The International Journal
of Not-for-Profit Law

Volume 2, Issue 3, March 2000

A quarterly publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor


Introduction: "Codes of Conduct for Partnership in Governance: Texts and Commentaries"
By Tatsuro Kunugi and Martha Schweitz

On the Establishment of Social Organizations Under Chinese Law
By Ge Yunsong

Australia's Nonprofit Taxation Reforms
By Myles McGregor-Lowndes


Codes of Conduct for Partnerships in Governance: Text and Comments
Edited by Tatsuro Kunugi and Martha Schweitz
Reviewed by Catherine Shea

Case Notes

Central and Eastern Europe: Croatia | Poland | Serbia

Middle East and North Africa: Egypt

Newly Independent States: Azerbaijan

North America:
the United States

South Asia:

Country Reports

Asia Pacific:
| East Timor |
New Zealand
| the Philippines | Vietnam

Central and Eastern Europe: Regional | Kosovo | Romania

Latin America:
Regional | Belize | Brazil | Venezuela

Newly Independent States:
Russia | Ukraine

Middles East and North Africa: Sudan

North America:
| Mexico |
the United States

South Asia:

Sub-Saharan Africa:
Cameroon | Kenya |
Sierra Leone
| South Africa | Tanzania | Zimbabwe

Western Europe:
France | Germany |
the United Kingdom

Self Governance

Law and Governance-- A Lesson in Limits
By Leon Irish and Karla Simon

Trends in Self-Regulation and Transparency of Nonprofits in the U.S.
By Robert O. Bothwell

The Role of Governing Boards in Fostering Accountability
By Crispin Gregoire

Financial Implications Affecting Nonprofit Nongovernmental Organizations Today
By Michael A. Freedman

International Grantmaking

Grantmaking by U.S. Foundations in Canada: A Canadian Lawyer Provides a Plain Language Primer
By Blake Bromley

Community Philanthropy

Community Philanthropy Initiative of the European Foundation Centre

Transatlantic Community Foundation Network

New Website


General | Brazil | Kenya | Russia

- - - - - - - - - -

Editorial Board

Subscription Information

Previous Issues

ICNL Homepage


Financial Implications Affecting Nonprofit Nongovernmental Organizations Today

By Michael A. Freedman
CPA, Gelman, Rosenberg & Freedman

This paper is written from the practitioner’s viewpoint, based on daily observation and interaction with more than 300 client-nonprofit non-governmental organizations. It is intended to illustrate through actual experience the fact that existing regulations are adequate and that nonprofit organizations have already taken the initiative to implement stronger measures needed to self-regulate.

Adequate Regulation

Current and proposed accounting regulations governing nonprofit organizations (NPOs) are sufficient to provide guidelines for responsible management. Nonprofit board members and managers are realizing that if they consistently meet their responsibilities, they will effect the self-regulation that maintains public confidence and provides proper governance. On the other hand, increased government regulation contradicts the mission and purpose of these organizations. Voluntary organizations are non-governmental and should continue to function with self-regulation.

Focus on Self-Regulation

Through my presence at board meetings and my management consulting interaction with NPO executives and board members, I have had the opportunity to observe the reality of nonprofit self-regulation efforts today. It is clear to me that nonprofit non-governmental organizations have the tools necessary to effect proper self-governance and that positive steps have been taken to refocus their accountability to their “owners.” This renewed emphasis on self-regulation is being initiated voluntarily by nonprofit managers and their board members and is evidenced in several ways:

§Boards are initiating top down reviews of their voluntary organizations, beginning with the close scrutiny of governing documents, including the original by-laws. By-laws establish the legal framework to be followed by NPO’s to govern the organizations. Within my client base, I have see many boards establish governance committees to review and revise existing by-laws. The trend has been to reduce the number of board members to a size that is more appropriate to govern. Boards of less than 20 members are more effective that those that exceed 50-60 members. These large boards, often made up of many community leaders and large donors, have not contributed to the effective governing of NPOs. Frequently, the Board meetings are poorly attended and effective management decisions cannot be made. By reducing the number of board members and establishing standards for attending meetings, NPOs have succeeded in bringing together a group of people who are concerned and interested in the governance of their organization.

Board committees have been scrutinized and, where appropriate, changed. New governance committees have been established. These committees have initiated ethics and conflict of interest policies to be followed by board members. The governance committee generally acts as a group to insure that board members meet their obligations to other board members and to the organization.

Board Oversight 

As mentioned earlier, more boards have improved their financial oversight of their NPOs. Board committee structures have been changed to include audit committees and more active finance committees. This has meant more emphasis on internal controls, including improved awareness by management of fiscal oversight responsibilities. Improved oversight translates into more resources focused on program expenditures; more control over expenditures translates into more efficiency.

