Accounting in Non-Profits: Expert Interview

non-profit accounting

Working as an accountant for non-profits and charities allows you to bring your technical business skills to a good cause and contribute to a goal that you’re passionate about. Accounting careers in non-profits can range from full-time positions to part-time Board members or ad-hoc help. To get a better understanding of the accounting in charities, we spoke with OSU and Fisher College of Business Professor Brian Mittendorf, who also runs the excellent blog Counting on Charity. Here are the 3 big things we learned from Brian about accounting in non-profits.

Brian Mittendorf

  1. Accounting in Non-Profits is EXCITING

For most accountants, the process of audits and tax advice for traditional commercial (for profit clients) is relatively routine. Yes, there will be interesting issues in complex cases, but many clients are well-funded and practiced at their accounting art. Furthermore, outside oversight, from industry analysts to regulatory groups, places close scrutiny on these operation, making sure they play by the rules.

In contrast, the non-profit sector is somewhat less scrutinized, more resource constrained, and subject to complex regulations that not everyone clearly understands. While it isn’t the ‘wild west’, it’s an environment where accountants with a good understanding of the basic rules can make a big impact.

As just one example, Brian talked us through recent news coverage of the Red Cross. He explained that when the Red Cross claims that 91c of every dollar spent goes to their programs, people assume that this means 91c goes into relief efforts. In reality, this figure includes education and other costs that can be allocated to the program expense category. While the Red Cross was in-line with the law, there was a difference between public perception and accounting reality, and only those who really understand the accounting mechanics in non-profits can explain the discrepancy. The correct interpretation of a non-profit’s financial results can mean the difference between well-run organizations, poor management, or even out-right fraud.

Most recently, the worst kind of this behavior surfaced with the Cancer Fund of America, in a $187M fraud case. Their accounting wizardry bent the rules to appear larger and more efficient than they were, subsequently garnering more support from potential donors. Brian says to imagine “if someone donates $100 to you and you spend $100 on the charitable program, then you look very efficient. If a person gives you $100 worth of inventory and you give it to another non-profit, and then they give it onto another non-profit, you see a chain of organizations that each look much more efficient.” The result is that they look large and efficient, although they are really neither and could be using the money for ulterior motives.

While this last case is extreme, it shows the kinds of puzzles accountants can crack in the non-profit sector. These cases are all similar to those that Brian has his students study in class, and he says that “it’s a lot harder for students to find audit failures or fraud in the for-profit sector than in the non-profit sector.” It’s an area where your average accountant can have a big impact.

  1. It’s all about efficiency

 Understanding accounting rules is critical for a non-profit organization, and applying these rules impacts the organization’s daily activities. For instance, with fundraising mail that is distributed to houses across the United States, you will often find educational material folded into the message of the fundraising request. It produces neither the best possible fundraising pitch, nor the most appropriate educational pamphlet, but it’s still done very deliberately by the industry at large.

The underlying cause is that, when a non-profit includes educational material in its fundraising efforts, it can allocate some of the cost of the mailings to its program spending category. The more cost it can allocate to the program category, the more efficient the non-profit looks to the outside world. This is not an isolated incident, but a practice used by the entire industry. Brian neatly explains that “how you record it impacts how organizations behave, not just the other way around.” It’s a great example of how critical good accounting knowledge is to the non-profit sector, and the big impact that the right accountants can have on an organization’s daily operations.

This idea of efficiency (measured by program expense ratio) dominates the industry. Brian says that “it’s a somewhat crude measure. It’s an entirely accounting construct, but although there is a lot of interest in alternative measures, it is not easy to find something that works”. In reality, each business requires evaluation in the same way a publicly traded entity does, to understand the true nature of their operation hidden in the numbers.

  1. Career paths are unclear but the passionate will find a way

While it’s clear that the non-profit sector has a need for accountants, both working in the non-profits themselves and sitting outside as analysts, the career path for graduating students is less clear. The reality is that the options are much less structured than more traditional public accounting paths.

“It’s much less defined than the traditional Big 4 career placement” says Brian. While many of his students have non-profit aspirations, the less standardized career options keep them in more traditional firms. However, Brian continues by saying that there’s a hunger for people who understand accounting and are also interested in non-profits” and that, whether it’s supporting the Board or other niche roles, you can always find a way to get involved.

So how do you get started? Most schools may offer some kind of non-profit accounting class, which is a great option for someone in a traditional accounting track who wants a taste of the industry. For those looking to go broader, Brian says that you can also consider joint degrees between Accounting and Public Policy schools. As an example, at OSU, Brian says students can easily slide between their accounting course in the business school and relevant units at the John Glenn College of Public Affairs. Ultimately, Brian says that “your best bet isn’t to find schools that specialize in non-profit accounting, but to find schools that offer flexibility or even a formal joint degree covering both business and nonprofit management.”

About Brian

Like many undergraduates, Brian started his accounting career in the Big 4, where he occasionally worked with non-profits, but spent most of his time with larger corporate clients. An opportunity to go back to school for his Phd and later teach at Yale gave him more exposure to the non-profit sector. As Brian comments, some people get into certain areas because that’s their life interest, and some people just fall into them. I’m in the latter group.”

Today, at OSU, Brian does both teaching and research across the accounting function, with a special focus on non-profits.