Nonprofit Groups Laid Off Employees, Shifted Investments, and Added Governance Steps in 2009

The vast majority of nonprofit organizations that responded to a recent accounting survey said they coped with the bad economy in 2009 with all-around cost cutting.

“In the face of declining revenues from donors, granting agencies, federal and state governments, and underwater endowments,” 87 percent of organizations reduced expenses, according to Grant Thornton, the accounting and business advisory group that conducted the survey.

Fifty-seven percent cut personnel and 53 percent delayed capital projects.

“In addition, recognizing that their plans no longer match their situation, more than half (56 percent) of survey respondents revised their strategic plans in light of the economic downturn,” Grant Thornton said.

A volatile stock market and “staggering losses for a number of organizations” led 58 percent of groups to rebalance their investment portfolios, Grant Thornton said. Thirty-nine percent of organizations made changes to their investment policies in 2009, an increase from 27 percent in 2008.

“Many organizations have reduced their positions in alternative investments and are maintaining much higher cash positions than in previous years,” said Frank Kurre, national managing partner of Grant Thornton’s Not-for-Profit and Higher Education practices.

“Unfortunately, as the market improved in the last half of calendar 2009, many organizations did not fully benefit since they had shifted out of equities into more conservative cash and fixed income positions,” he said.

‘Enormous Uptick’

Boards of nonprofit organizations in 2009 stepped up their efforts to govern themselves effectively, Grant Thornton said.

More than half—55 percent—of responding groups established formal policies for their board members to review the Form 990 federal informational tax return, according to the report, up from 22 percent in 2008.

The Form 990 tax return for the 2008 tax year included a new question: “Was a copy of the Form 990 provided to the organization’s governing body before it was filed? All organizations must describe the process, if any, the organization uses to review the Form 990.”

“There was an enormous uptick in governance activities among not-for-profit boards since 2008, due to increased scrutiny of not-for-profit organizations, instances of fraud, changes to the Form 990, and an intensified push for not-for-profit transparency,” said Mr. Kurre.

“The heightened attention resulted in a flurry of activity and policy changes” in areas such as whistle blowers, conflicts of interest, record-keeping, investments, and executive compensation policies,” he said.

Spotlight on Pay

Grant Thornton said Form 990 disclosure requirements “cast a spotlight on executive compensation among not-for-profits by creating an easily accessible format for anyone to view this information and increased the board’s focus on review of executive compensation.”

Seventy-three percent of respondents said their organizations had formal policies in place in 2009 to review executive pay, up only slightly from 71 percent in the previous year.

To increase accountability, boards have become more focused on scrutinizing the performance of the boards themselves as well as organizations’ chief executive officers, chief financial officers, and development directors, Grant Thornton said.

“Thirty percent reported that one of the main ways the board’s agenda changed in 2009 was that they spent more time evaluating CFO performance,” said Grant Thornton. Twenty-four percent paid more attention to evaluating board performance and 14 percent “became more focused on evaluating the executive director/CEO or the director of development.”

More and more nonprofit audit committees are meeting frequently with organizations’ outside auditors, said Grant Thornton.

What’s more, “in the past few years, there has also been a clear increase in the percentage of audit committees that include at least one certified public accountant,” Grant Thornton said. Seventy-four percent of responding groups had CPAs on audit committees in 2009, up from 66 percent in 2008 and 24 percent in 2006.

“Given the complexities of internal controls and governance, we expect this percentage to continue to rise,” said Mr. Kurre. “Organizations that do not have at least one CPA on their audit committee should strongly consider adding at least one professional who brings this credential and skill set.”

Grant Thornton conducted the survey in October and November of 2009. Responses were received from 465 officials.

Grant Thornton’s 2009 “National Board Governance Survey for Not-for-Profit Organizations” is available online at http://www.gt.com/bgsurvey.