Eric Saunders is an accountant with Boston-based Braver PC, which has offices in Providence. He specializes in accounting and tax issues with nonprofit organizations. The IRS recently overhauled the tax forms nonprofits are required to file. Saunders answered a few questions about that and the fiscal state of affairs with nonprofits.

PBN: How has the change in the U.S. economy affected nonprofit organizations?

SAUNDERS: Like so many sectors of our economy, these organizations have been experiencing significant and in some cases, severe downward trends in their financial operations and ability to deliver their services. Almost all organizations are seeing reductions in their contribution, gift and grant revenue sources and 30 to 40 percent declines in investment portfolios. Social welfare organizations who count on support from federal, state and local governments are also seeing significant declines or complete elimination of that support. As has been well publicized, many organizations caught up in Ponzi schemes through direct or indirect investments in these schemes, have had to severely curtail programs or shut down their organizations.

PBN: How are these organizations responding to these changes?

SAUNDERS: The more immediate and initial responses have been employee layoffs, the suspension or reduction of compensation and benefit increases, and cuts or elimination of programs. Longer-term changes are being implemented through revised budgeting, more aggressive fundraising efforts and in some cases discounting of products and services. Some organizations are looking to see if they qualify for government stimulus funds. Many organizations are strengthening their boards and committees with business people and others with specialized skills that may be able to provide guidance in operating and surviving through a recession and provide connections to wider and deeper networks of funding sources. Still other organizations have merged or are exploring mergers with similar organizations. Or they are entering joint ventures all with the goal of reducing overhead to prevent reducing or eliminating programs.

PBN: What other changes and challenges currently face charities and other nonprofits?

SAUNDERS: Historically nonprofits have suffered from a leadership gap as compensation and benefits have not been able to compete with for-profit businesses. While this trend still exists, many organizations are beginning to recognize this challenge and are finding ways to bring dynamic and professional leadership to their organizations.

Another challenge to which these organizations are responding to is governance. Many board members and others are well aware of the Sarbanes-Oxley Act, which brought governance issues and improved business practices to publicly traded entities. As such, these individuals are bringing similar changes to the organizations through the boards on which they serve. In addition, the IRS has completely redesigned the tax form most nonprofits have to file. The new forms have a significant focus on disclosures of governance practices. As a result of trickle down from [Sarbanes-Oxley] and the new IRS requirements, organizations are taking a hard look at their business practices and strengthening, improving and implementing significant changes.

Perhaps one of the most recent and challenging issues facing many organizations is the management of donor-restricted funds. Over the past decade or two, a continually rising stock market has allowed nonprofits with invested donor-restricted funds to maintain the value of those gifts. However, with recent steep declines in investment values, the actual assets such as cash and investments supporting the donor’s gift are less than the original gift amount. This situation referred to as being “underwater” is in some cases forcing the organization to sell other assets in order to generate cash to restore the value of the donor’s gift.

PBN: What can nonprofits do to prepare for all the information needed in the next tax forms?

SAUNDERS: There are a few simple steps an organization can take to prepare by going to the IRS Web site, www.irs.gov, and then clicking on the “charities and nonprofits” button. Found there are the actual forms, instructions, related publications, filing tips and very helpful online mini courses, which are designed as tutorials to answer questions and assist in completing the forms. In addition, if the organization does use the services of a CPA firm, they can certainly provide additional guidance and support. The benefit of doing advance preparation will allow organizations to be able to answer the various questions and provide information about their organization in a more positive light. As the tax Form 990 is a public document, often easily accessible on various Web sites, all organizations will benefit from advance preparation for their first filing of the redesigned tax forms.

PBN: How do you see the future of the nonprofit community?

SAUNDERS: The proliferation of nonprofit organizations over the past 10 to 20 years has been tremendous. For example in Massachusetts alone it is estimated there are 30,000 to 35,000 such organizations. With the changes in our economy, such numbers cannot be sustained. As a result I believe there will be significant mergers and consolidations throughout the sector. I have heard estimates that nationally more than 100,000 organizations will close or merge over the next few years.

Organizations that do survive will be leaner and more efficient in their operations, will become narrower and more focused on their primary mission and programs, will have significantly improved governance practices and will become more aggressive in areas such as marketing and fund raising.

Besides industry consolidation, the future organizations are going to have to manage budgets and strategies that allow for and attract talented employees and professional leadership through competitive compensation and benefits, challenging positions with potential long-term career paths.

The nonprofit organization community will continue to be a major employer throughout the country, will continue to provide tremendous value to our society and improve the quality of life for many, however there will be far fewer organizations, programs and services than the sprawling web that currently exists.