Red Flags for Nonprofit CPAs

by Michael F. Cade, CPA, CGMA | Feb 28, 2020

CPAs working for or serving on the board of a nonprofit organization will likely be the most business-savvy person on the leadership team. As such, you can add critical value by assessing performance results and identifying troubling trends as they develop. This requires a CPA to look beyond the numbers by integrating financial and nonfinancial data to uncover serious threats before they become crises. Here are six common red flags that you should be actively monitoring and addressing.

Declining Use of Services

Some grants and agreements pay a set amount per year for a service provided. The total may change year to year; still, you should assess the long-term stability of the program or service. Look for underlying metrics, such as number of clients served, to ensure the program continues to provide value to the funder. If the number of clients served trends downward, eventually the funder may look to shift resources elsewhere. 

Changing Funder Priorities

Funding organizations rarely shift their funding without warning; but when they decide to make a shift they rarely change course. It is vitally important to identify early warning signs. Where possible, review available financial and strategic documents from those entities that provide significant funding. Look for trends in funding your programs versus growth in other similar and dissimilar programs. Note when money is moving toward or away from related programs, or if new funding priorities become evident.

Increased Frequency of Audits and Reviews

When funders are considering changing their priorities, they start to dig deeper into current programs. So, if you start to experience additional review steps, more formal cost or impact audits, or even a higher level of scrutiny on invoices, then there may be funding changes ahead. Work with counterparts at the funder to determine the cause for the increased focus. If you find they are reassessing funding priorities, ask what is driving the change and which areas they are looking to divert resources toward. Keep your senior leadership team aware of this, and work with them to assess and plan.

No Growth in Services Funding

Many nonprofits have at least a few programs with “zero-based” funding, which generally means budgets are reset to the same amount every year. It is unlikely that these programs are sustainable over the long term. If the program is stagnating and a lack of additional funding is leading toward obsolescence, then you need to make sure your organization proactively addresses the situation. If program requirements are changing but no additional funding is available, then your organization may need to look for efficiencies or alternative funding to keep the program viable. 

Improperly Managed Growth

Top-line growth for any nonprofit is typically a cause for celebration. How that growth is achieved, however, can be very important. If growth is driven by fundraising, the organization needs to consider if the increase can be sustained. Windfalls or unexpected spikes in donations can be valuable sources of new project funding or can provide critical reserves. Develop a next-best-use plan for such situations.

If the growth is sourced from program or service delivery, then the organization needs to execute plans to scale efficiently to ensure program performance standards are maintained. If growth will strain support functions, establish a priority list of short-term additional resources and longer-term projects, such as implementing new systems.

Declining Fixed-Asset Balances

Most fixed assets in an organization need to be replaced as time goes by; in some nonprofits, lack of resources leads to a stretching of the replacement cycle. This can lead to the continued use of obsolete assets or aging infrastructure, such as computers, office space, or other equipment. Monitor fixed assets and ensure that as net book value of these assets decreases replacement assets are added.

Since many small and midsize nonprofits outsource the information technology function, have regular discussions (at least annually) with IT service providers about new technology requirements. 

Bottom Line

CPAs working in or on the board of a nonprofit organization will add value by identifying and addressing serious issues as early as possible. You have the knowledge, skills, and access to the information needed to be able to spot red flags and avert major issues in the future. Look for trends in value drivers and infrastructure within your organization and with your funders. Prepare plans to stabilize and strengthen the nonprofit’s financial condition, strategize and execute toward targets, and be ready to take action if a serious problem is looming.  


Michael F. Cade, CPA, CGMA, is a strategy consultant and executive coach for MFCCoach LLC in Morrisville and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at mfcade@nfpbeyondthenumbers.com.
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