At some point during a not-for-profit organization’s audit, the auditor will likely ask for information pertaining to any known related party transactions. To give a more complete understanding of what the numbers represent, a GAAP financial statement audit requires certain related party transactions to be disclosed in the notes of the financial statements. When the auditor asks for this information, there’s no need to worry. It’s very common for not-for-profits to have a variety of related party transactions simply because those closest to the organization can be the ones most passionate about its mission and success.
Not all related party transactions are required to be disclosed, however. For the auditor to determine which transactions require disclosure, the not-for-profit needs to be able to give an informed response to this inquiry. To help you with that, this article brings clarity to two specific questions: who is a related party, and which transactions should be considered?
Related Parties: Who Holds Power in Nonprofits
A related party is any party that can exercise control or significant influence over an organization. Potential examples in a not-for-profit include the following:
- Directors on the organization’s board
- Members of the organization’s management team
- Immediate family members of the organization’s board of directors or management team
- Significant donors to the organization
- Affiliated national, state, or local organizations
- Organizations under common control
- Organizations with shared board members or members of management
- Businesses owned by any of the previously mentioned parties
Transactions to Consider When the Nonprofit Deals with Related Parties
Below are some common transaction types that can require disclosure if the not-for-profit engages in them with any of the related parties listed above.
- Purchases of goods or services
- Receipt of contributed goods or services
- Monetary contributions received
- Purchase or sale of assets
- Leasing a building
- Using donated space
- Borrowing or lending funds
- Maintaining bank accounts at a financial institution that employs a board member
If you’re aware of a related party transaction in your organization, inform your auditor. They will consider the financial impact and related controls in place to determine whether it meets the reporting requirements.