Opinion: New harmonized financial reporting will truly shift power

The power dynamic between donors and grantees is inherently imbalanced, with donors often imposing their own unique due diligence requirements, budget and reporting formats, and audits. To secure funding, prospective grantees must comply with these varied demands, and for those with multiple donors, these requirements multiply significantly.

A core principle of locally led development is the commitment to directly deliver 25% of funding to civil society organizations, or CSOs, that are closest to the challenges, solutions, and communities in need. However, this target remains largely unmet. For instance, the U.S. Agency for International Development reported only 9.6% of its direct funding went to local partners in the financial year 2023. A common explanation for this shortfall is that CSOs lack the capacity to adequately manage existing compliance burdens. While some advocate for increased training to bridge this gap, a more strategic approach would streamline and reduce these compliance requirements.

The root of this challenge lies with the donor community. When funders fail to adopt a unified approach, grantees bear the brunt. As highlighted in Humentum’s “Breaking the Starvation Cycle” research report, two-thirds of grant agreements with CSOs did not cover the full costs of administration, hindering their ability to meet donor compliance demands. At the same time, a 2015 study by CCAB found that 72% of respondents from 179 countries favored harmonized financial reporting for nonprofits. While calls for reduced compliance burdens and standardization are not new, they are growing louder and more insistent.

There is promising news on the horizon that could ease this compliance burden. The International Non-Profit Accounting Guidance, or INPAG, stewarded by Humentum and the Chartered Institute of Public Finance and Accountancy through the IFR4NPO initiative, is set to be released next year. Developed over five years with input from 80 contributors across 29 countries and the engagement of over 14,000 individuals, INPAG is poised to become a recognized accounting standard for nonprofits, akin to those used by businesses and governments. It has undergone four rounds of public consultations, receiving input from 147 organizations and 598 individuals across 63 countries. This guidance offers a global and unified approach that could be adopted by funders, CSOs, and governments alike.

How can INPAG shift the power dynamic?

Facilitated due diligence. Streamlined due diligence will make it easier for grantees to access funding. With INPAG, a funder reviewing a grantee’s audited financial statements will find much of the required information readily available, reducing the need for additional requests. Key details such as registration status, governance, mission, size, impact, indirect cost rate, and financial health will be presented consistently. (There are also other complementary initiatives underway to streamline due diligence processes).

Harmonized grant budget and reporting formats. INPAG’s harmonized expenditure headings will simplify the preparation of accountability reporting. CSOs can uniformly align their costs across funders, saving vast amounts of wasted time and reducing the risk of errors or fraud. This builds on efforts from the Money Where It Counts Initiative in 2019, carried out under the “Grand Bargain” — the pledge to shift 25% of funding and decision-making to local organizations. Currently, the INPAG effort includes a donor reference group of 12 private, bi- and multilateral donor agencies and donors including the U.S. Agency for International Development, the U.K.’s Foreign & Commonwealth Office, and the Oak Foundation have signed the Donor Statement of Support.

Audit and assurance. By enhancing transparency and accountability, INPAG can foster trust and eliminate much of the administrative burden on nonprofits in accommodating multiple donor audits. The same systems and processes get audited over and again for each subset of transactions. This administrative burden can be especially felt when human resources are limited. Efforts end up being redirected to responding to donor requests, rather than delivering on programmatic commitments. With INPAG, entity (organization-wide) and project-specific audits can be integrated and interlinked, creating a more efficient process.

Accountability without micromanagement. Through INPAG, nonprofits will be able to provide transparency and accountability for unrestricted funding they receive from donors. There is a growing push for funders to provide flexible funding so that CSOs can be agile in responding to their own priorities. However, there is still some resistance to “trust-based” philanthropy when it is misperceived to be giving without requiring accountability. INPAG bridges this gap by providing an international framework that all organizations can use to demonstrate the stewardship of resources to achieve their missions.

Looking ahead

It is for these reasons and more that Humentum has chosen to advocate for the use of INPAG as a central pillar of our financial year 2025-2027 strategy. We believe that INPAG represents a transformational “public good,” whose benefits will become increasingly evident as it gains widespread adoption. We are eager to collaborate with early adopter donors to integrate this new reporting format into their standard practices, positioning them ahead of the curve in streamlining and harmonizing financial reporting. Additionally, we will support CSOs and grantee organizations in aligning their financial systems with INPAG, enabling them to fully capitalize on the advantages of this new guidance.

INPAG signifies a major advancement in enhancing the quality and reliability of audited accounts while easing the reporting burden for nonprofits and funders alike. We urge grantmakers and government regulators to embrace this opportunity and swiftly implement the guidance upon its 2025 launch. In doing so, they can help shift power to local organizations and guide the funding ecosystem toward true equity, resilience, and accountability for all.

Support the adoption of INPAG. Join us in changing the way the sector standardizes financial reporting.