Guiding not-for-profits through post-pandemic challenges

The COVID-19 pandemic officially came to an end more than a year ago, yet its impact continues to reverberate through charities and other donor-dependent organizations.  These entities face challenges stemming from shifts in labor market conditions, a tightening donor environment, and an increase in the need for support from those served by the organizations.

“Many groups underwent significant changes in their mission and approach during the COVID-19 pandemic,” said Pete Ugo, CPA, a Crowe LLP partner who oversees the delivery of audit services to higher education entities and not-for-profits.

Ugo, who is also the chair of the AICPA’s Not-for-Profit Expert Panel, frequently advises audit committees and not-for-profit boards to continually assess risks of all kinds.  Having management monitor the top risks helps to ensure there will be response measures in place and to ensure the not-for-profit entity prioritizes mitigating its exposure to risky scenarios.

“They should be continually maintaining a list of their main risks,” he said.

On most lists would be items such as employee retention strategies, internal embezzlement or vendor fraud, cybersecurity threats, changes in funding, increases in the need for direct services, and overall shifts in support from the public for the organization’s mission.

What can CPAs do to help charities and other not-for-profits keep their feet on an unsteady, shifting economy?  Ugo and Paul Preziotti, CPA, a member of the AICPA’s Not-for-Profit Advisory Council who co-leads Johnson Lambert LLP’s not-for-profit audit practice, share their thoughts on the biggest challenges not-for-profits face and what these organizations can do moving forward.

POST-COVID-19 PANDEMIC PLANNING

CPAs should be prepared to question their clients on how they are adjusting to the new, post-COVID-19 pandemic reality, with an eye toward ensuring that not-for-profit clients are looking ahead and not relying on fundraising and program strategies that served a pre-pandemic world that no longer exists.

For example, Ugo has found that as COVID-19 pandemic-era aid such as Paycheck Protection Program loans dries up, many of the clients his practice serves are just now taking a hard look at their structure and what’s ahead.

“A lot of places used that money to continue operating like normal,” Ugo said.  “Now they’re trying to figure out what to do.”

All this change comes with risks as funding models shift and, perhaps, drop in the short term.  Furthermore, new programs may bring increased needs for services.  While top leaders at a  not-for-profit are likely occupied with making sure transitions flow smoothly, CPAs need to stress to their clients the importance of updating internal controls and processes to reflect new structures and missions.

These controls and processes can include ensuring new partnerships are in line with the organization’s mission and fiduciary standards and ensuring that as new staff and vendors are brought on, controls are in place to make sure dollars spent are tracked and in line with the organization’s mission and public charity status.  “Nonprofits tend to be pretty trusting organizations,” Ugo said.  “You have to keep an eye on internal controls.”

FUNDRAISING PRESSURES

One of the central questions not-for-profits face is how to ensure that the money coming in is enough to keep the lights on, fulfill the organization’s mission, and sustain its vision for the future.

“With high rates of inflation and whispers of a recession circulating for months, not-for-profits had many of their previously reliable individual donors and foundations pull back on their contributions,” Ugo said.

The reasons vary — from individual donors unwilling to tap their discretionary money as inflation pressures ate into personal budgets to the continued retreat from unrestricted funding by foundations and bigger donors.

“The ability to raise money from donors is a little harder,” Ugo said.  Big donors “want to give money for specific things, not just unrestricted operational support to pay the light bill.”

The high volatility in investment markets has led some grantmaking foundations and large donors with significant investments to pull back because of losses or concerns about future losses from swings in the market, Ugo said.

He suggests CPAs work with their clients to think through different ways of raising money, given that fundraising numbers overall are down and the big golf events and galas aren’t holding the same interest for donors post-COVID-19.

The Fundraising Effectiveness Project, an initiative of the Association of Fundraising Professionals and the Center on Nonprofits and Philanthropy at the Urban Institute, analyzed 2023 contributions from more than 8,100 organizations and found year-over-year declines of 3.4% in the number of donors and 2.8% in dollars supporting not-for-profits.  Large donors, those that give more than $50,000 annually, showed the largest decline.

Ugo also works with several performing arts entities, and those groups are finding that the season ticket holder model, where people would reliably buy their annual passes for ballet or theater performances, doesn’t resonate as much with individuals who would rather buy tickets for the shows they wish to see and not for the whole season.  One study by JCA, a New York City-based not-for-profit arts marketing firm, found that season ticket sales for opera, music, and theater halls in the 2023 fiscal year were 67% of what they were pre-pandemic.

“They’re starting to think about the ways to reach out to donors,” he said.  “People change over time.”

To make up for many of the behavioral changes in donor giving, as well as shifts in how individual donors are giving, Ugo has found that not-forprofits exploring multiple revenue streams —fundraisers that are adapted to people’s post-COVID-19 lives or even collaborating with partner organizations — are succeeding.

CPAs also can emphasize that big donor and foundation funding is continuing to shift away from unrestricted donations, which the not-for-profits can use for operational costs and other priorities, toward program-specific grants.  That carries with it obligations on the not-for-profit’s side to make sure it can satisfy the terms of the more specific grants, which may not always align perfectly with the group’s existing workloads.  Leaders should think through what fits their mission and how to have a fundraising strategy that looks out several years as opposed to squeaking by on year-by-year funding cycles.

