Domain 3: Financial Management and Accountability
What the exam tests
Financial Management and Accountability tests whether you can read nonprofit financial statements, apply fund accounting, design internal controls, and explain Form 990 and audit requirements.
Core rules
- GAAP for nonprofits (FASB ASC 958): statements include the statement of financial position, statement of activities, statement of functional expenses, and statement of cash flows. Net assets are classified as with donor restrictions or without donor restrictions-not "fund balance."
- Functional expenses: allocate costs among program, management/general, and fundraising. Form 990 requires this allocation; misleading allocation is a common audit finding.
- Internal controls: segregation of duties, dual signatures above a threshold, monthly bank reconciliation by someone who does not handle cash, a board-approved budget, and an independent audit committee.
- Audit levels: audited (independent opinion), reviewed (limited assurance), and compiled (no assurance). Many funders and states require an audit above a revenue threshold.
- Reserves and endowments: an operating reserve policy often targets 3–6 months of expenses. Endowment spending is governed by state UPMIFA and a board-approved spending policy, commonly around 4–5% of a trailing average.
- Form 990 is a public information return, not a tax payment. It reports governance, compensation, revenue, functional expenses, and program accomplishments.
Worked example
The same staff member opens the mail, records gifts, prepares the deposit, and reconciles the bank statement. That fails segregation of duties and creates an opportunity for fraud. Fix: a development associate opens and logs gifts; the finance manager reconciles; the treasurer reviews reconciliations monthly; the board approves the reserve and investment policies.
Traps that cost marks
- Treating net assets as cash; restricted net assets may be invested in property.
- Reporting endowment principal as available for operations.
- Calling an operating surplus "profit" or assuming a surplus is always good-unrestricted reserves may be below policy.
- Allocating too little to management/general to look efficient; that understates real overhead and can mislead funders.