No matter the size of a nonprofit or its mission, accurate financial reporting is critical. However, nonprofit organizations often make accounting mistakes. In a 2015 study, public charities reported a 60% higher error rate than publicly traded corporations. The most common accounting errors made by nonprofits include:
Lack of Formal Accounting Procedures
Every organization, no matter how small, should have formal, detailed accounting procedures in place. The accounting manual should outline policies and procedures for every accounting task, from accepting donations to processing cash disbursements and payroll. Anyone who performs any accounting function should be trained in the procedures.
Not Reporting Unrelated Business Income
One of the most common mistakes nonprofits make is failing to accurately report unrelated business income (UBI). The IRS defines UBI as income from a trade or business activity which “is regularly carried on [and] is not substantially related to furthering the exempt purpose of the organization.”
Another common error is misclassifying employees as independent contractors. This is important because organizations must withhold (and pay) payroll taxes on employees’ wages, but are not required to do so for independent contractors. If the IRS finds that independent contractors should be classified as employees, the organization could face penalties.
Not Backing Up Data
Many organizations neglect to back up their accounting data. All nonprofits should ensure that their data is secure and is frequently backed up. Without backups, all your accounting records could be lost in the event of a natural disaster or a computer system failure. Cloud-based services are a good option for automatic, safe, off-site backups.
Relying on Inexperienced Volunteers
Most nonprofits have tight budgets, and many assign bookkeeping functions to volunteers or to staff without accounting experience. This is often a costly mistake. Accounting errors can lead to audits and penalties from the IRS. They also make a negative impression on potential donors. Financial reporting and tax preparation should be handled by a CPA or a seasoned bookkeeper with nonprofit experience.
Contact us to learn more about the accounting mistakes nonprofits make and how we can help.