CPAs nodded their heads in sympathy as stories of governance mistakes were told during a session at the AICPA Not-for-Profit Industry Conference in Washington on Thursday.
One organization accepted a gift of a cattle ranch that had nothing to do with its mission, creating huge administrative headaches.
Another organization did not immediately sell a gift of $500,000 in securities that were donated to finance an endowment. The value of the securities suddenly plummeted, and within two weeks just $250,000 was left for the endowment.
This is the difficulty with governance at not-for-profits. They often are run by well-meaning people who want to direct a maximum amount of their energy and resources to the cause they are trying to serve. But BDO Assurance Partner Laurie Arena Rocha, CPA, said not-for-profits that don’t follow good governance procedures put the mission at risk unnecessarily.
“I had a client that had swampland in Florida,” Rocha said. “They couldn’t unload it. It was worthless, and they got stuck with it. That’s the challenge with organizations feeling like they’re too small [to invest in sound governance]. Because they’re really not too small to run into any one of these problems.”
Rocha and BDO Tax Exempt Senior Director Rebekuh Eley, CPA, described 15 governance policies that can help not-for-profits avoid such problems. These include:
- A written code of ethics for board members that states the organization’s values and is presented to board members during the orientation process. The code should become part of the not-for-profit’s culture rather than a stale document that is easily forgotten.
- A conflict-of-interest policy for board members that requires periodic disclosures and consistent monitoring. Some boards read the policy before every meeting, and some have quarterly or semiannual reminders.
- A whistleblower policy. This should allow everyone associated with the organization to come forward without fear of retaliation. Some organizations use a hotline, while others designate a certain person in the organization to receive and respond to complaints.
- A document retention and destruction policy. This should undergo legal review to make sure it complies with state and federal laws and requires regular compliance monitoring.
- Expense reimbursement. This should follow IRS guidelines, requiring documentation and receipts for all purchases over a specific dollar amount, which often is $25. There should be no payment of personal expenses or family travel from expense accounts, and reviewers should be empowered to question any and all expenditures.
- A gift acceptance policy. This also should be reviewed by legal counsel, and potential gifts should be screened to determine whether ethics, financial circumstances, or other interests are compromised by the acceptance of the gift. A best practice is to liquidate gifts of securities immediately to avoid losing a portion of the donation if the value of the securities suddenly drops.
- A process that allows all board members to review Form 990, Return of Organization Exempt From Income Tax, before it is filed.
- A board compensation policy. Not-for-profit board members should not be compensated, Rocha said. But in some instances, she said, board members do receive stipends. If compensation is paid, it should be documented and approved.
- Oversight of independent review of financial statements. Best practices call for an independent audit committee that monitors financial practices and is involved in auditor selection. Recruiting board members with financial expertise is critical to assist this process.
- Procedures for selecting and monitoring grant recipients. No private inurement should be given.
- An endowment spending policy. This can help make sure investment is done responsibly.
- A fundraising policy. Although this is seen in practice less frequently, according to Rocha, she advises having a written policy that’s monitored for compliance and reviewed with management annually.
- Disclosure of governing documents. This aids in transparency.
- Review the size, structure, and independence of a board. There should be at least five members, with two-thirds of members independent, and with a diverse background, according to the conference speakers.
- A meeting minutes policy. Minutes should contain enough detail to determine the quality and extent of discussion, and typically are reviewed and approved at a subsequent board meeting.
Many of the items include duties for board members who are volunteers. And smaller not-for-profits sometimes neglect governance because they develop a comfort level with volunteers or staff, Eley said. It’s difficult to imagine that the kind, churchgoing employee who brings cake to the office on everyone’s birthday also could be committing fraud.
“That [comfort level means] you’re really running the risk,” Eley said.
CPA representation on not-for-profit boards is extremely helpful, Rocha said. The checks and balances may not always be appreciated by those who are gung-ho about the mission of the charity, because the governance can seem to interfere with plans and goals.
“It’s very important [to have CPAs on boards] because we’re very often the voice of reason,” Rocha said. “When people get carried away with their mission, they need the voice of reason. But the voice of reason is not the obstacle. It’s really the tools that you need, the foundation to really grow on.”
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.