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.
You hit the nail on its head. It’s time for accounting convergence. The common factor in all this is public accountabilty for all of them deal with public money. While a common accounting practice is important, the auditing process is just as important if not more important. The current economic meltdown would not have occurred if the auditors have exercised due diligence and rang alarm bells to plug leaks long before the dams broke. While my job deals with innovation, I think irresponisble innovations for short-term display illusions of profits and to boost performance figures are the source of the current crisis. Financial innovations should only be implemented if and when the corporate leaders are imbued with a sense of social responsibility and a set of accepted human values. Yet these people who created misery for billions of people are enjoying the fruits of their ill-gotten gains. Why?
“What underlies this mistrust of the nonprofit sector?”
The mistrust is rooted in the fact that the ultimate fiduciary authority in a nonprofit lays with a volunteer board, with little accountability and virtually no (personal) consequences for bone-headed decisions, weak fiscal oversight, lack of “fundamentals” on which to base decisions, and an often laissez-faire attitude about the ethical imperatives of stewardship. And these are problems that exist regardless of size.
Fund accounting is a pain, but for a donor or grantor, fund accounting is one of the few checks in place that ensures that their gift, grant or donation is being utilized to achieve the social objective the donor intended.
Too often, “fungible” means “fudge-able.” The answer here is to place the same fund accounting requirements on banks that are on nonprofits. Force them to prove to us that they are using our taxpayer “donations” for the purposes for which they were intended. If they can afford seven-figure bonuses, they can afford some six-figure accountants to track funds usage.
Renata Rafferty
Rafferty Consulting Group
http://www.raffertyconsulting.com
twitter.com/RenataRafferty
Renata,
Thanks for your comments. I agree with you that banks need more oversight in their use of federal dollars, but I don’t agree that nonprofit fund accounting is acceptable. I agree with you that because of weak boards nonprofits have little oversight. I believe we should change that problem instead of forcing nonprofits to practice costly and inefficient accounting practices. Overhauling the requirements of nonprofit boards could do much more than simply ensure that money is being spent according to mission and donor requirements. It could much more effectively harness an often underutilized resource.