(taken from the Sept/Oct 2006 issue of On Balance magazine)

Get Your Board in Gear

By Steven B. Borenstein, CPA, JD

The newspaper headlines have become more frequent and more disturbing. When a nonprofit agency garners negative publicity because of mismanagement or fraud, all nonprofits suffer to some extent.

Unlike a for-profit enterprise that is primarily responsible to its shareholders, a nonprofit organization is responsible to a much broader constituency. It is responsible to members of the public who make donations of dollars and time. More important, a nonprofit is responsible to its clients, who are often the most vulnerable members of the community.

CPAs who work for and volunteer with nonprofit organizations play a key role in the management of these organizations. Adoption of the following suggestions will help boards meet their fiduciary duties and keep their organizations from receiving unwanted exposure in the media:

1. Board composition: All boards should have representation from individuals with the requisite financial expertise to interpret financial statements. While it is the responsibility of all board members to provide oversight to financial matters, a financial expert will be able to pinpoint particular areas for concentration.

2. Orientation: Newly-elected board members should be given a thorough introduction to the organization. This orientation should include information regarding the organization’s mission statement, bylaws, programming and organizational chart. Board member job descriptions are recommended. Financial information should be included in this presentation, including sources of revenue, types of expenditures and a copy of the most recent audited financial statements. In addition, board members without financial expertise should be provided guidance regarding the interpretation of the organization’s financial statements.

3. Board meetings: Nonprofit boards and committees should meet regularly to provide adequate oversight. Nonprofit organizations exist in a constantly changing environment, and regular meetings are crucial for board members to understand the world in which the organization functions. Furthermore, regular attendance at board and committee meetings should be required.

4. Documentation: All board and committee meetings should be supported by detailed minutes. Minutes are the only record of business being conducted. They provide a wealth of information and historical context for the organization. Minutes should include the date of the meeting, the presiding officer, names of present and absent members and matters discussed. Minutes should be distributed prior to the subsequent meeting, reviewed for accuracy and approved at the subsequent meeting.

5. Relevant information: Complete financial information should be provided, including a statement of financial position (balance sheet), statement of activities (income statement) and statement of cash flows. In addition, comparison to budget and prior years should be included to put the statements in context. Written explanations of significant variances and financial ratio analyses (for example, days of net assets, days of working capital and days of receivables outstanding) are also helpful in interpreting the statements. Information should be disseminated in advance of the scheduled meeting.

6. Current information: Board and committee members should be given the most recent information available. For example, investment information could include copies of the latest statements that indicate current market value. Old data is irrelevant and does not allow for informed decision making.

7. Committee structure: Nonprofit organizations should have separate finance committees and audit committees. The finance committee oversees the preparation of budgets and financial statements, manages the collection and disbursement of financial resources of the organization, and advises the board with respect to significant financial decisions. The audit committee oversees the dissemination of financial reports, makes sure that systems of internal control are adequate, monitors staff compliance with policies and procedures, and engages independent external auditors.

8. Ethics: Board members should be required to comply with a strict conflict-of-interest policy. This policy should be in writing and signed by board members. An effective policy should require disclosure of relationships with the nonprofit organization’s vendors and other business associates. Board members should be prohibited from involvement in discussions and decisions involving these entities.

9. Board/staff relationship: Board members should feel comfortable discussing pertinent matters with all staff of the nonprofit organization. Similarly, staff members should be encouraged to contact board members with any suggestions or concerns, particularly when other avenues have been exhausted. Board members should monitor that adverse action is not taken against staff and volunteers as a result of these communications.

10. Passion: The most accurate and complete financial reports are meaningless without a dedication to the organization’s mission. It is without question that board members should be chosen for their expertise. However, nothing can substitute for genuine enthusiasm for the important role that the organization plays in the community. An engaged board member is an effective board member.

Steven B. Borenstein, CPA, JD has been the chief financial officer of the American Red Cross Greater Milwaukee Chapter for more than 10 years. He has also served as a board member for several nonprofit organizations. He can be reached at borensteins@wi-redcross.org or (414) 345-8643.

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