Seven Governance Tips to Stay Out of Trouble
By Paul Konigstein
Nearly all nonprofits seek publicity, and despite what P.T. Barnum saidthat theres no such thing as bad publicitynegative publicity can have a chilling effect on donations to a nonprofit.
To keep your donations flowing, here are seven governance tips to help board members avoid trouble and bad publicity for their organization.
- Adopt a transparent budget before the start of the fiscal year. Transparent means documenting the individual items that comprise each budget line.
- Monitor actual financial activity against the budget. Monitoring assures that your nonprofit continues to have adequate resources to meet its obligations and achieve its goals. Understand the reason for significant variations from budget and require corrective action when necessary.
- Most mismanagement and fraud can be detected with transparent budget construction and regular budget monitoring.
3) Financial Controls
- Undergo an annual financial audit.
- Hire the audit firm at the board level rather than delegating the decision to staff.
- Communicate with your auditors before and after the audit. Before the audit, discuss the engagement letter to understand what the audit is designed to accomplish. Afterward, meet the auditors without management present to discuss any audit findings in a management letter or audit communication letter.
4) IRS Form 990
- Financial controls are policies and procedures designed to protect your organizations assets.
The most basic financial control is the involvement of at least two people in every transaction or activity.
Make sure all the financial controls are in writing and distributed throughout the organization.
- Review IRS Form 990, your nonprofits annual public information disclosure, with the preparer before it is filed. Ask questions about anything you dont understand.
- Learn about Unrelated Business Income Tax (UBIT). If your nonprofit has any activities that are subject to UBIT, make sure IRS Form 990-T is filed and the tax, if any, is paid.
- Set program goals and report your organizations progress toward achieving them in Part III to easily demonstrate fulfillment of your exempt purpose.
- Comply with donor restrictions on gifts. Permanently restricted gifts (more commonly called endowment) can never be spent. Only the earnings on the gift may be spent when certain criteria are met. Temporarily restricted gifts may be spent only for certain activities or only at a certain time.
- Unrestricted gifts may be spent however your organization chooses.
- Make sure your financial statements clearly distinguish temporarily and permanently restricted gifts from unrestricted ones.
- Most states require nonprofits to register before fundraising. If you solicit contributions by mail, phone, or website, register your organization in every required state.
7) Best Practices
- The Federal government and most local governments regulate lobbying. If your organization lobbies, register this activity with the appropriate governmental body. Review Form 990 Schedule C to learn about Federal lobbying oversight.
- Last year New York passed the Nonprofit Revitalization Act requiring nonprofits to have a conflict of interest policy and a whistleblower policy. Just as many nonprofits treated the Sarbanes Oxley Act as a best practice and adopted some of its provisions even though not required to do so, Massachusetts nonprofits should consider this Act a best practice and adopt its policy requirements.
- Have financial key performance indicators and employ a dashboard to monitor them.
- Have a finance committee of the board that meets regularly.
Woody Allen said 80% of success is showing up. Well, 80% of board governance is showing up mentally and critically listening to whats going on. If you pay attention, youre smart enough to recognize something that could land you or your organization in trouble.
Paul Konigstein, a senior consultant with Accounting Management Solutions, has assisted nonprofits for more than two decades as a controller and chief financial officer. Contact him at firstname.lastname@example.org. This article has been republished with permission from BoardAssist.