Harmonizing donor financial reporting: Three perspectives on a groundbreaking global proposal

In this conversation, Samantha Musoke, Project Director for IFR4NPO at Humentum discusses the impact of new proposals for harmonizing nonprofit financial reporting with Sophia Hernandez, Program Officer at the Ford Foundation in Mexico, and with Oyebisi Oluseyi, Executive Director of the Nigeria Network of NGOs.

The conversation is all about the culmination of five years of effort to develop the first International Non-Profit Accounting Guidance (INPAG), that will enhance transparency and bridge funder and nonprofit realities globally.


Why does the Ford Foundation support IFR4NPO’s INPAG initiative?

Sophia: We were attracted by the goal of reducing the burden on nonprofit organizations for multiple grant-making formats since this resonates with our grantee-focused philosophy. Financial reporting has been recognized as a problem in the sector ever since the Grand Bargain in 2015, so this project was proposing a bold solution that seemed to have the support of accounting professionals. We liked this inclusive nature of the project design. Having a global advisory group and input from NGOs over a diverse scope offers equity in countries where this project could have a significant impact. 


What were the reasons for the Nigerian network of NGOs to engage in the Ford project? What wins were you hoping for your members?

Oyebisi: The project came at a time when we were already discussing how best to harmonize charts of accounts for nonprofits to ensure that reporting becomes easier and showcases the economic impact of nonprofits. When I heard of this project, I had discussions with the coordinating team, and agreed that it was an exciting opportunity for us to achieve that goal. Over the last two decades, I’ve focused on what needs to happen for civil society organizations (CSOs) to stay transparent and accountable, and to report to our donors, beneficiaries and the public, how we are spending resources and ensuring a strong impact in our communities.

Samantha: There are different reporting requirements for grant reports where each donor has their own expenditure headings and formats. This is a challenge. This year Humentum decided to set up a working group for INPAG Exposure Draft 3. Draft includes a standard format for supplementary statements that can be used for donors or project reporting. This harmonization will be great for NGOs, but there is also a win for funders.


From a donor perspective, what do you see as some of the pros and cons of a harmonized format for grant reporting?

Sophia: It’s easy to see how this could make life easier for nonprofit organizations. Having the same headings or expense categories could make it easier to set up accounting systems that work for multiple grants. Most donors, including Ford, have developed systems around proposals, budgets, and accountability reporting for decades. These aren’t easy to change overnight. However, there are advantages for funders too. The win for donors is the bridge between the report for a specific grant and the annual audited accounts of the entity. This gives more assurance and context for the grants and the activities that they are funding. Particularly interesting is that better financial reporting can make it easier for local organizations to demonstrate their capacity to absorb grants and access funding.

Samantha: When you think of localization, you think of getting closer to the ground. And here we have an international harmonization standardization project. It almost sounds like it’s the opposite of localization. Yet, it unlocks and enables it. It makes it easier for local organizations to fit into this global system because it’s predictable and harmonized.


What difference do you think a harmonized format could make for NGOs in Nigeria?

Oyebisi: It helps external auditors to be able to properly audit our accounts. In terms of localization, this means that we can bring contexts from different parts of the world for expenses. For instance, in some countries you won’t see expenses on fuel for generators, but in Africa you will see an expense for fuel, generator, repairs and servicing. This brings nuance to the conversation. If we’re going to have an international standard chart of accounts, and external auditors will be able to audit us properly, the voices of southern NGOs are important. It gives a full picture of what it means to run an NGO in different regions. One challenge that may arise is resistance, which is natural. Awareness and discussions with donors will be crucial for accepting these standards as a proper way for reporting and external audits.   

Samantha: I can understand there being resistance from donors because they’ve set up their systems, the budgeting templates and reporting formats. But you are saying there might also be resistance from NGOs because it’s a change from what they’re currently doing. If one donor adopts this new international standard, it’s a process of change that, while offering great long-term outcomes, presents short-term challenges.

Another hot topic that’s addressed in INPAG Exposure Draft 3 is support costs, also known as indirect costs, overheads, or administration costs. The donor reporting format includes a line for support costs. If an NGO chooses to present a donor report in that standard format it must disclose the support costs for the whole organization. Sophia, you’ve been calling out the starvation cycle as chronic underfunding” of support costs.


