The National Center for Charitable Statistics asked nonprofit organizations what the greatest challenges facing non-profit organizations are today. Here is a breakdown of the most popular answers:

• Finding the money for the mission: 46%

• Getting the word out about the organization: 17%

• Staffing: 7%

• Strategic planning/setting priorities: 3%

• Managing donor/funder expectations: 2%

• Building public trust: 1%

• Obtaining and/or incorporating the technology needed to accomplish the mission: 1%

• Complying with state and federal requirements for the organization: 1%

– quoted in the 2006 Book of Lists, p. 194 Boston Business Journal

Clearly, despite the issues floating around in the adjacent article, there’s a lot of swamp to be drained before mandated reporting surfaces as a major concern…