Following the lead of for-profit corporations, NPOs now frequently establish audit committees. These committees, made up generally of experienced financial leaders, meet with the independent auditors several times during the year. They assist in developing the audit plan and meet with the auditors at the conclusion of the audit to review the financial results. They expect the auditors not only to review the past year’s financial results, but also to discuss the trends. Part of this interaction is devoted to reviewing the auditors’ evaluation of the NPO’s accounting policies and procedures. Suggestions for improvement are an expected outcome from audit committee meetings and auditors’ comments are solicited. Additionally, audit committee members are asking the independent auditors to evaluate the qualifications of the finance staff. This evaluation is then used to assist the board in determining the reliability of the financial information received from the finance staff. This additional input from the organization’s independent accountants facilitates board members’ informed performance of their fiduciary responsibilities.

Improved understanding of their fiduciary responsibilities has also led more Boards to establish finance committees. The finance committee responsibilities include the review of the organization’s annual operating budget, cash flow forecast and capital improvement budget prior to the beginning of the fiscal year. Meeting several times a year, the finance committee sets the financial agenda for the board. This, in turn, requires management to provide accurate financial data for board review. The finance committee is also charged with the responsibility of insuring that the budget conforms to the strategic plan’s goals and objectives. Financial analyses and budget comparisons are now reviewed routinely. As a result, financial issues are identified earlier and are therefore addressed earlier. Improved information has facilitated the Board’s ability to make more accurate and timely financial decisions, which keeps the organization operating more efficiently and effectively.

Accountability to Donors

Voluntary organizations are being forced to be more accountable for the manner in which they spend their resources. Donors have become more restrictive with funding. General-purpose grants from major donors and foundations have been reduced. More grants now come with both financial and programmatic restrictions. Our recent work with clients reflects that grantors no longer appear to be willing to support the NPO’s operations. Increasingly, grants are being restricted for specific program purposes. This limits the amount that grantees can spend to support operations. Funders have also increased the reporting requirements. Grantees are more frequently asked to provide detailed financial and programmatic reviews. The financial reports are organized by budget categories thereby reducing the grantee’s ability to spend these funds on non-grant programs. These restrictions, i.e., grants that limit expense allocations, have forced voluntary organizations to be more focused on the efficiency of their operations. Overall, this improved accountability has resulted in more streamlined organizations that focus on community needs.

Grantors have also become more restrictive in limiting the overhead costs that they are willing to reimburse. NPO’s are therefore faced with the issue of controlling their indirect costs or loosing money (the difference between the rate provided by the grantor and the organization’s actual rate) on foundation grants. Given this prospect, grantees have become more diligent in controlling indirect costs.

Public Awareness

The general public has intensified its scrutiny of voluntary organizations by questioning and becoming involved in the way organizations spend their resources. Questions target topics such as overhead rates, fund raising expenses, and the portion of funds spent to achieve program results. The public has been able to obtain this information through a variety of sources. More organizations are including financial data on their web sites. New IRS regulations have made it easier to obtain financial information through requests for copies of tax returns. Other technology advances have made it possible for internet-wide dissemination of financial information concerning nonprofit organizations, i.e., Guidestar. Because of this increased exposure, voluntary organizations are taking measures to improve their control over financial activities and are strengthening their communication with the general public. This has had the effect of improved accountability and therefore better management and control over resources.

Outside Influences

To assist in the scrutinizing process, outside rating boards have been more visible. Local media has reported on intensified efforts of watchdog agencies. Oversight by the Better Business Bureau and local United Way and Combined Federal Campaigns has demanded improved accounting and reporting measures. Each NPO has published guidelines defining the limits that should be spent on fundraising and indirect costs. These limits focus NPOs on the need to spend their operating dollars efficiently and wisely. They also provide the public with an indication of the portion of their donations that will be spent for program purposes. By reviewing the actual results, donors are more likely to donate to organizations that spend the major portion of the gifts on program activities.

More NPOs are embracing the codes of ethics promolgated by organizations such as Independent Sector and other local nonprofit organizations such as the Maryland Association of Nonprofit Organizations. Organizations that have “self-certified” demonstrate their commitment to good governance and to full disclosure.

Other external factors have contributed to the clarification of financial reporting for nonprofit organizations. In the last few years, the AICPA has standardized the accounting presentation of all nonprofit organizations (FASB 116 and 117). This has created a uniform system for financial review and comparison of nonprofit organizations in spite of differences of purpose and programs. Proposed accounting rules will also remove some of the inconsistencies in recording fund raising costs. This will again improve nonprofit accountability to the public.


Increased government regulation can generate more rules, but the key to improved operational integrity depends on the ability of board members and managers to consistently meet their oversight responsibilities, to demand accountability from each other and to focus on the mission and purpose of the organization and the intentions of its financial supporters. I believe that organizations understand the need for transparency and self-regulation. Further regulations will not achieve additional benefits.


Copyright 2008 The International Center for Not-for-Profit Law (ICNL)
ISSN: 1556-5157