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Where the Buck Stops
By Jim Keeslar, director and shareholder of Brockman, Coats,
Gedelian & Co.Financial Oversight
Budgeting
Controls
Investing
Conflicts of Interest
Tax Issues
Resources
At a time when newspapers are rife with headlines screaming about the
latest corporate finance scandal, it is important for board members of
not-for-profit organizations to understand their responsibilities when it
comes to financial management.
Financial Oversight
Board members assume potential liability and risk damage to their
reputations if finances are poorly managed. To prevent this, it’s important
that not-for-profit board members receive timely and accurate financial
information and understand how the entity’s resources are being used.
There are two primary ways a board can oversee this financial
responsibility. The first is through its treasurer, who explains budget
variances, ensures that records are properly maintained and sees that tax
and financial reports are filed in a timely, accurate manner. The second is
through its finance committee, which supervises financial responsibility,
including reviewing financial statements, overseeing the budgeting process,
upholding proper accounting policies and procedures and making investment
decisions.
Above all, board members should be encouraged to ask questions when it
comes to management of the organization.
Budgeting
Although an organization’s budget is typically prepared by management
and staff members, participation in the budgeting process can be beneficial
to board members as well. The budget generally will be based on historical
results (i.e. trends from the previous year), yet adjusted for anticipated
events. Involvement in this process affords board members a clear view of
the organization’s “game plan” for the upcoming year.
It also provides a tool for measuring the performance of the management
team. Additionally, an active review of the proposed budget versus actual
results, performed periodically, can be critical to avoiding surprises and
possibly even financial disaster.
Controls
Preventing financial disaster is also a function of internal controls –
another important responsibility of the board – designed to safeguard
against the misappropriation of assets. Some common controls include
segregating duties; designating multiple authorized check signers (including
for electronic funds transfers); conducting appropriate, timely reviews and
approvals of payroll, cash disbursements, bank reconciliations and financial
statements; and ensuring compliance with donor restrictions.
At the board level, policies and procedures can ensure the following:
- the finance committee maintains active oversight,
- qualified people serve on the finance committee and as the
treasurer,
- the finance or audit committee hire capable auditors and review
audit results directly with them, and
- financial results and issues are reported to the board in a timely
fashion.
Investing
It is also within the board’s realm of responsibility to develop and monitor
the organization’s investment policy. Once the board determines an
appropriate level of reserves for operating, capital and long-term purposes,
the investment policy should indicate how the reserves will be handled. Most
organizations choose a conservative investment strategy with an emphasis on
diversification. This policy should be revisited annually, and the results
should be monitored at least quarterly.
Conflicts of Interest
In addition, the board should ensure a conflict-of-interest policy is in
place, covering all employees, as well as all volunteers. Transactions with
a party-in-interest can take place; however, proper steps and procedures
need to be followed to protect both the organization and the individual
involved.
Tax Issues
The board must also be cognizant of tax-related issues specific to
not-for-profit organizations. For instance, fundraising is subject to its
own set of tax guidelines: gifts of $250 or more must be acknowledged,
raffle tickets are not deductible, and only the portion greater than fair
market value is deductible for dinners and auction items. Additionally,
potential tax hot buttons, such as political and lobbying activities, fair
and reasonable executive compensation and unrelated business income tax (UBIT),
must be considered.
Involvement in such financial issues may raise board members’ concerns
about their liability in the instance of any financial malfeasance. However,
state law often provides protection for members acting in good faith.
Additionally, the organization can carry directors and officers (D&O)
insurance to safeguard against personal liability on the part of its board
members.
No laws or insurance, however, will protect board members who disregard
their responsibilities to the not-for-profit organization. So be an active
and engaged board member. The organization and community will be better off
because of it.
Resources
Additional resources can help not-for-profit board members to understand
their financial responsibilities even more thoroughly. These include the IRS and
AICPA, which offers a
free comprehensive
Audit Committee Toolkit that can be downloaded and utilized by
not-for-profit boards. The Michigan Nonprofit Management Manual,
published by the Volunteer
Accounting Service Team of Michigan, is a comprehensive guide to
nonprofit law, finance, governance and management of tax-exempt
organizations. The Canadian Institute of Chartered Accountants produces a
series of free downloadable 20-questions booklets for directors on a wide
range of issues. Also visit not-for-profit association sites such as
www.boardsource.org
and www.allianceonline.org.
What Sarbanes-Oxley Means for
Not-for-Profit Organizations
In the wake of Enron and other corporate accounting scandals, the
Sarbanes-Oxley Act of 2002 was signed into law, requiring
publicly traded companies to broaden the financial responsibility of
their boards. While the law applies mainly to publicly owned
for-profit corporations, the not-for-profit sector could face
similar governmental regulations in the near future. Not-for-profit
organizations may want to voluntarily adopt some aspects of the
Sarbanes-Oxley Act to provide better governance.A good
portion of the law naturally covers auditing practices. Boards must
ensure auditors’ independence and disclose the presence of at least
one “financial expert” on the audit committee. Likewise,
not-for-profit boards should review their practices to ensure the
audit committee is independent and should make sure that members of
the audit committee are capable of carrying out their financial
responsibilities. The requirement that management must disclose all
of the organization’s “critical accounting policies and practices”
to the audit committee is another good general business practice.
Under Sarbanes-Oxley, CFOs and CEOs are required to sign
off on all financial statements. While not strictly necessary in a
not-for-profit organization, implementation of this rule may help to
ensure that the CFO and CEO understand these reports and know they
are accurate and complete. The Act also prohibits personal loans to
directors and executives, a provision that exists already in some
states in regard to not-for-profit organizations. Regardless of its
specific legality, providing personal loans is not recommended for
any not-for-profit.
There are a few provisions in the law, such as protection for
whistle-blowers and prohibition of destroying litigation-related
documents that apply to both for-profit and not-for-profit
organizations. But regulations don’t have to be specifically geared
at not-for-profits to be adopted as good business practices. |
About the Author
James J. Keeslar, CPA, is a director and shareholder of Brockman, Coats,
Gedelian & Co., a regional certified public accounting and business
consulting firm, based in Akron, Ohio. Through decades of experience
overseeing audit, review and compilation engagements for the firm’s Business
and Assurance Services group, Keeslar has developed considerable specialized
expertise in the not-for-profit sector. Keeslar serves as a reviewer for the
American Institute of Certified Public Accountants’ Practice Monitoring
Program. E-mail him at
jim.keeslar@bcgcompany.com.
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March/April 2005
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