Opinion: Nonprofits need an international standard for financial reporting

Janez Lenarčič, who oversees the crisis management portfolio at the European Commission, recently caused a stir when he said the biggest barrier to localization is the administrative capacity of local actors in “accountability, transparency [and] sound financial management.” But is the lack of capacity the primary cause, or is it the colossal task of meeting multiple financial reporting requirements set by international funders? Many of us in the humanitarian and global development sectors are involved in partnering with NGOs and other nonprofit organizations to implement programs and deliver shared goals. Due diligence checks are part of the — ideally mutual — trust-building process and typically include a review of audited annual accounts. If you have ever struggled to make sense of the financial statements of a nonprofit organization or NGO, you are not alone. Outside a handful of countries that have national standards to guide nonprofit financial reporting, the accounts can look wildly different from one organization to the next. Comparable aches and pains in the private and public sectors have been alleviated in the last five decades by international financial reporting standards. Few songs have been written in praise of accounting standards, but the improved quality and consistency have increased the international flow of funds and supported the building of trust in those sectors. Many are surprised that there is no equivalent international accounting standard that meets the nonprofit sector’s unique needs, which include grants with restrictions, assets that don’t generate revenue, and the classification of expenditure in a meaningful and consistent way to facilitate comparison and analysis. Few songs have been written in praise of accounting standards, but the improved quality and consistency have increased the international flow of funds and supported the building of trust. --— In that context, it’s not surprising that individual funders necessarily fill the gap with their own formats. This leads to a multiplicity of requirements, further complicating the environment for nonprofits and creating a greater risk of misleading information, inconsistencies, and even fraud. The complexity also makes strengthening financial management harder for accountants, trainers, accounting software providers, and others. How can they design solutions for international scale when there is such a variety of accounting and reporting practices? And as we make long-overdue progress on decolonization, localization, equity, and inclusion, is it appropriate that the financial reporting requirements are so dominated by the needs of stakeholders in the global north? How would northern governments and nonprofit regulators react if foreign governments and funders were the primary force shaping the accounting and reporting of their domestic nonprofits? Not only is the system inequitable, but it is not working. Users of financial statements protest that they cannot find the information they need, such as reserves income or overheads, in an organization’s annual reports. Nonprofits preparing financial reports also complain about wasteful duplication of effort with respect to due diligence and audits, as well as the high compliance burden, even as they are pressured to minimize overheads. Research in 2014 showed that 72% of survey respondents from 179 countries agreed that an international standard for the sector would be useful. The International Accounting Standards Board considered expanding its scope to include nonprofits but ultimately decided against it. In 2019, the International Financial Reporting for Non-Profit Organisations project was launched to meet this need. The initiative is led by Humentum and the Chartered Institute of Public Finance and Accountancy, with input from the International Accounting Standards Board as an official observer of the technical advisory group. Individuals from 110 countries are involved so far, including national standard-setters, donors, international and local nonprofit organizations, regulators, auditors, and members of civil society. The same rigorous due process used for existing standards is being deployed to build respected and credible guidance that can bring nonprofit accounting and financial reporting to an equivalent professional standing as in other sectors. Major international funders are also committed to being part of the solution. A donor reference group has been created involving the U.S. Agency for International Development, the U.K. Foreign, Commonwealth & Development Office, the World Bank, and others. This forum creates an opportunity for donors to give input to the guidance development process. We are at an important stage of the project. A consultation paper, released in January, is open for responses until July 30. It addresses key issues like: What information do readers of nonprofit financial statements actually want? Should the reports include nonfinancial information? Analysis of the responses will be used for developing concrete proposals and releasing draft guidance in 2023, which will again go for global feedback. We are committed to engaging diverse stakeholders from every region in the development and consultation processes. If you are a funder, nonprofit, or other stakeholder, this consultation is a chance to shape the future of financial reporting so that it is relevant to your needs. The project is not lacking in ambition or complexity. But we believe the sector desperately needs a more equitable, functional system of financial reporting.