Asking about serving not-for-profit organizations is bit about asking someone if they like birds. Do you mean flightless or capable of flying, carnivorous or seedeaters, land-based or aquatic, solitary or gregarious? There seem to be as many different categories in the nonprofit world: religious organizations, tribal groups, private schools, foundations, health services.And that's just a beginning. But there are some principals that cross most boundaries that firms getting into NFP services need to know—or maybe need to be reminded of if they are already in the market.
"The first thing you have to think about with not-for-profits, which is non-intuitive, is that they are in business. They need the same types of services that businesses need," says Chris Cole, a senior technical manager responsible for the NFP initiatives of the American Institute of CPAs. "They need to hire, pay people, pay supplies, report financial results."
But from there, things get complex very quickly. NFPs worry more about protecting the reputation of their organizations. The laws and regulations affecting NFPs "are not necessarily as cut-and-dried as the rules of the SEC," Cole says. And laws and regulation come at the practitioner from different directions. "A lot of laws and regulations are more likely to be local laws," he continues. "That is probably one of the pitfalls for practitioners." However, he notes for those who master these intricacies "it is an opportunity for them to provide value-added services."
The fact that commercial accounting and NFP accounting differ also present challenges for firms that want to enter the field, says Greyson Seymour, training operations supervisor for Abila, the Austin, Texas-based company that markets the Abila MIP nonprofit accounting line.
"The biggest pitfall is the assumption that because they [practitioners] are familiar with for-profit accounting that will be able to quickly and easily into the not-for-profit space," says Seymour. "That is always a little bit of a surprise. It ends up being a much larger investment that they originally thought." Seymour, who works with firms to make the transition to NFP accounting, says that "They are often surprised that the accounting rules are different and the terminology is different."
Firms need to understand accounting, of course. "But that is not enough. You need to understand grant management," Seymour says. "You are going to be interacting with the grant management department. You are going to be working with the fundraising people." Clients will also be querying accountants and resellers concerning how they will interact with grant management and fundraising teams.
"The more of that big picture you can get. The better off you are," he says.
For those firms that sell software, there is also a different buying cycle in the nonprofit market. "The decision-making process is longer and more complicated than in the commercial market because they are shepherds of other people's money so they are more conservative in spending," says Peter Stam, owner of AccuFund.
The Needham, Mass.-based company markets nonprofit and government accounting and fundraising software. Because NFPs are often more mission-oriented than financially oriented they have more constituencies. "They need approval from their board and they are looking to their employees," Stam says.
Firms serving NFPs need knowledge of applicable rules and standards, such as FASB 117 and standards for net asset accounting. Then there is CFR 25, formerly OMB Circular A-133, which spells out rules for grant management for organizations that receive federal grant funding. Accountants that have NFP clients that fundraise must also understand that process.
For firms, the job is "Harder than they think on accounting side," he says. Stam notes that he sees AccuFund clients that hired new CFOs who think that they can save their organization money by purchasing less expensive software. "I have seen in a number of cases, a new controller or CFO comes in and says, "We can do it in QuickBooks,'" says Stam. "They last about a year and either they are gone, or they call us."
The low-cost packages cannot provide the reporting tools NFPs need. "The thing you have to understand in reporting is that there are more audiences," Stam says. The NFP has the public audience for its accounting and audits, but there is also internal board reporting, reporting for internal capabilities, fund reporting. "The fact that you have to serve them all is very different from what people are used to in a commercial setting," Stam says. "The software they deal with, by default, is more complicated than commercial software."
Steps that aid in delivering NFP services include organizing a separate practice for that market. "The accounting firms that have a NFP practice or a separate government practice have an advantage," he says.
And firms need to do more than simply say they want to serve nonprofits "Getting into NFP is not quite descriptive," says the AICPA's Cole. "You want to narrow down to a final level of precision, perhaps you are interested in doing universities."
From an engagement perspective, firms must be careful in how they define the work they will perform. "My personal experience is that in small NFP audits there tends to be engagement creep," Cole continues. Engagement creep can quickly undermine profitability. "You come in to do that audit and find the bank rec isn't done and journal entries aren't posted. All of a sudden, you look back and wonder, 'Did I just cause a problem for independence of myself? I did a whole lot more work I cannot bill for.'"
Also practitioners may agree with an NFP's mission and that can cause problems. "It's easy to really want to help them—and go ahead and do that work," Cole says. And because NFPs often have limited funds, "practitioners have to be aware of underbidding" in order to obtain cost-conscious clients," he says.
With the much regulatory and business knowledge required, training is a given and there is a lot of help and education available.
"When I am working with partners, our focus is to train them on our software, which by default gets them into the realm of not-for-profit accounting," says Abila's Seymour. "I recommend, if they don't' have a lot of NFP or governmental accounting experience that they look into the CPE providers."
Those providers include the AICPA which has its June NFP conference, which draws 1,500 to 1,800 attendees annually, Cole says. "The goal is to cover every area of interest and for any area that we see as problematical for practitioners and clients."
The AICPA also has a variety of publications including several under title Not-for-Profit Entities, such has the Audit and Accounting Guide, Best Practices in Presentation and Disclosure and Financial Statements.
Despite the complexity, there is lots of opportunity for firms, including small ones. "I have done audits as small as $360,000 in annual revenue and up to about $20 million," Cole says. He warns that in picking up new NFP clients "The experience is going to cost the small practitioner in terms of profit, if you can do the first year at cost, that is what you are going to go for," he says.
