The Quality of Financial Reporting by Nonprofits

Brief #4 from the series "Nonprofit Overhead Cost Project"

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Financial information has become a popular ingredient in assessing the performance of charities. Donors, funders, and watchdog agencies make extensive use of audited financial statements and publicly available IRS Forms 990 as part of their assessments. Many users pay particular attention to the proportion of total expenditures used for administration and fundraising. They also look to annual surpluses and deficits as measures of the quality of financial management, or in some cases, financial need.

But how good are the numbers on which these assessments are based? When we examine them closely, do we find serious errors? What are the sources of inaccuracy? Do nonprofits face unique issues that ordinary accounting principles do not address? Will users who analyze the more readily available Form 990 data reach the same conclusions about an organization as those who review audited financial statements?

To study these issues in depth, we conducted detailed discussions with nine organizations. The organizations ranged in size from under $1 million to over $40 million in annual expenditures. They represented various fields of work, such as health, education, and the arts. This brief highlights five groups of findings relating to financial reporting that emerged from these case studies.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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