Nonprofit Financial Reporting and Compliance

January 5, 2026

By: Diana Miller

Partner, Assurance

Key Takeaways

Monthly closes prevent year-end chaos: Reconciling accounts and classifying expenses monthly—within 10 business days of month-end—keeps documentation current and makes audit preparation straightforward.
Allocation methodologies need documentation: FASB requires expenses reported by both natural and functional categories, but most nonprofits lack written policies explaining how they allocate shared costs across programs, fundraising, and administration.
Small staffs still need control separation: Even minimal segregation—like having different people open mail, make deposits, and reconcile accounts—prevents a single person from both committing and concealing fraud.
Grant compliance tracking protects funding: Restricted funds require systems that monitor spending against approved budgets, track expiration dates, and maintain compliance files with original agreements and expenditure documentation.
Bottom Line: Form 990 preparation starts in January, not March—capturing required information throughout the year reduces errors, enables meaningful board review, and ensures your public filing accurately tells your organization’s story.

Nonprofit leaders juggle mission delivery, fundraising, and stakeholder expectations while navigating financial reporting requirements that differ fundamentally from for-profit accounting. The consequences of compliance failures extend beyond penalties—they erode donor trust, jeopardize grant funding, and divert leadership attention from advancing the mission.

These six practices help nonprofit leaders maintain compliance while strengthening financial operations that support organizational objectives.

1. Establish Monthly Financial Close Procedures

Most nonprofits concentrate on annual audits and Form 990 preparation, treating monthly financial statements as informal management tools. This creates problems when year-end arrives and accounting teams discover unreconciled accounts, missing documentation, or classification errors that require extensive cleanup.

Monthly close procedures force discipline into financial operations. Close the books by a specific date each month—typically within 10 business days of month-end. Reconcile all bank accounts, credit cards, and loan balances. Review accounts receivable aging and write off uncollectible pledges. Classify expenses by both natural and functional categories as you record them, not retroactively during audit prep.

This monthly rigor accomplishes several objectives. Accounting staff stay current with classification decisions while transaction details remain fresh. Board members receive timely financial reports that enable informed decision-making. Year-end audit preparation becomes straightforward because documentation already exists and accounts reconcile cleanly.

Leadership should review monthly financial statements with the same scrutiny applied to annual audited statements. Compare actual results to budget, investigate significant variances, and document explanations for unusual transactions. This ongoing oversight catches errors when they’re easy to correct rather than discovering them during audit fieldwork.

2. Document Your Expense Allocation Methodology

FASB requires all nonprofits to report expenses by both natural classification (salaries, rent, supplies) and functional classification (program services, management and general, fundraising). Many organizations struggle with this requirement because they lack documented methodologies for allocating shared expenses across functions.

Create a written allocation policy that explains how your organization assigns expenses to functions. The methodology must be reasonable and consistently applied. Common allocation bases include employee time studies, square footage for occupancy costs, headcount for certain administrative expenses, and usage metrics for technology costs.

For staff who work across multiple functions, implement timesheet or activity-tracking systems. A development director who spends 60% of their time on fundraising, 30% on program management, and 10% on administrative tasks should have a salary and benefits allocated accordingly. Without documentation, you’re guessing—and auditors will challenge allocation decisions that lack support.

Review allocation methodologies annually. As organizations grow or programs change, allocation bases that made sense historically may no longer reflect actual resource usage. Document any changes and the rationale behind them. Consistent application matters more than perfect precision, but your methodology should align with how your organization actually operates.

3. Implement Segregation of Duties Controls

Fraud risk exists in every organization, including nonprofits. Small organizations with limited staff face particular challenges because the same person often handles multiple financial functions. However, even minimal staffing provides some control and segregation, reducing risk.

The person who opens mail and logs donations should not be the same person who makes bank deposits. The employee who processes vendor invoices shouldn’t also approve payments. The individual who reconciles bank accounts must not have check-signing authority. These basic separations prevent a single person from both perpetrating and concealing financial irregularities.

For organizations too small to segregate duties through different staff members, compensating controls become essential. Board members can open bank statements and review transaction details before providing them to staff. An executive director can review detailed expense reports rather than receiving summary-level information. Online banking access can require dual approval for transactions exceeding specified amounts.

