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Nonprofit Board Members, Don’t Be Caught Off Guard!

I have been involved in nonprofit financial management—either as an employee, a board member, or an external auditor—for more than 20 years. I’ve observed that small nonprofits (those with less than 10 employees) typically follow one of two governance models, neither of which is optimal. Those with extremely constrained resources sometimes rely on the expertise of board members to perform staff functions. This creates liability issues of which the board members may not be aware. At the other end of the spectrum is the hands-off approach. This creates risk when there is inadequate accounting staff or when the financial reporting function is improperly insulated from those charged with governance. This more often than not occurs when there is no finance or audit committee, but can also result from management telling the board just what it wants them to know. When the organization structure is inadequate, financial reports can easily be manipulated to hide bad news. Three key points to remember are:

  1. Each board member, not just the treasurer and finance committee, has fiduciary responsibility to the organization for sound financial management. Board members can be held financially responsible for actions taken by the organization, employees and other board members. The total board is liable if something goes awry, not just those who were involved or had knowledge of it.

  2. It is essential that financial reports be timely and understandable so board all members can be fully informed. The basic financial statements should be made available to board members within 30 days of closing a period. Not everyone understands how to read financial statements, however. In preparing financial presentations for boards, I keep in mind that individuals process information differently and take a multi-media approach that uses a combination of narrative, numbers and illustrations.

  3. Finance and audit committees should monitor financial activity in detail. Finance committee members should have, or quickly develop, a good understanding of nonprofit financial reporting. Note that a smaller board may forgo establishing an audit committee if the finance committee is charged with overseeing the organization's internal controls and independent audit, including engaging the independent auditor, reviewing all audit reports and management letters and reviewing the IRS Form 990.

Failure to properly set the tone at the top and monitor financial activity and the operation of controls makes it easier for management to sweep bad financial performance under the carpet until it becomes too big to ignore. For some organizations, this has even become a recurring pattern. New board members aren’t properly educated and are caught by surprise when things hit the fan.

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