How a new accounting standard reduces administrative burdens and helps prevent misuse
Non-profit organizations (NPOs) — a global industry that includes 10M+ entities — lack a unified standard for reporting their finances, unlike their for-profit counterparts.
That might not sound important on the surface. But imagine if you owned a coffee shop. Some customers buy the coffee right away because they want that particular kind of coffee. But others want a tour of the factory where the coffee is produced. Others want to go to the coffee grove to see the actual beans. And yet others want to inspect the water filtration process. How much coffee would you be able to sell while trying to meet all those customer demands?
That’s what it’s like for NPOs, who have to fill out multiple types of forms and follow different processes to share different kinds of information, all to prove they’re a reliable investment. The diversity and complexity of reporting also creates barriers for funders, each of whom has to come up with their own way to validate a potential grantee’s financial soundness.
But yet, the answer isn’t straightforward. The regulation and transparency of NPOs is a delicate balancing act. Too much regulation can result in government overreach — using non-compliance with regulations as a pretext for closing organizations. On the other hand, too little regulation leaves gaps that can be exploited.
The benefits of INPAS
How can balance be achieved?
That’s where IFR4NPO, an initiative to develop the world’s first Internationally applicable Financial Reporting guidance for NPOs, comes in. Led by Humentum, a global nonprofit focused on strengthening operations, and the Chartered Institute of Public Finance and Accountancy in the UK, the team developed what is now called the International Non-Profit Accounting Standard (INPAS). The entire process was highly collaborative, including direct input from more than 80 people in 27 countries, as well as feedback from more than 500 responses through public consultations.
We recently talked to someone directly involved in creating safer operating environments for NPOs to get their perspective. Here are two benefits of INPAS from Yona Wangala, the director general for the Civic Advisory Hub (CAH).
Benefit #1: Reduce the administrative burden
NPOs face two huge and related burdens when it comes to finances.
Why does this matter?
“The NPOs in particular might have very limited administrative or core support,” said Wangala. “You might find they have only one finance executive or officer who cannot observe all these reporting requirements yet also do due diligence work for different or divergent donor requirements.”
Given CAH’s focus on addressing issues that disrupt operations, they fully support the work of INPAS to implement the world’s first internationally applicable financial reporting standard for NPOs, similar to what for-profit organizations have had for years. When that becomes fully adopted, organizations in the nonprofit sector will have one set of standards to follow, saving time and reducing administrative burdens (including overhead costs).
Benefit #2: Mitigate the risk of financing terrorism
Standardized financial reporting isn’t just about efficiency—it’s also a tool to prevent financial misuse.
“If you look at recommendation eight of the Financial Action Task Force, it highlights areas of vulnerability,” said Wangala.
Risks include:
- Unverified funding sources that could be linked to illicit activities.
- Illegitimate groups who can register as nonprofits to avoid scrutiny.
How does INPAS help mitigate those risks?
“Clear and transparent sources of funding can be guided by the reporting system that Humentum and others are advocating for,” said Wangala.