Do you think that disclosing support costs at the entity level in the year-end accounts would be beneficial? 

Sophia: Yes, for funders like us who are keen to fund the full cost of the programs it is good to know the real amount of support costs relative to direct costs and to track this over time. If support costs are low, it could indicate chronic under-investment in crucial systems and infrastructure. If they are, then we understand the needs better. Ford has invested significantly in reversing the starvation cycle for nearly a decade through institutional commitments like expanding unrestricted support.  In 2015, only 36% of Ford’s grant-making was in the form of general or core support. By 2024 this increased to 85%. Also, we now pay a minimum of 25% indirect cost rate on all project grants.


From your perspective as an NGO, is it all positive to disclose your support costs in financial statements?

Oyebisi: It’s positive and it helps us to negotiate better. Over time, we’ve seen donors struggle with overheads, but if there’s a systematic approach to show the true cost of delivering projects, then it supports sustainability. For example, the Nigerian Network of NGOs recently lost a major grant which could have jeopardized our operations. Understanding true costs helps organizations like ours plan better and makes sure that critical infrastructures are maintained

Support from organizations like Ford shows a commitment to long-term sustainability, allowing us to use resources efficiently and to focus on our mission.


Have you encountered the mentality of overhead costs are bad and inefficient? Is there a risk that disclosing overheads could lead to a race to the bottom, with everyone lowering numbers to be the cheapest?

Sophia: We see this mentality with peers, but our Build Program is trying to challenge that across the sector and inside the organization too. Our theory of change is that stronger organizations are more impactful. Once an organization invests in its own infrastructure [operations] we start seeing the results. We track these results and have evidence that there is a connection between institutional strengthening and mission achievement, regardless of the organization’s size.

Oyebisi: That depends on the lifecycle of that organization. Organizations that are at the startup phase may want to lower their overhead costs. But the Nigerian Network of NGOs with 32 years in the market will not price itself low. Sometimes the confidence to negotiate for good rates also comes with experience and understanding donor expectations. Balancing the conversation between volunteering and expertise is crucial. Having a project like this helps us look at the true cost of running an NGO.

Samantha: One nice aspect of INPAG is the narrative report. We’re encouraging organizations to discuss their indirect rate. For example, sharing what covers the costs of safeguarding, fraud prevention, and financials.
When an NGO prepares accounts using INPAG, there will be more transparency about unrestricted income, expenses and reserves.


Do you think more transparency around unrestricted income is important for an NGO? Are there benefits or risks?

Oyebisi: Unrestricted funding is what any NGO executive director would like to have. However, the challenge is transparency. This is where flexible funding is useful, because it also helps track spending to look at where unrestricted funding is going. Unrestricted funding could be discretionary, but what mechanism are organizations setting to ensure that they can get board approval in a timely manner? The core level of corporate governance guarantees that organizations must track the expense flows. The beauty of uninstructed funding is that it fosters innovation and the use of technology to improve operations.


Ford has also been a leader in flexible and unrestricted funding. Do you think if there is more information about how it works other funders will follow your example?

Sophia: Ford advocates for more trust-based relationships with their grantees, and for long-term, flexible support. Transparency is key to getting there. There’s a lot of interest to learn about our experience with flexible funding, but many funders find it challenging to move in that direction for different reasons. We say that there are different ways to do flexible funding. Transparency about the use of unrestricted funds could be a game changer. Founders would let go of the need to micromanage and instead trust how NPOs decide to use the funds. This is far less of a risk than not having civil society [due to chronic underfunding].


Join the organizations and individuals advocating for efficiency, equity and accountability in non-profit financial reporting. Add your name to our campaign.

The INPAG Exposure Draft 3 Webinar Series will hold from July 9 -25.  This series will cover key proposals in the Exposure Draft 3. Each one is for 60 minutes starting at 11:00 UTC / GMT.

This is a great opportunity for stakeholders in our Country to become familiar with the proposals, ask questions, share comments, and learn how to respond to the consultation. The events will be held in English, and will support participation in Spanish and French.

You can see information about all the events and register here.

This article was originally published on humentum.org.