Whether building endowments, funding specific projects, or growing reserves, investments can significantly impact a nonprofit’s financial health. However, managing these investments requires careful coordination between accountants, investment advisors, and investment committees. Sometimes it can be tricky to keep this all straight, so let’s explore the distinct roles of nonprofit accountants and investment advisors in investment management, and what nonprofits should consider for effective financial oversight.
Nonprofit accountants are responsible for tracking the financial performance of investments, creating reports that offer a clear snapshot of the organization’s overall financial health. While they do not make decisions about where to invest funds—that responsibility falls to the investment advisors—accountants ensure that every dollar is accounted for accurately. Their work provides the foundation for transparency, compliance, and informed decision-making within the organization. Meanwhile, investment advisors focus on strategic decision-making, guiding nonprofits on where and how to invest their resources for optimal returns.
Understanding the complementary roles involved is key to ensuring that nonprofit investments are not only well-managed but also aligned with the organization’s long-term mission.
The Role of Nonprofit Accountants in Investment Management
What Accountants Can Do:
Nonprofit accountants ensure that the performance and financial health of investments are accurately reported. Here’s what they can do:
- Track investment performance: Accountants monitor how much a nonprofit has earned (or lost) in its investments. This data is crucial for understanding the organization’s assets and overall financial health.
- Reconcile investment statements: Regular monthly or quarterly investment statement reconciliations ensure that these reports remain precise and up to date. Nonprofits that stay on top of reconciliations are better equipped to make informed decisions and course corrections when necessary.
- Create financial statements: Accountants compile financial statements that offer a snapshot of investment performance. These reports help nonprofit leaders and boards make informed decisions about future investments and expenditures.
- Report on investment performance: Investments always carry risks, and part of the accountant’s job is to report on the performance of those investments—whether good or bad. It is not their role to mitigate or predict market risks; instead, their task is to provide an accurate reflection of the nonprofit’s financial standing.
- Ensure compliance: Although nonprofits are generally tax-exempt, they still need to file an informational tax return each year. Properly recording investment earnings in the appropriate general ledger accounts is essential to facilitate this filing. Investment earnings typically fall into several categories, including dividends, interest, realized or capital gains/losses, and unrealized gains/losses. By thoroughly understanding investment statements and accurately categorizing earnings, accountants help ensure that all financial reports are precise and transparent, supporting the organization’s commitment to accountability.
- Monitor investments for reserve requirements: Through accurate recording and reporting, accountants help nonprofits balance liquid assets and long-term investments to ensure they have enough readily available funds to meet operational needs. This financial transparency enables the nonprofit’s leadership, investment committee and Board to regularly monitor investment portfolios and cash flow, ensuring the organization can meet both current operating expenses and reserve requirements for the foreseeable future.
What Accountants Can’t Do:
While accountants are critical for tracking and reporting on investments, their expertise does not extend to deciding where to invest. Here’s where the line is drawn:
- Provide investment advice: It’s important to note that accountants don’t have the expertise or legal authority to guide investment decisions. That role belongs to the nonprofit’s investment advisor or investment committee.
- Replace the need for strategic decision-makers: Accountants highlight the importance of having a dedicated investment advisor or committee. This team takes responsibility for balancing risk and returns while ensuring investments align with the organization’s mission.
The Three Primary Duties of a Fiduciary
- Duty of Care: As a fiduciary, it’s your job to make smart decisions and be careful with all your nonprofit’s resources, both financial and human. Think of it like managing your own finances, but on a larger scale. You are responsible for ensuring the organization operates efficiently and sustainably.
- Duty of Loyalty: This duty demands that every decision be made solely in the nonprofit’s best interests. Avoid any conflict of interest or appearance of divided loyalties. The question always to ask is: What’s best for the organization?
- Duty of Obedience: This requires that your actions and the decisions you make align with the nonprofit’s mission and legal requirements. Fiduciaries ensure the organization stays true to its purpose and complies with all relevant laws and regulations. Every decision should further your nonprofit’s mission and support compliance, not diverging from either.
Understanding Your Legal and Financial Responsibilities
Fiduciary roles come with risks and potential liabilities. You can be held accountable for damages caused by your wrongful acts or omissions. To protect yourself and the organization, it’s essential to ensure compliance with laws, bylaws, and best practices.
Liability coverage, such as Directors and Officers (D&O) insurance, is one layer of protection. Additionally, your nonprofit must have strong internal controls in place to mitigate financial risks and fraud. Think of yourself as the captain of a ship, ensuring you know the rules of navigation and are prepared for unexpected storms.
Reducing Risk: Financial Awareness & Internal Controls
Understanding your nonprofit’s financial health is vital for fiduciaries. Familiarize yourself with financial statements and the internal controls that keep the organization secure. A strong “Tone at the Top” is essential to instill a culture of integrity and transparency. This means making it clear that ethical practices and accountability are non-negotiable.
Fraud prevention is also a crucial aspect of internal controls. According to the 2024 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), nonprofits account for 10% of reported fraud cases, with a median loss of $76,000 per case. This statistic underscores the importance of implementing robust internal controls and regularly reviewing financial practices to safeguard the organization’s future.
Protecting Your Nonprofit with Policies and Procedures
Internal policies, such as conflict-of-interest and whistleblower policies, help reinforce accountability. These policies support the “Tone at the Top” by establishing clear expectations for ethical behavior. Without a strong policy framework, even small cracks in governance can grow into larger issues over time.
Establishing these policies is like building a solid foundation for your nonprofit—without them, it’s easy for the organization to be compromised.
Budgets and Financial Statements: Your Guideposts
A nonprofit’s financial statements and budgets are essential tools for tracking its health . Fiduciaries must not only create and approve budgets but also monitor them throughout the year. This ensures the nonprofit remains on course to achieve its mission.
Financial statements act as a pulse check on the organization’s operations because truly, they are the financial representation of the activities occurring in the organization. They tell the story of the nonprofit’s financial health and provide insights into areas that may need attention.
Contributions and Restrictions: Understanding Donor Restrictions
Not all contributions come without conditions. Nonprofits must track and manage restricted and unrestricted donations to comply with donor expectations. Restricted donations may come with specific instructions on how funds can be used, and this must be reflected in financial tracking and reports.
Just as a donor’s gift may come with agreed-upon designations, your financial reports should accurately reflect any restrictions to ensure transparency and compliance.
External Parties: Auditors and the IRS
Auditors and the IRS play vital roles in ensuring financial transparency. While auditors confirm the material correctness of financial statements, the true responsibility for protecting the organization lies with its leadership. Fiduciaries must ensure that the organization is transparent and compliant with legal obligations.
Additionally, IRS Form 990 is not just a compliance requirement—it’s a public document that reflects the nonprofit’s commitment to transparency and accountability.
Conclusion
Fiduciary responsibility is key to a healthy organization that can fulfill its mission. With the right knowledge and proactive practices, you can confidently lead, ensuring your organization remains strong and true to its purpose.
If you need assistance navigating these waters—whether it’s understanding fiduciary responsibility, implementing internal controls, or meeting your accounting needs—reach out to our team at Chazin & Company. We’re here to support you in safeguarding your nonprofit’s future.
Chazin & Company
With over 19 years working exclusively with nonprofits, we pride ourselves in having a unique understanding of nonprofit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual and customized solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance.