Nonprofit Accounting Under Regulatory Scrutiny

State charity regulators have been increasing scrutiny of nonprofits’ financial statements, the Internal Revenue Service (IRS) Form 990s and solicitation materials in a number of key ways. These areas of growing scrutiny include nonprofits’ allocation of joint costs and valuation of non-cash donations (a.k.a. gifts in kind or GIK).

Many state regulators believe that charities are improperly using these accounting principles to hide their fundraising costs by unfairly inflating their program expenses.

Several states, including New York, Michigan and California, have brought enforcement actions alleging that as a result of an incorrect allocation of joint costs, the organization has, in effect, made materially false statements in the financial documents they submit as part of their required state reporting.

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