Perhaps the “public” in the CPA title suggests it to everyone. Or perhaps our expertise with “those numbers and financial issues” is the factor, but for these and other reasons, CPAs are almost routinely expected to serve on boards of nonprofit organizations.

Many CPAs have heard rumors of enhanced accountability and Sarbanes-Oxley-type regulations on the horizon for nonprofits. While this article does not address any specific requirements, it is clear that change is on the horizon.

CPAs simply have a lot of experience in either participating on or interacting with boards of nonprofit organizations.
As a result, many CPAs might agree that nonprofit boards are not necessarily revered as models of either effectiveness or efficiency.

I have developed a theory of such boards from my experience with dozens of nonprofit organizations. Simply put, most members of nonprofit boards tend to serve with their hearts instead of their heads.

Board members who would normally make effective decisions in their own businesses enter a nonprofit boardroom and often become caught up in the mission – and no longer follow their normal business instincts.

True, nonprofit missions are usually noble, with a potentially significant impact on the lives of real people. However, if the entity is not managed in an intelligent manner, the mission is ultimately unattainable. My advice to boards generally follows basic guidelines that include actions initiated by both the organization and by the board members themselves.

First, the nonprofit organization should educate board members with basic information about the entity. Every member should be given copies of the articles of incorporation or charter, bylaws, most recent corporate tax return (Form 990, 990-EZ, etc.), tax exemption letter from the IRS, cover page from the organization’s directors and officers liability insurance policy, conflict of interest policy and any publications concerning the entity’s history, current programs or initiatives. Here’s why:

• The articles of incorporation or charter provide the legal definition of the organization’s purpose. Board members must be cognizant of the organization’s legal purpose to ensure changes in goals or programs do not move the entity beyond the outlines of these documents. Why? Because the IRS could determine the changes affect the tax exemption of the entity. No board member wants to explain a loss of tax exemption for a popular charity.
• The bylaws of the organization outline the duties of officers and board members – necessary information to ensure these people act within their authority. The bylaws (or possibly the articles of incorporation) should also include indemnification clauses to protect the liability exposure of board members.
• The entity’s most recent Form 990 (or Form 990-EZ) is, by law, available to the public. Board members should see the form, first to ensure that it was filed, and secondly to be aware of its contents. If the public can view the document, it is even more important each board member understand its contents. Of course, if the Form 990 was not supposed to be filed, due to the entity’s receipts being less than $25,000, then that information should be communicated to the board.
• The entity’s exemption letter from the IRS justifies its tax status, and may often be requested by donors or funding agencies. Again, board members should have the same information in their hands that may one day be placed in the hands of outsiders.
• The existence, or lack thereof, of directors and officers liability insurance is important information for board members to know concerning their own potential personal liability for their service. While there are certain statutory limitations on liability to board members, the insurance policy potentially provides payment of legal expenses associated with lawsuits.
• The organization’s conflict of interest policy, along with applicable procedures and reporting forms, further defines the responsibilities of board members. The evidence of such a policy also adds credibility to the entity’s institutional integrity.
• Any history of the entity, as well as copies of current publications, is important background information for a board member. This information allows each board member to understand where the entity has been and where it is going.

Before committing to a nonprofit board, any potential board member should take certain steps prior to accepting the position:

• Obtain and carefully review the information outlined above.
• Verify the tax status of the entity by using the newly enhanced search feature on the IRS web site. Why is this necessary in addition to having a copy of the IRS exemption letter? Many exemption letters are several years old and represent the tax status at the date of the letter. The IRS web site will display the current (or at least a more current) tax-exempt status.
• If the entity is a corporation, verify the corporation has maintained its legal status by checking Michigan’s corporate entity search. If the state no longer recognizes the organization as a separate corporation, the entity’s tax status and operations could be impacted.

Third, the organization’s management should provide – and board members should expect to receive – the following information on an ongoing basis:

• Goals and objectives for the major programs of the organization.
• Reports of outcomes for major programs, including both financial and non-financial data.
• Non-financial data the board may deem applicable in monitoring the progress of operations. Examples could include number of meals provided to constituents, census data of a nursing home, contacts made for fund raising, etc.
• Regular and timely financial reporting, at a level of detail deemed suitable by the board.

