Guidance for New Finance Chairs at Arts and Culture Nonprofits

The role of the Finance Chair in an arts and culture nonprofit is an extremely important one. As the leader of the Finance Committee, the Finance Chair has a fiduciary responsibility to ensure that the nonprofit is in strong financial health. Maintaining and bolstering this firm financial footing is fundamental in enabling the nonprofit to continue investing in program activities. 

The responsibilities of a Finance Chair differ significantly between organizations and tend to be driven by various factors, including the sophistication of the organization, management, and the board as a whole. 

At the same time, many Finance Chairs at arts and culture organizations often lack expertise in navigating the nuances of nonprofit accounting environments. From understanding Form 990 filing requirements to reviewing internal governance policies, this is a complex role. 

For new Finance Chairs or Finance Committee Members, success demands knowledge of the intricacies of nonprofit accounting. In this overview, we highlight several important nonprofit accounting concepts finance leaders must be aware of to provide meaningful fiscal oversight. 

The Role of the Finance Chair: Key Responsibilities

No two Finance Chair roles are exactly the same. The responsibilities assigned to a Finance Chair at one of the nation’s largest art museums will be different from those assigned to the Finance Chair of a small performing arts organization. In most instances, you can find the exact duties of the Finance Committee Chair outlined in the nonprofit’s bylaws. 

However, regardless of the scale or sophistication of the nonprofit, several key responsibilities apply to all nonprofit Finance Chairs. They include:

• Reviewing Form 990
• Selecting auditors and contributing comments to the audit
• Ensuring the organization’s financial needs are being met by external service providers
• Providing oversight of all financial information shared by management
• Updating fellow board members on financial matters

Overall, the role of the Finance Chair can be summarized into one simple statement: to act as a fiduciary for the governance and oversight of the organization. What these responsibilities look like on an ongoing basis primarily depends on the organization itself. 

In a smaller nonprofit with a limited management structure, the Finance Chair may have to take a hands-on approach in supporting the Executive Director. In a larger, more sophisticated nonprofit, Finance Chairs are primarily concerned with monitoring the output of the internal accounting and finance department. 

Additionally, larger nonprofit organizations may have an Audit Committee that acts separately to the Finance Committee. These board subcommittees will handle all aspects of the audit, including interviewing auditors, contributing comments, and relating audit findings to the wider board. 

Key Nonprofit Accounting Concepts for New Finance Chairs

Often, the individuals that find themselves acting as the Finance Chair for an arts and culture organization have some kind of financial background. Perhaps they’re a partner at an accounting firm or serve as the CFO of a for-profit organization. 

While individuals with these types of backgrounds are well-matched to the Finance Chair role, they must also understand the central concepts of nonprofit accounting. 

Below, you will find a summary of each of these key concepts. For each concept, we have included a link to additional resources that explore the concept in more detail. 

Revenue Recognition

Many arts and culture organizations have several sources of revenue. From an accounting perspective, each of these revenue streams is treated differently, and often in ways that are completely unfamiliar to individuals without a background in nonprofit accounting. 

Some revenue, such as contribution revenue from donations without restrictions or conditions, is relatively simple to record. However, other revenues, particularly restricted or conditional contributions and exchange transactions, must be treated differently.  

Learn More: What Development Teams Need to Know About Revenue Recognition

IRS Form 990

IRS Form 990, Return of Organization Exempt from Income Tax, is an informational return that all tax-exempt organizations must file with the IRS each year. 

However, Form 990 is much more than a tax filing: it’s a public document that discloses a lot of information about the nonprofit, including revenue, expenses, assets, liabilities, executive compensation, and more. 

Nonprofits should leverage Form 990 as a marketing tool: an opportunity to create a positive narrative around the organization. You should expect this filing to be reviewed by grantmakers and donors and view it as a platform to demonstrate the organization’s effectiveness in fulfilling its mission. 

Learn More: Form 990: Key Focus Areas for Compliance and for the Public

Restricted vs. Unrestricted Assets

Many of a nonprofit’s assets may be restricted, meaning they must be allocated in a manner consistent with restrictions mandated by the individual or organization that donated the asset. 

Restricted assets may include cash, stock, or endowments that must be used for a certain program activity, over a certain time period, or for another designated purpose. Implementing a framework to track how restricted assets are disbursed is a key step to robust internal governance for all nonprofit organizations. 

Unrelated Business Income (UBI)

It’s easy to think an arts and culture nonprofit is fully tax-exempt, but this often is not the case. When a nonprofit has revenue generated from a trade or business not substantially tied to the mission of the nonprofit, it may owe Unrelated Business Income Tax (UBIT) on this revenue. 

Common examples of this include renting out event space to the public or having an on-site restaurant that’s open to the public, not just patrons. Partnering with an experienced nonprofit accounting firm to understand the organization’s UBIT liability is key to ensuring that any tax liability is minimized. 

Learn More: Unrelated Business Income Tax: A Comprehensive Guide

Audit Requirements

Finance Committees are often tasked with leading the annual audit process, although in larger nonprofit organizations this task may fall to a separate board sub-committee. 

Understanding the nonprofit’s audit requirements is key. If the nonprofit receives more than $750,000 from the federal government, they’re required to undergo a Uniform Guidance Audit that goes beyond the scope of a regular audit. 

Learn More: Attention Nonprofit Board of Directors: Here is What You Should Look For From an Audit

Smith + Howard: Trusted Nonprofit Accounting Advisors

For Finance Chairs new to the nonprofit sector, understanding these nuances can be intimidating. But with the right guidance and support, providing strong financial oversight that moves the nonprofit’s mission forward is entirely within your grasp. 

Your role is to act as a financial conduit between management and the board and ensure that the organization remains in a strong fiscal position to continue executing its mission.

The support of an experienced nonprofit accounting firm is invaluable. At Smith + Howard, our dedicated nonprofit accounting team serves as a trusted advisor to leading nonprofit organizations across the arts and culture sector. 

We believe that maintaining an ongoing relationship is vital to your success and encourage our clients – and their board members – to reach out to proactively discuss any accounting questions with our team. 

To learn more about Smith + Howard’s nonprofit accounting and advisory services, contact us today.