Enhanced compliance requirements, restrictions on the use of grant funds, tightening federal regulations, and rising donor scrutiny has created an environment where accountability and transparency are more important than ever in the nonprofit community.
If you’re using commercial accounting software like QuickBooks to manage financial operations, accountability and transparency can be extremely difficult to demonstrate. Here are a few reasons why.
True Fund Accounting
At the most basic level, commercial accounting software is essentially designed to help you track assets and measure profit and loss. But nonprofits have social and legal responsibilities that extend beyond the balance sheet. That’s because donations or grants often come with strings attached. That is to say, the grantor or donor can designate that the funds be used for very specific purposes and/or programs. You now have a legal obligation to keep these monies segregated and ensure they’re used for the intended purpose.
That’s why nonprofits use Fund Accounting – something that’s extremely difficult to do with commercial software. Things can really get out of hand as your organization grows in both the number of records you maintain and in the diversity of funding sources. That’s when fund tracking activities move to Excel spreadsheets, opening the door to costly errors, adverse audits, and potential loss of funding.
Measuring, Reporting, and Audit Trails
Beyond tracking just financial information, nonprofit organizations typically need to report on program results and outcome measures. Again, something that’s difficult to achieve with commercial accounting software.
When it comes to reporting, commercial accounting often assumes that fiscal years end in the same months each year, nonprofits often have to report to several different audiences, each with different information requirements and reporting timelines.
Another issue with commercial accounting software is the lack of audit trails and accountability. This is particularly important in a large nonprofit that needs to demonstrate controls against internal fraud.
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Contact Us if you’d like to discuss, in more detail, the pitfalls of commercial accounting software for nonprofits.