The Power of an Accounting Convergence

One of the most exciting things happening in recent years is a “convergence” of the three sectors:  government, business and nonprofit.  Some private businesses now include a social mission in their business model (a solar energy company); nonprofits are using business models to create sustainable organizations; the federal government is thinking about an office of social innovation.  The old, separate sectors are being swept aside by a new idea that each sector has something to offer and by combining the social focus of the nonprofit sector; the business acumen, wealth, and innovation of the private sector; and the tremendous resources of the public sector you have a palpable ability to solve the challenges we face.

One area where I think convergence could be particularly powerful is in accounting practices.  I’ve talked before about the ideas of adding equity to the nonprofit balance sheet, nonprofits raising growth capital like businesses can, and moving nonprofits towards the for-profit understanding of necessary and justified costs.

All of these ideas demonstrate how currently the nonprofit sector is put at a disadvantage by not having access to powerful financial tools that the for-profit sector is well versed in:  growth capital, justified costs, equity.  On the flip side, nonprofits are also hindered by strings and restrictions on the money they do receive.  Take government grants for example.  There was a fascinating New York Times Op-Ed this week by two University of Texas at Austin accounting professors arguing that banks receiving TARP money should be held to the same requirements that nonprofits are when they receive federal aid.  They argue that TARP banks should be required to practice “fund accounting,” where a separate set of books is kept for funds given to a specific project or activity, just as nonprofits are.

Any nonprofit accountant, executive director or development director will tell you that fund accounting can be a nightmare.  Indeed as the professors point out:

Executives of banks that have received TARP cash have said that it is too hard to account separately for how they spend their federal dollars. Money is fungible, they argue, and therefore they cannot readily distinguish between outlays of their own resources and those provided by the government. But that’s the type of doublespeak that would get the head of a town’s homeless shelter thrown in jail. If bankers are unable to segregate cash by source and specifically account for expenditures, why are they in charge of banks in the first place?

The underlying assumption of nonprofit fund accounting is that nonprofits can’t be trusted to effectively and honestly use the money they have been given.  The banks that have received TARP money have already demonstrated their inability to use the money as it was intended, so fund accounting going forward might be the answer.

But what the op-ed unintentionally demonstrates is how crazy the strictures we put on nonprofits are.  Why is the assumption that for-profit businesses can be trusted to spend government money correctly, but nonprofits cannot?  Does it stem from an assumption that nonprofits tend not to know what they are doing when it comes to the business side of things?  Or is it an assumption that nonprofit work must have more safeguards in place?

What ends up happening is that we are weakening the financial position, and thus the productivity, of a key sector.  We are limiting the tools at their disposal and making those resources we do give them cumbersome and costly to use.

What underlies this mistrust of the nonprofit sector?  And how do we change these rules and structures so that nonprofits are given the capital, without the strings, that will allow them to successfully address issues?  We need to move towards a convergence of accounting practices whereby nonprofits are given more of the tools the for-profit sector enjoys and the for-profit sector is called to account in a more meaningful way for the resources they receive.

Tags: accounting, Convergence, fund accounting, Nonprofits, TARP