Non-profit organisations (NPOs) are organisations established not for profit, but for the purpose of achieving socially important goals set out in their charter. The activities of such organisations are aimed at meeting the social, cultural, educational, humanitarian, religious, environmental and other needs of society.
NGOs are often funded by grants, charitable donations, contributions, membership fees, and sometimes income from permitted but non-core economic activities, if allowed by their charter and used strictly for statutory purposes. That is why accounting in NGOs is not just about recording income and expenses, but primarily about controlling the targeted use of funds. Every hryvnia received from donors or benefactors must be used strictly in accordance with their objectives and Ukrainian legislation.
However, as in any field, there are pitfalls that, if overlooked, may lead to serious consequences: from loss of non-profit status and fines to undermining donor trust.
Accounting: What Matters Most
Accounting for NGOs is not limited to recording income and expenses. It is essential to monitor the targeted use of funds. Every hryvnia received from donors or benefactors must be used in line with their goals and, of course, the laws of Ukraine.
Why is this critically important?
- Transparent and clear accounting is the foundation of building and maintaining trust. Donors want to see that their funds are used effectively and as intended.
- Incorrect accounting may lead to tax risks, penalties, and most importantly, loss of non-profit status.
- Quality accounting provides NGO management with a complete picture of the financial status, enabling sound decisions and effective planning for future activities.
Legal Aspects: Charter and Attention to Detail
Charter compliance, proper contract documentation, and accurate labor relations must be carefully managed to avoid unexpected problems. A single misstep can cost an NGO its non-profit status.
In our practice, there was a case where a public organization nearly lost its non-profit status due to what seemed like a minor transaction—renting part of its premises to another NGO. Although the rental income was intended solely for statutory activities, the organization’s charter did not explicitly authorize rental operations. The tax office could interpret these proceeds as business income, making the organization ineligible for the Register of Non-Profit Institutions. This risked losing the non-profit status, incurring profit tax and penalties.
CeDePe experts thoroughly analyzed the organization’s charter and prepared a request for an Individual Tax Consultation (ITC) to clarify the legality of such activities. After receiving confirmation that rental is allowed if clearly stated in the charter, we drafted and facilitated the necessary charter amendments. The revised charter explicitly allowed property rental to support statutory activities, provided the income is used for non-profit purposes. The changes were registered, and the tax authority was notified.
As a result, the organization retained its non-profit status, avoided tax issues, and received confirmation of the legality of its activities. This case became a basis for our new internal practice: we now check each client’s charter at the start of our cooperation.
Misuse of Grant Funds: Consequences and Corrections
Another common issue that requires careful attention is the misuse of grant or charitable funds. One of our clients, a public organization, received a grant with a clearly defined budget. However, part of the funds was used to purchase computer equipment not approved in the grant budget.
This led to a breach of the grant agreement, a demand from the donor to return funds, and the risk of losing future support. To resolve the issue, we conducted an internal audit and identified all discrepancies. We prepared a letter to the donor admitting the error and explaining the reasons. We offered a solution: either return the funds or cover the equipment cost from the organization’s own sources so it would not count against the grant. The donor agreed to adjust the budget, and we officially submitted a request to amend the grant budget. Meanwhile, new control procedures were implemented: all expenses must now be pre-approved by the project accountant and undergo regular internal reporting.
The organization avoided financial sanctions, retained donor support, and we developed a “risky expenses” checklist for every new project to prevent similar issues in the future.
Employment Relations: Civil vs. Labor Contract
A common mistake leading to tax risks for NGOs is incorrectly treating employment as civil contracts (CCs) with staff who perform regular duties (e.g., accountants, project coordinators, lawyers). Tax authorities may consider such contracts disguised employment relationships. During an audit, this could result in fines, recalculated social security contributions, income tax, and military levy.
To avoid this risk, it’s crucial to analyze the nature of the work. If it has characteristics of employment (regularity, adherence to internal rules, designated workplace, steady pay), a labor contract must be signed. Early consultation with a lawyer and accountant is the best prevention.
Management Aspect: Transparency and Efficiency
Quality accounting and legal support are not just formalities—they’re the foundation of effective NGO management. This gives leadership a complete financial picture, allowing prompt responses to challenges and long-term planning.
CeDePe experts have repeatedly assisted NGOs in preparing for external audits and donor reporting. For example, a public organization came to us while implementing its first major project with international donor funds. An external audit was approaching to verify the use of funds, availability of supporting documents, compliance with the budget, and internal policies. The key challenges included disorganized documentation, budget mismatches (e.g., expenses were reallocated without donor approval), and a lack of internal policies (no official procurement or reporting policy).
- We conducted a complete inventory of financial documents, created a clear folder structure (both physical and digital), and organized documents by period, type, and project article;
- We reconciled the budget with actual expenses, prepared explanations for every deviation, and documented them with internal memos;
- We organized contracts and acts, checked all signatures, dates, and wording;
- We developed internal regulations: procurement policy, salary policy, and expense approval procedures;
- We trained the team for the audit by simulating typical auditor questions and checking team readiness.
The audit was successful. The donor made no critical remarks and even praised the transparency and thorough preparation. Since then, the organization has implemented quarterly project financial reviews as a risk prevention measure.
Non-profit organizations in Ukraine are a vital pillar of society. Their work is built on the trust of benefactors, donors, and those they serve. This trust, like a fragile bridge, rests on strong pillars of transparent accounting and impeccable legal compliance. When financial and legal documents are in order, every hryvnia works efficiently, and the organization can fully focus on its mission.
