Best Practices for Transparency in Financial Reporting for Nonprofits

By Michael Cecere, CPA, MST & Julie Schwallie, CPA, MBA

Gray, Gray & Gray, LLP

To retain the trust and support of donor and the public, nonprofit organizations must maintain high levels of transparency, particularly in their financial reporting. Transparency helps to build trust and demonstrate that the organization is using its resources responsibly and effectively.

Key Principles of Transparent Financial Reporting

Transparent financial reporting for nonprofits should be guided by the following key principles:

• Completeness: Financial reports should provide a comprehensive overview of the organization’s financial activities, including revenue, expenses, assets, liabilities, and net assets.
• Accuracy: Financial reports should be accurate and free from errors. This requires strong internal controls and regular audits or reviews.
• Timeliness: Financial reports should be released in a timely manner, allowing stakeholders to make informed decisions about their support for the organization.
• Clarity: Financial reports should be presented in a clear and understandable manner, using plain language and avoiding technical jargon.
• Accessibility: Financial reports should be easily accessible to the public, typically by posting them on the organization’s website.

 Enhancing Transparency

In addition to adhering to the key principles outlined above, nonprofits can implement best practices to further enhance transparency in their financial reporting:

• Adopt a clear and consistent accounting framework: Use a well-established accounting framework, such as Generally Accepted Accounting Principles (GAAP) or the Financial Accounting Standards Board’s (FASB) Accounting Standards for Not-for-Profit Organizations (ASC 958), to ensure consistency and comparability in financial reporting.
• Provide detailed disclosures in the notes to the financial statements: Use the notes to provide additional information about the organization’s financial activities, such as its revenue sources, expense allocations, and investment policies.
• Obtain an independent audit of the financial statements: Engaging an independent auditor to review the organization’s financial statements adds credibility and assurance to the financial reporting process.
• Make financial statements easily accessible to the public: Post financial statements, including the organization’s Form 990, on the organization’s website in a downloadable format.
• Use plain language and avoid jargon in financial reporting: Use clear and concise language that is easy for non-financial stakeholders to understand. Avoid using technical accounting terms or jargon.
• Provide comparative financial statements for multiple periods: Present financial statements for multiple periods to allow stakeholders to track the organization’s financial performance over time.
• Use charts and graphs to visually represent financial information: Use charts and graphs to make financial information more visually appealing and easier to understand.
• Conduct regular reviews of financial reporting policies and procedures: Regularly review and update the organization’s financial reporting policies and procedures to ensure they are aligned with current accounting standards and best practices.
• Seek professional guidance when necessary: Consult with accounting or financial professionals when needed to ensure that the organization’s financial reporting is accurate, compliant, and transparent.

Transparent financial reporting is essential for building trust with stakeholders and demonstrating that a nonprofit organization is using its resources responsibly and effectively. By implementing the key principles and best practices outlined in this blog, nonprofits can enhance their financial transparency and strengthen their relationships with donors, funders, and the general public.