STAFFING

“Another enormous challenge for not-for-profits is attracting and keeping talented staff,” Preziotti said.  While employers in the for-profit sector also are dealing with a tight labor market, not-for-profit organizations have the disadvantage of generally not being able to pay as much.

Preziotti has had multiple conversations with clients about employee recruitment and retention, and he suggests CPAs frame the staffing challenge as an ongoing risk to emphasize for boards and leaders the need to strategize about this in a meaningful way.

The mission of not-for-profits is a major draw for many employees, and not-for-profits can enhance their appeal by offering flexible scheduling and other benefits, including remote or hybrid work options.

“What they can control is the culture and the environment at their organization,” he said. “Cultural considerations are different now in the work environment we find ourselves in 2024.”

The staffing issue is especially acute for accounting and finance employees that handle the financial functions inside mission-driven organizations, Preziotti said.  As they compete for talent in a thin accounting talent pool, not-for-profits struggle to pay at a level that would entice talented finance staff.

As a result, many not-for-profits are considering outsourcing their accounting and bookkeeping needs to cut costs.  Contracting these services out can be a logical efficiency for an entity looking to stretch each dollar as far as it can go or that may simply not be busy enough to justify an in-house accounting department.

CPAs can play an important role in helping clients think through the pros and cons of each approach, price out options, and help them weigh their options about what is the right fit.

“It can make a lot of sense,” Preziotti said about outsourcing those needs.

Another piece of staffing concerns is leadership succession — many charities operate on lean  Budgets and aren’t necessarily prioritizing how to develop new leadership within an organization or have a plan of how to pivot if a longtime executive director or CEO strongly identified with the organization leaves.  Leadership succession is a risk that not-for-profit boards should be aware of to ensure they aren’t caught unprepared if a top executive departs.

AI AND OTHER ADVANCED TECHNOLOGY

In general, not-for-profits tend to lag their forprofit counterparts when it comes to incorporating the latest technology into work processes.  But Preziotti believes not-for-profit leaders should prioritize understanding the opportunities, and risks, of AI.

That’s because not-for-profits can implement AI and other advanced technologies to streamline and automate work, which frees up employee time and eases the pressure on organizations to devote more of their often tight budgets to staffing.

Preziotti said he has seen clients use robotic process automation (RPA) in creating and submitting invoices, for example, when billing the federal government for services, turning what used to be a cumbersome and tedious task into a smooth process.

“Over the long term, these organizations are going to have more money and free up employee time,” he said.

CPAs should emphasize that clients incorporating advanced technologies, including AI, into their work must also update their policies and documents regarding the use of these technologies.  Policies need to address data security as well as align with existing grants, contracts, and data privacy rules.

He suggests running new initiatives by legal counsel, as well, to ensure that the organization isn’t running afoul of copyright or other applicable laws. Here, too, CPAs can aid their clients by identifying law firms or attorneys with expertise in this area for consultation.

CYBER RISKS

Warning clients about the substantial risks of cyberattacks may seem repetitive from years past, but cybersecurity risk to organizations is only growing as schemes to defraud increase in numbers and complexity, Preziotti said.

This is not an area to skimp on, and CPAs should encourage their clients to view cybersecurity investments and training as critical needs.  Stressing the importance of this to clients can help them avoid becoming victims and losing valuable time and money responding to a ransomware or other type of crisis.

Having robust protections against cyberattacks “is a big ask and it costs time, and it costs money,” Preziotti said.

“Make sure, as well, that clients are training everyone in the organization about cybersecurity concerns, not just IT professionals,” he added.

REPUTATIONAL RISKS

A not-for-profit’s reputation is of immense value, and the organization’s leaders need to make sure they are not taking that for granted.

“Not-for-profits, especially larger ones with big staffs, should have structures in place to monitor their reputation on social media channels and in the news; and they should safeguard against errant comments by staff that could have major ripple effects,” Ugo said.

CPAs can emphasize the critical importance of having a rapid-response plan ready if an organization finds itself embroiled in controversy, which can quickly overtake an organization and have lasting consequences.

Ugo suggests having defined social media policies that address online commentary and political statements in ways that protect the organization’s reputation but still respect the rights of employees to speak out in their personal capacities.

“It’s important for nonprofits to remind their board members and employees that they represent the organization,” he said.

It’s also important to remind organizations that IRS Form 990, Return of Organization Exempt From Income Tax, filled out each year, is a public document and often what media outlets or others use to gather insight into an organization’s operations.  Consider the narrative and view of the not-for-profit that is presented in this document to make sure it aligns with the organization’s vision and mission.

“Make sure you’re looking at it from this viewpoint, knowing it’s available to the public,” Ugo said.

In addition, 2024 is a major election year, and the current political climate is one that remains divisive and contentious.

Most not-for-profits, especially those structured as Sec.  501(c)(3) organizations, are barred from actions that can be interpreted as electioneering. CPAs should suggest that not-for-profit leaders hold training to remind staff and board members what limitations and expectations exist when it comes to involvement with lobbying or political activities, Preziotti recommended.

The not-for-profit landscape continues to be a challenging one, with no signs that the changes wrought upon fundraising and work environments are slowing.

CPAs can continue to play critical roles with these mission-driven groups by flagging big-picture questions and risks that may escape organization leaders embroiled in day-to-day operations.

About the author 

Sarah Ovaska is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.

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“What’s the Plan? Best Industry Practices in Not-for-Profit Budgeting and Financial Planning,” AICPA & CIMA, March 23, 2023

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