Complying with new nonprofit reporting standards

From the Sept/Oct 2019 issue of New Jersey CPA magazine (njcpa.org/newjerseycpa)

By Brigid D’Souza, CPA, and Lori Buza, Esq., Saint Peter’s University      

When new reporting standards are released, CPAs must assist their nonprofit clients or employers in adapting to the changes in order to comply with the law and his or her professional responsibility. The CPA has a duty to understand the new rules, and, depending on the scope of responsibility, to aid the nonprofit in adapting to those rules.

AICPA Code of Professional Conduct

The AICPA Code of Professional Conduct requires CPAs to exercise due care, meaning that he or she must:

• Observe the profession’s technical and ethical standards
• Commit to learning and professional improvement to ensure a mastery of the services discharged 
• Be diligent in discharging responsibili­ties to clients.

Thus, in exercising due care, CPAs must understand and adapt to new reporting rules with respect to their nonprofit clients or em­ployers. This includes advising the nonprofit in written terms, such as in the engagement letter or as defined pursuant to the role that the CPA has within the organization (e.g., if the CPA is employed by the nonprofit in an accounting or financial role).

Technical standards and guidance

It is essential that CPAs keep current with technical standards and guidance to understand the baseline rules, any subsequent changes and the gap that a client or employer must then bridge to ensure go-forward compliance. Key considerations the CPA should discuss with the nonprofit include potential impact to both internal and external processes and formulation of a communications plan.

Financial accounting and reporting

The Financial Accounting Standards Board’s ASU 2016-14 — “Topic 958: Presentation of Financial Statements of Not-for-Profit Entities” is one example that illustrates a CPA’s duty. This new rule was enacted to improve reporting around net asset classifi­cation requirements presented in both the financial statements and the notes to the financial statements. It aimed to provide better disclosure around the nonprofit’s liquidity, financial performance and cash flows. ASU 2016-14 requires changes to the financial statements and the notes. Here are some questions that CPAs should consider and discuss with nonprofit staff when adapt­ing to a new reporting rule:

• Do accounting systems require updat­ing to track data in a manner and meth­od that supports new disclosures?
• Are all requisite stakeholders (e.g., man­agement, staff, volunteer support staff, board trustees) impacted by the new rule in terms of work process?
• If stakeholders’ processes are impacted by the new rule, is there a training and implementation plan in place to ensure that the nonprofit can migrate to the new rule and ensure compliance?
• Does the new rule impact the financial reporting in such a way that board trust­ees must be educated as to the purpose and the resulting impact of the change?
• Is nonprofit management aware of the cost-benefit ratio of adapting to the new rule, including investments needed to create new, or adapt existing, business process, as well as penalties of noncom­pliance to the new rule?

The CPA’s responsibilities will vary depending on the scope and nature of the issue with the employer or client.

Federal tax reporting

In addition to financial reporting standards, the CPA should be cognizant of any potential tax reporting impact. Nonprofits must adhere to annual filing mandates to maintain tax-exempt status, as well as the applicable Form 990 to report annual activity. For instance, in May 2017, the AICPA Tax Executive Committee sent a notice to the IRS with proposed changes to Form 990 based on ASU 2016-14. The 2018 Form 990 instructions referred to ASU 2016-14, but the form itself was not yet updated to reflect the AICPA’s pro­posed changes.

The CPA should take care to both understand a rule change as well as the purpose of it. This may help stakeholders of the nonprofit understand the costs and benefits of the changes required to be in compliance with the new reporting standards. At the same time, the CPA ensures compliance with his/her duty and professional responsibility.

Lori A. Buza, J.D., is an attorney at law, N.J. & D.N.J Cts., chair of the Department of Accountancy & Business Law and full professor of business law at Saint Peter’s University. Brigid D’Souza, CPA, MBA, is an assistant professor in the Department of Accountancy & Business Law at Saint Peter’s University.