Donation Substantiation

thank_you_note1As we approach the end of the year, many organizations may experience a flurry of donations. It is important to be aware of the related substantiation requirements.

Substantiation of cash donations can be fairly straight-forward. An organization can provide a statement including the name of the organization, the amount of the contribution, and a statement that no goods or services were provided by the organization in return for the contribution.

However, if any goods or services were provided in return for the contribution, there are additional substantiation requirements. A description and good faith estimate of the value of the goods and services must be provided to the donor. For example, attendees of gala events must be apprised of the portion of the ticket price that is deductible and the portion that is nondeductible.

There are additional provisions and some exceptions to the substantiation rules. Nonprofit organizations are encouraged to become familiar with the rules. IRS Publication 1771 contains helpful information.

Nonprofit Executive Compensation

IRS Form 990 has a number of items requiring information regarding the compensation of the executives of the nonprofit organization. One of the questions asks for details regarding the methods used to establish compensation for the CEO/Executive Director.

It is often recommended that nonprofits organizations establish a compensation committee to establish executive compensation. Organizations without a compensation committee may use the executive committee for this task. Most nonprofit organizations involve the board in some way (through committee or as a whole), in order to fulfill the fiduciary responsibilities as a board member. Often this includes a board vote on the compensation.

Those charged with the determination of compensation can use a number of tools to accomplish this task. Many organizations use their human resources personnel or independent consultants to analyze comparable salaries. It is common to use various salary studies to compare the organization with other nonprofits. It is less common to compare the organization with similar for-profit entities. The analysis is most commonly performed on an annual basis.

Strong nonprofit governance includes a policy that enables the board to make fair and reasonable compensation decisions.

Preparing for a Single Audit

Under the guidance of the Single Audit Act; OMB Circular A-133, Audits of States, Local Governments, and Non-profit Organizations, nonfederal entities that expend $500,000 or more of federal awards in a fiscal year are required to have a single or program-specific audit. A single audit is an examination of the organization’s compliance with the federal requirements applicable to awards. This includes an examination of the controls in place to ensure compliance. The key to a successful single audit is to be well-prepared.

At the time a grant is first awarded, and periodically thereafter, the organization should review the applicable grant requirements to identify its compliance requirements. The grant agreement will identify many of the requirements, and the Catalog of Federal Domestic Assistance (CFDA) has additional guidance. A review of the OMB Circular A-133 compliance supplement will identify compliance requirements that may not have been specifically stated in the grant contract. OMB Circular A-122 Cost Principles for Non-Profit Organizations also provides guidance on determining costs applicable to grants.

Once the compliance requirements are identified, an analysis of internal controls appropriate to meet the objectives should be performed. Management should determine whether the controls that are in place are operating effectively. These controls should also be well documented. Using the COSO (Committee of Sponsoring Organizations) internal control framework to evaluate and document the adequacy of controls can be helpful.

As the end of the year and the single audit approaches, the organization should prepare the Schedule of Expenditures of Federal Awards (SEFA). This will help the organization get a sense of which federal programs may be audited as major programs during the single audit. A final reconciliation of the SEFA to the total award expenditures can be done when the year-end accounting is completed.

The AICPA Governmental Audit Quality Center website has two practice aids for auditees that may be helpful. The Worksheet for Identifying Federal Program Information  is intended to assist the auditee in accumulating and documenting important information for each of its federal awards. This information could be provided to the auditor at the beginning of the single audit. The Auditee Disclosure Checklist for the SEFA intended to assist auditees with preparing a SEFA that includes all of the elements required by Circular A-133. These can be accessed through the AICPA website.

Looking Behind the Numbers

Recently I had a great conversation with a board of directors about the story their financial statements are telling. In my mind, the fact that we were having the discussion and that the board was so engaged is indicative of the good work the board is doing for their organization.

Our review of the metrics that are often calculated for nonprofit organizations landed on the percentage of expenditures that are functionally allocated to program, management and general, and fundraising. While this organization’s allocation seemed reasonable and appropriate, there were a number of questions and comments as to whether the allocation to program should be higher. The thought is that this shows the organization in a better light.