Document your internal controls in writing. Include control procedures, identify who performs each control, and specify the frequency of performance. This documentation serves multiple purposes—it trains new staff, provides accountability for control performance, and demonstrates to auditors and grantmakers that you’ve considered risk management.

4. Create a Grant Compliance Tracking System

Restricted grants and contributions require careful tracking to ensure funds are spent in accordance with donor or grantor specifications. Compliance failures can trigger repayment obligations, jeopardize future funding, and damage relationships with supporters.

Establish a grant-tracking system to monitor spending for each restricted fund. Your accounting system should allow you to run reports showing expenditures by grant, comparing actual spending to budgeted amounts and identifying remaining balances. This visibility enables program managers to spend funds before expiration dates while ensuring expenditures align with approved budgets.

Maintain grant compliance files that include the original grant agreement, approved budget, periodic financial reports, documentation of grant-funded expenditures, and correspondence with the grantor. When auditors or grantors request support for restricted fund expenditures, these files provide immediate access to required documentation.

Some grants impose specific requirements beyond budget compliance—specialized reporting formats, matching fund obligations, reimbursement-only funding structures, or restrictions on certain expense categories. Track these requirements in a centralized location. Missing a specialized reporting deadline or failing to document matching contributions creates compliance issues that consume leadership time and strain grantor relationships.

5. Prepare for Form 990 Throughout the Year

Form 990 preparation shouldn’t begin in February or March when the filing deadline approaches. Gathering information retroactively creates stress, increases error risk, and often reveals that required information wasn’t captured during the year.

Identify Form 990 information requirements at year-start and create systems to capture data throughout the year. Track volunteer hours if you report them on the form. Document board meeting dates and attendance. Maintain current descriptions of your three largest programs. Record executive compensation decisions and the process used to determine reasonable compensation.

Schedule 990 review should involve board members with financial or legal expertise before filing. These members can identify inconsistencies, suggest narrative improvements, and ensure compensation arrangements appear reasonable. Board review also creates opportunity to address questions about governance practices, conflict of interest policies, and whistleblower protections that Form 990 specifically asks about.

Consider the public nature of Form 990. Donors, charity evaluators, and the general public scrutinize the form. Narrative descriptions of programs should clearly articulate mission impact. Expense allocations should demonstrate reasonable program spending percentages. Compensation should align with comparable organizations. The form tells your organization’s story—ensure it’s compelling and accurate.

6. Build a Financial Dashboard for Board Oversight

Board members need financial information that enables oversight without overwhelming them with detail. Many nonprofits provide board members with full financial statements that accountants understand but leave board members uncertain about organizational financial health.

Create a financial dashboard that presents key metrics in accessible formats. Include current month and year-to-date results compared to budget. Show restricted and unrestricted net asset balances. Display cash position and months of operating reserves. Highlight program expenses as a percentage of total expenses—a metric donors and charity evaluators monitor closely.

Explain variances that exceed thresholds you establish. If program expenses run 15% below budget at mid-year, explain whether this reflects timing differences, program delays, or budget errors. If contributions exceed projections, indicate whether this represents one-time gifts or sustained fundraising success. Context helps board members understand whether financial results indicate healthy operations or emerging problems.

Update the dashboard monthly and distribute it before board meetings. This allows board members time to review information and formulate questions. Financial discussions become more productive when board members arrive prepared rather than seeing financial information for the first time during the meeting.

How Wiss Supports Nonprofit Financial Compliance

Wiss Assurance and Advisory Services works with nonprofit organizations to establish financial reporting systems that satisfy compliance requirements while providing leadership with decision-useful information. Our team helps nonprofits design expense allocation methodologies, implement internal controls appropriate for organization size, prepare for audits through year-round accounting support, and create board reporting that balances detail with accessibility.

We understand that nonprofit accounting serves both compliance and mission objectives. Strong financial systems free leadership to focus on program delivery, fundraising, and stakeholder engagement rather than scrambling to satisfy reporting requirements.

Ready to strengthen your nonprofit’s financial reporting and compliance systems? Contact Wiss for a consultation on your organization’s specific needs and reporting obligations.