Fourth, I suggest adopting a “front page management approach.” That is, when faced with a tough decision, if you want to see the probable result on the front page of the newspaper, then proceed. However, if you do not want to see the probable result on the front page of your newspaper, strongly reconsider.

Pitfalls to avoid
In the ongoing operation of a nonprofit, ideally board members should not actually manage the operation, but they should be aware of operational issues that could impact the long-term health of the activity. Often, there is a tension between board members becoming too involved versus having board members serve solely as a rubber stamp to aggressive, but well-intended managers. In the larger view, this tension is healthy for the nonprofit – when the tension can be balanced and managed effectively.

Avoid the following potential pitfalls:
Do not defer financial reporting of any kind. While boards can operate effectively without receiving detailed monthly financial statements, they can seldom operate effectively without ANY financial information. Use your head – a modest financial report is better than no information.

I have worked with organizations in which the board had no idea of cash balances for several months, simply because management could not compile a full financial report. That particular organization had a CPA and a bank president on the board, but they had felt the charity “was serving the community” and that program management was more important than finances. Six months later, after finding problems, they had to fire the manager.

Nonprofit financial reporting to boards runs the gamut from too basic to far too detailed. A CPA is in an excellent position to suggest a level-headed approach designed to provide enough information upon which to base decisions, but not so much information that it is disregarded from fear of boredom or “getting lost in the numbers” by board members.

Do not adopt new programs simply because some people could be helped. Many nonprofits ultimately fail in their core mission by becoming fragmented in their approach. Unfortunately, someone must ask the question, “Can we afford this?” Helping a few people today might endanger helping many more in the future.

Manage conflict of interest issues. Establish and enforce a policy for board members and management to follow. Articles appear almost weekly in newspapers in which conflicts have been discovered that have contributed to the detriment of the nonprofit’s overall mission.

Make certain that information in brochures, web sites and other publications is consistent. I have seen entities where as many as three different sets of program eligibility rules existed within their communication efforts. Several board members were publicly embarrassed at a fund-raising dinner when these discrepancies were called to their attention.

The board should ensure that basic regulatory matters are handled promptly. This may include licensing; reporting to the IRS, payroll and sales tax authorities; as well as annual corporate reporting to the SCC and other regulatory bodies. I assisted one charity that had a college treasurer and a CPA on its board, but had not filed the required Form 990 for three years. The two men told me they “assumed” it had been done. They never inquired of management about the reporting during those years.

Although most of the more than one million or so tax-exempt entities in the U.S. do not have a financial audit, the board should at least have a subcommittee review the basic financial records. While this approach is not an audit or review, as defined by CPAs, such a step at least serves notice that “someone is watching.” It is also a method to implement some basic financial controls.

I helped one charity that lost an unknown amount of money from concession sales because the treasurer collected the sale proceeds, made the bank deposit, reconciled the bank statement and presented financial information to the board, but sporadically. The entire board had been impressed by her devotion to the cause. But, the money was lost. By asking two volunteers to assist the new treasurer in
certain steps, we inserted some control and efficiency to the process.

The above ideas are but a few examples CPAs can utilize for their nonprofit clients, particularly the smaller ones, and for organizations on whose boards they serve. A CPA has great financial skills to offer these entities. But, CPAs must remember they may need to be the person who asks the “tough” questions. Ultimately, the basic business aspects of an operation have to be managed effectively, or all the good feelings will be wasted in a poorly executed approach.

About the Author
Jim Cole, CPA, is director of development for the Masonic Home of Virginia. His 25 years of experience with corporations and nonprofits include roles as a founder, officer, consultant and auditor. He regularly speaks on topics including financial reporting, communicating with non-accountants, accounting and auditing issues, endowment administration, tax, fund raising, planned giving, board development and organizational structures for nonprofits and their taxable subsidiaries. He can be reached at Jdcole2001@aol.com.

Reprinted with permission from the Virginia Society of CPAs.

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