Is that true? I suppose that someone uninformed about an organization and its programs and operations could conclude that a nonprofit with a higher percentage of expenditures allocated to program is “doing a better job” with their resources. But to truly understand how a nonprofit is operating, you need to look behind those numbers. Are they in the middle of a fundraising campaign in order to bring new programs on board, and therefore allocating more resources to fundraising? Are they gearing up for significant growth and wisely putting resources into the infrastructure necessary to create and sustain that growth?

Ultimately, board members need to know what the key metrics are for their organization, what story those metrics are telling, and what the reality is behind the numbers.

Board Responsibilities and Legal Accountability

The members of nonprofit boards have a number of responsibilities. One of those is addressing the legal accountability of the organization. A nonprofit must follow the applicable local, state and federal laws. These encompass issues such as governance, solicitation of funds, service delivery, personnel, and other areas. Each member of the board should be aware of the laws and regulations that govern the organization and be certain that a process is in place to ensure the nonprofit remains in compliance.

Nonprofit organizations can run afoul of legal restrictions in a number of ways. Examples include fraud and embezzlement, telemarketing scams, misappropriation of funds, excessive compensation, using charitable funds inappropriately, participating in prohibited transactions, and others. Penalties vary, depending on the nature and reason for the illegal activity. Consequences could include fines, restitution, revocation of tax-exempt status, or other actions. And of course, there may be irreparable damage to the organization’s reputation.

Nonprofit leadership requires an understanding of legal compliance. This is a complex and extensive area, and legal noncompliance is not always easily detected. Some organizations are lulled by the thought that since they are nonprofit, no one would consider doing anything illegal. Others are simply unaware of the requirements that govern their activities. Creating strong internal controls, communicating clear expectations regarding behavior and legal compliance, and employing the oversight of skilled, involved and informed board members are pieces of an effective program to ensure legal compliance.

Gift Acceptance Policies

There are many stories going around about organizations that accepted gifts which subsequently become a difficulty for the organization for a wide variety of reasons. There may be severe restrictions on the use of the gift, the gift may be expensive to maintain and difficult to dispose of, have unexpected and unwanted effects on the organization financially, or any number of other complications.


An effective tool for organizations to use is a gift acceptance policy. Having a policy aids the organization by ensuring that gifts that may cost the organization money, time or even its reputation, being able to say “no” to gifts without offending the potential donor, reducing “spur of the moment” gift decisions, and helping to educate the staff and board about issues surrounding unusual gifts.


Some gift acceptance policies are quite lengthy and technical, depending on the nature of the organization and its donors. However, the policies do not need to be complicated or address every conceivable situation. There are some standard segments included in most policies. We usually see a paragraph describing the purpose of the policy, an acknowledgement of the value of donors and their rights, a description of gifts that are acceptable, and a summary of the processes surrounding gift acceptance.


Such a policy is likely to be revised periodically to address situations that had not been previously contemplated. This is a good time to reeducate management and the board about the policy and the motivations behind it.

Effective governance and board diversity

Recently I had the opportunity to meet with the board chair of a young nonprofit organization. We discussed a number of topics, but spent the most time on how to build a board that will effectively govern this organization. While the role of a board may vary from organization to organization and as an organization moves through its life cycle, the basic tenets are generally consistent.

A board is responsible for setting the mission and the strategic direction of the nonprofit. The members of the board have a duty to understand and support the mission and to develop and implement strategies aligned with that mission. This certainly doesn’t mean that all board members will always be on the same page and agree on all issues and points. And in fact, a strong and diverse board will have many differing opinions. Building a board with a diversity of members – those with differing skills, experiences, points of view – will foster an environment that allows the organization to change, grow and adjust as circumstances warrant.

So where to start? Create a matrix of attributes, such as stakeholder representation, skills and expertise, key demographics, etc. Then begin identifying gaps and enlist current board members and friends of the organization to find potential candidates that meet the identified needs. Intentional recruitment of a diverse board is a key to effective governance.