Nonprofit Audits

Objectives of Nonprofit Accounting and Financial Reporting

The objective of financial reporting for nonprofit organizations are to provide information to current and potential resource providers and others in assessing (a) the services a nonprofit organization provides and its ability to provide those services and (b) how management has discharged its stewardship responsibilities, as well as providing information about (c) the organization’s economic resources, obligations, and net resources and (d) the effects of transactions, events, and circumstances that change those resources (that is, the organization’s performance or service efforts and accomplishments). More specifically, nonprofit financial reporting objectives are to:

• communicate the ways resources have been used to meet the organization’s objectives and external requirements
• identify an organization’s principal programs and their costs
• disclose the degree of control exercised by donors and funding sources over use of resources
• help the user evaluate the organization’s ability to carry out its fiscal objectives

These objectives are further refined and expanded in SFAS No. 117. According to SFAS No. 117, paragraph 4, “the primary purpose of financial statements is to provide relevant information to meet the common interests of donors, members, creditors, and others who provide resources to not-for-profit organizations.”

Groups that are particularly interested in the financial information of a nonprofit organization include the following:

• Funding sources and contributors to the organization
• Regulatory agencies
• Governing boards (board of trustees or directors)
• Beneficiaries of the services rendered by the organization
• Employees
• Creditors and potential creditors
• Constituent organizations; for example, a local chapter of a national organization