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Why non-profits need better financial reporting

For the non-profit sector, the economic crisis amplified a shift that was already underway: the need to be much more transparent in terms of financial performance. Today, more corporations, individuals, and foundations are considering their support of non-profits as social investments and expecting tangible results backed-up by effective financial reporting.
The Voluntary Sector Reporting Awardsare helping to advance better and more transparent financial reporting in the non-profit sector. This is the third year of the awards program that was created in 2008 by the CA-Queen’s Centre for Governance, a partnership between the Queen’s School of Businessand the Institute of Chartered Accountants of Ontario. PricewaterhouseCoopers Canadais the exclusive corporate sponsor of the awards program.
To find out more about the need for better financial reporting I spoke with Sara Oates, an associate partner in PWC’s Audit and Assurance Group who specializes in working with not-for-profit organizations.
In what ways have macro issues such as the economic crisis changed the needs for financial reporting by non-profits?

The combination of increased media scrutiny, shrinking donations due to the recession, and donors who want to make more educated decisions about which organization they donate to has led to a need for much more financial transparency from non-profits. In this context, good financial reporting will act as a point of differentiation from other non-profit organizations who are also seeking support from donors.
Are corporations expecting to see a more clearly defined social ROI from their support of non-profits ?
Today, donations are being made much more strategically and there’s a trend for corporations to be doing more than just giving money. Corporations want to be involved with non-profits that are aligned with their corporate values and have placed a higher priority on developing long-term relationships to further corporate aims and objectives. This means that non-profits need to be more transparent about their financial performance as needed to build engagement with their corporate partners.
What is the relationship between effective financial reporting and program performance in terms of social change?
There is often a strong relationship between good financial management and the strength of an organization to provide effective services. It’s also important to remember that financial reporting shouldn’t be considered in isolation. Other important pieces of the picture should involve information on the results of programs and services, commentary on governance, and involvement of volunteers. The best examples are organizations that demonstrate their commitment to being transparent by being upfront about the challenges they face in all areas as well as sharing their success stories.
How about the growing trend for non-profits to develop social enterprises – related businesses that support the mission of the organization?
We’ve seen and increase in social enterprises over the last two years. This fits in with an overall trend for non-profits to be working more collaboratively and to be more innovative. In terms of reporting, how the social enterprise contributes financially and otherwise to the overall mission of organization must be transparent to donors and public.
When a corporation is looking at supporting a charitable organization, what should they pay attention to in terms of financial reporting?

A level of comfort can be obtained about the availability of financial information – after all, if and organization is willing to take a corporation or individual’s money, one would hope they would be willing to share how that money is spent. However, financial measures are not an indicators of effectiveness in every situation – many exceptional organizations which do impressive work in addressing important social issues struggle because of a lack of support as the funding of charities is not always based on results – often it depends on a charity having the affluent connections or resources to fund marketing campaigns. The use of non-financial measures is a much more important factor in the non-profit sector than with profit-oriented corporations and financial information should not be considered in isolation.