Misreporting on 990s Is Poor Form for CPAs.

Recent studies by the Chronicle of Philanthropy, the National Center for Charitable Statistics at The Urban Institute and others have found widespread misreporting of fund-raising costs by nonprofit organizations. According to the Chronicle's May 18, 2000 issue, more than a quarter of the 4,889 nonprofit organizations receiving $500,000 or more in gifts from private sources claimed to have spent nothing on fund raising. These organizations accounted for 90 percent of the total donations to charities of all sizes reporting to the IRS on Form 990 for 1996.

In reality, many of these organizations spent hundreds of thousands, and in some cases, millions of dollars on fund raising--a fact that their audited financial statements accurately reported. Yet their government information returns, Form 990s, claimed that they spent zero on fund raising. Other studies have found the percentage of nonprofits claiming zero fund raising to be as high as 35 percent and include many prominent organizations.

Some organizations appear to have legitimate explanations for their Form 990 reporting, for example an affiliated entity might report consolidated fund raising. Many others, according to the Chronicle's investigation, merely choose not to follow IRS rules. One explanation for such underreporting is a fear that potential donors will think the nonprofit organization spends too much on its fund raising and may decide not to contribute.

WHY SHOULD WE CARE?

CPAs prepare more than 80 percent of all Form 990s. And a number of the nonprofit organizations reporting zero fund-raising expense told the Chronicle that they did so based on advice from their CPAs.

In addition to the fund-raising problem, estimates of Form 990s being filed with incomplete or inaccurate information range as high as 50 percent or more. It is tempting to think that such problems are found primarily in the 20 percent of returns that CPAs do not prepare, or that it must be only a few bad-apple CPAs stinking up the barrel. However, a number of IRS and state charity officials with whom I have spoken are convinced that the problem of substandard reporting is widespread--and that CPAs are deeply complicit in the problem. Two recent presidents of the National Association of State Charity Officials have told me of their frustration in trying to make regulatory sense of incomplete and inaccurate Form 990 data. Marc Owens, former director of the IRS' Exempt Organizations Division, also has confirmed the existence of such problems.

"Well, so what?" you might ask. "Form 990 is just a regulatory report anyway, isn't it? Nobody pays any attention to it, right?" Wrong. Form 990 is filed with the IRS and with many states, including California. State charity officials pay close attention to Form 990s in monitoring the actions of nonprofits. Public policy decisions are based on Form 990 data at federal, state and local levels. For example, decisions by regulators regarding new types of nonprofit regulation are based in part on Form 990 data. Congress and state legislatures use such data in making laws governing the nonprofit sector. When we contribute to bad data, we contribute to bad public policy.

IMPROVEMENTS NEEDED

A primary function of Form 990 is that of a public disclosure document, but it is hardly user-friendly. Form 990 has evolved to meet a complex web of statutory and regulatory requirements of the IRS and many states that rely on it for part or all of their required nonprofit reporting. However, Form 990's complexity is not an excuse for it to be completed inaccurately. IRS staff, state charity officials, CPAs and representatives of the nonprofit sector meet annually in an ongoing effort to improve it.

Form 990s are being published on the Internet. Philanthropic Research Inc., and The Urban Institute's Center for Charitable Statistics have a contract with the IRS to publish Form 990s on PRI's Web site, http://www.gaidestar.org. Some 281,000 public charities now have at least one year of their Form 990s on the Guidestar Web site. While the publishing of such data on the Internet, and the data's quality, have been the subjects of criticism, the data has been greatly improved and will continue to improve with time.

Guidestar also offers a service that allows nonprofits to publish additional information about themselves to present a more complete picture of their operations and accomplishments. The Center for Charitable Statistics has worked with Form 990 data for years and maintains a database for use by researchers, policymakers, practitioners and the public.

As CPAs, we have a major role in maintaining and improving the health of the nonprofit sector. Judging by the quality, or lack thereof, of nonprofit information we help produce, some of us are not living up to the high standards of performance that our profession demands of us. We pride ourselves as auditors. We also should take pride in helping our nonprofit clients and employers prepare Form 990s that are as accurate and informative as possible. Anything less is beneath us.

Gale L. Case, CPA, is a principal with Rothstein, Kass & Co. in Beverly Hills and a CalCPA past president. He currently chairs the CalCPA Group insurance Trust and the California Nonprofit Quality Reporting Project.