Transparency Wins, 28-12 The new For by ahu93919


									The Leading Business Publication For Nonprofit Management                                  SEPTEMBER 1, 2007

 STREETSMART NONPROFIT MANAGER                                                           THOMAS A. MCLAUGHLIN

Transparency Wins, 28-12
The new Form 990 makes a point of governance

         eldom does a bureaucratic blank       lines provided it’s time to create a new       people formerly in one of these positions.
         form foretell the future. But         mission statement. And in case you miss           Smartly, the IRS also asks for back-
         when the Internal Revenue             the point, the heading of the first 10 lines   ground information on the same topic
         Service (IRS) released its new        is “Activities and Governance.”                from related entities.Then it goes on to
Form 990 this past summer it sent an                                                          ask Sarbanes-Oxley-inspired questions
unmistakable message about what it             SWEEPING CHANGE                                about whistleblower and records reten-
considers most important for nonprofit            The magnitude of the change is              tion policies, board minutes, audit poli-
public charities. That message can be          sweeping. To get an idea of why, use a         cies, collections of artwork, sponsorship
summed up in three words: leadership,          measurement that media types call “col-        of donor advised funds, and a whole
governance, and purpose.                       umn inches.”This is simply a linear meas-      range of other questions. Not until page
    This is a departure from the past for      urement of each column of text. The            5 does it get around to asking the old
the IRS.To understand why,one need only        new Form 990 has only one “column,” so         front page questions about revenue.
put the old Form 990 side-by-side against      the maximum number of column inches               You get the picture. If this form is
the new one and analyze the differences.       per page is about nine. The old form           finalized to look anything like this draft,
    The old form was truly a tax form,         asked for 12 column inches worth of            it will dramatically alter what nonprofits
exactly as its lineage implied. Up-front       information about leadership, gover-           report and the way they report it. To
information included numbers that              nance, and purpose, with the rest being        describe the changes succinctly, streets-
would have been drawn directly from            devoted to straight financial data, factual    mart CEOs will be paying a lot more
the audited financial statement, such as       things such as corporate name and              attention to their organization’s Form
types of revenue, total expenses, and net      address, and miscellaneous information.        990 than in the past. The relatively
assets (or fund balance, as it used to be      The new form asks for 28 inches of lead-       innocuous end-of-the-year ritual in finan-
called). On the second page came the           ership, governance, and purpose.               cial reporting will become a whole-
call for expenses and a thumbnail sketch       Transparency wins, 28-12.                      agency undertaking.
of what the programs and services were            Those accustomed to the old form and
all about. The balance sheet came next,        its subtle messages (“tell us about the        WHAT TO DO
and then some largely non-financial ques-      money!” the first page used to scream)             As a first step, every nonprofit
tions about an eclectic mix of subjects.       will need to do some adjusting. By the         organization should look at the
    In effect, the first three pages were a    time you’ve answered 10 questions the          redesigned form. It can be found at:
re-arranging and selective use of data         subjects have ranged from mission to           h t t p : / / w w w. i r s . g o v / p u b / i r s -
from the audited financial statements.         activities to unrelated business operations    tege/form990coreform.pdf
The underlying message was subtle but          to executive and trustee compensation              IRS press material suggests that the
strong: Give us the numbers first and the      and total numbers (including ‘independ-        new form should not cause most organ-
soft stuff second, if at all.                  ent’ trustees, a term more familiar to the     izations to experience a “change in bur-
    The priorities are now different, start-   for-profit sector).                            den.”This might well be true, especially
ing with the first line. In the old form the      These first questions are just a hint of    after a few filings. But, the nature of the
first numbered line asks for total contri-     what’s to come.The second page is devot-       existing burden will change for all. The
butions.The new draft’s first line asks for    ed entirely to compensation received by        IRS acknowledges that the burden might
the mission. Although it’s probably acci-      executives, board members, and inde-           increase for those with complicated
dental, this change is a good test for any     pendent contractors. Alumni of these           compensation practices and related cor-
streetsmart manager.If you can’t describe      ranks get drawn in as well, since the ques-    porate structures.The IRS intends to
your organization’s mission in the two         tions specifically ask for the data about                                continued on next page

                 Reprinted with permission of THE NONPROFIT TIMES September 1, 2007, Vol. 21, No. 16
  For subscription information, please visit For subscription information, please visit

continued from previous page                  school test, with the “correct” answer         ability, and that the real enforcers will be
begin using the new form in FY 2008.          embedded in the question.The message           the outsiders who decide not to donate to
   For small and/or relatively uncompli-      is, do your homework on executive com-         you until you adopt these good practices.
cated entities with modest financial          pensation. In practice that will probably          Also, it cannot have escaped the IRS’
operations, the change might not be           mean a salary benchmark study by an            attention that the new form provides a
troublesome. For example, the compen-         independent party, along with appropri-        handy road map for data gathering by
sation disclosures generally apply only       ate documentation of board delibera-           enterprising reporters who already have
to levels exceeding $100,000. The cur-        tions on the matter.                           their suspicions about a particular non-
rent cut-off is $50,000.                          Similarly, many of the mission, gover-     profit in their media market.
   It is hard to imagine the actual act of    nance, and activity questions can be               In the end, this is one of those situa-
data collection will be difficult for large   answered effectively if the organization       tions where the inconvenience, extra
and complex organizations. Many of the        has done some reasonably good thinking         work, and maybe even embarrassment
requirements embody best practices that       about its strategy. Other questions about      for a few is the price that will be paid for
have been informally adopted anyway.          making certain documents and records           strengthening the sector. Virtually every
The real issue is not how easy or hard it     available to the public can be answered        kind of institution in the U.S. economy
will be to collect the data.The real issue    simply by making them available on             gets publicly knocked down and dirtied
will be the reaction to what is disclosed,    your Web site.                                 every now and then, including nonprof-
and what the streetsmart manager can do           Enforcement is a lurking question in       its. A decline in reputation and financial
about it in advance. Happily, following       this form. The Form 990 was and is an          well-being can come from this ritual
good practices will usually steer you clear   informational return. There are no             roughing-up.
of the potential gotchas.                     explicit financial stakes the way there            The oil industry and the pharmaceu-
   For example, there is a simmering          are with a personal tax return. So if your     ticals can absorb the blows well enough.
tension about executive pay in all cor-       mission statement is ill-conceived and         Nonprofits usually can’t, and if the
porations, nonprofits included, and this      poorly written, or if you don’t have a         increased disclosures mandated here
will fan those embers. Several areas deal     written whistleblower policy, will the         can head off some public unpleasant-
with executive compensation, but Part II      IRS do anything about it?                      ness for some organizations and
asks “did the process for determining             The answer has to be, probably not. It     strengthen the rest, it should be a trade-
compensation include a review and             is inconceivable that the IRS would use its    off worth making. NPT
approval by independent members of            limited resources to pursue, say, a non-
the governing body, comparability data,       profit that admits it doesn’t have a written   Thomas A. McLaughlin is a national nonprofit management con-
and contemporaneous substantiation of         conflict of interest policy. More likely is    sultant with Grant Thornton in Boston. He is the author of the
the deliberation and decision?”               that the form is meant as a quiet lesson in    book Nonprofit Strategic Positioning (John Wiley and Sons,
   This is like a heavy-handed middle         current thinking about nonprofit account-      2006). His email address is

                 Reprinted with permission of THE NONPROFIT TIMES September 1, 2007, Vol. 21, No. 16
  For subscription information, please visit For subscription information, please visit

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