According to a new study from the University of Notre Dame, accounting errors in nonprofit organizations are common, more common in fact than in for-profit organizations.  Although nonprofits of all sizes tend to make these mistakes, the smaller the nonprofit, the more frequently these errors occur.  As Jeffery Burk, Associate Professor of Accountancy at Notre Dame and author of the study, notes:

“Nonprofits of all sizes tend to have high error rates.  The rate of errors does vary with the size of the nonprofit’s audit firm. The clients of the largest eight audit firms in the country have a significantly lower rate of errors.”

What Are the Most Common Nonprofit Accounting Errors?

According to Burk, most of the accounting mistakes that occur in nonprofits are the result of limited resources, the lion’s share of which go to mission-related rather than administrative functions, like accounting.  That said, here are 5 of the most common nonprofit accounting errors:

1. The lack of formal accounting procedures:  many smaller nonprofits don’t maintain a documented procedures manual which details the ways in which, for example, donations should be accepted and deposited.  Essentially, these nonprofits are “flying blind” without the internal checks and balances to avoid common mistakes.
2. Overreliance on accounting software:  most accounting software does a good job of tracking accounts, but it’s a mistake to rely inordinately on that software because it’s only as good as the employees who manage it.  Nonprofits still need to review the accuracy of entries and reconcile their bank accounts.
3. Misreporting unrelated business income (UBI):  many nonprofits don’t fully understand unrelated business income, and for this reason, frequently fail to report it, or to report it in its entirety.  Because this mistake is so common, the IRS tends to take special care in reviewing this aspect of tax filing.
4. Incorrectly classifying employees:  many smaller nonprofits don’t have the resources to accurately distinguish between employees and independent contractors.  When a nonprofit mistakenly classifies a regular employee as an independent contractor—and for this reason doesn’t withhold payroll taxes—it can face often costly financial penalties.
5. Not backing up data:  the smaller a nonprofit, the less likely that it takes the time to provide data backup safeguards.  This makes nonprofits vulnerable in the event of a natural disaster or cyber-attack.  Nonprofits should ensure they’ve taken the steps necessary to protect their data automatically and often.

Conclusion

If your nonprofit is making one or more of these mistakes, you need to assess their cost and weigh that against the cost of working with experienced tax and notary services professionals.  To learn more about the ways our accounting, bookkeeping, payroll, direct deposit, tax and notary services can help you make your business more productive and profitable, contact us today.