Is Your Nonprofit Protected from Risks?

“What was the board thinking?” When a nonprofit runs off course, this is question that most people ask. And so it was with the panelists described instances of fraud and malfeasance. The answer, apparently, is that the boards in question weren’t thinking, a lapse that can leave them open to prosecution.

nonprofit governance, nonprofit fraud, nonprofit leadershipThe news is rife with stories of boards that, because of cronyism, timidity, carelessness, or disengagement let bad things happen to good organizations: NARAL, where the executive director embezzled hundreds of thousands of dollars; the Central Asia Institute, where the founder billed the organization for the expenses of tours to touting his book, Three Cups of Tea, while being reimbursed by sponsors for those same trips; or the small nonprofit where the board chair left blank checks for the executive director to fill out as needed.

Most fraud and misuse of funds at nonprofits is the result of lackadaisical boards who don’t use common sense. That was the consensus of the discussion of How Can Boards Protect Their Organizations from Legal Risks?, one of a series of monthly roundtable discussions hosted by VCG/Governance Matters.

The panelists leading the discussion included attorneys with experience as both prosecutors and nonprofit counsel, and a CPA who specializes in auditing and establishing internal controls for nonprofits.

If you are a board member, start thinking about the risks your organization runs.

  • Does one person write the checks and reconcile the bank statement?
  • Does your board accept summaries of audit reports given by staff or does it have an executive session, without staff present, to discuss the details of an audit?
  • When you establish compensation for your executive staff, do you get reports about comparable salaries in the sector? Do you check those reports to make sure the comparables are for jobs in the nonprofit sector, at organizations of a similar size.
  • Do you know your organization well enough and its services well enough to judge when an expense is within reasonable limits?
  • Do you monitor rising expenses and look into the details of just what is included in those expenses?
  • Are you willing to challenge the executive director -- even if s/he is the founder -- about policies and oversight?
  • Does your board have conflict-of-interest and whistleblower policies in place and enforced?

About that last question: Board members can be held to account for wasting a nonprofit’s money, even if they did not personally gain from the transaction. So don’t give the contract for janitorial services to the executive director’s brother-in law’s firm without competitive bidding, full disclosure, and a careful audit of the books.

The attorneys on the panel hammered home the duties of board members to put the interests of the organization ahead of their own, to show up at meetings, and to ask questions. “Board member” is not an honorary title; it’s a commitment of time and talent.

In fact, the mantra of the meeting was “ask, ask, ask.” And some good rules of the road were passed on:

  • Challenge the leadership, no matter how charismatic, no matter if s/he is the founder or board chair.
  • Have the audit committee meet with the auditor, without staff present. Don’t accept a summary report presented by staff.
  • Always have at least two sets of eyes on any financial transaction.
  • Read your organization’s 990 and ask questions about it; the board is responsible for its contents.
  • Have legal counsel and an auditor who specialize in nonprofits.
  • Have a succession plan in place on the board and executives.
  • Have terms limits for board leadership.
  • Develop a board culture in which discussion and questioning is welcome.
  • Put conflict-of-interest and whistleblower policies in place and use them.
  • Evaluate then compensate your executive director, based on his/her achievement of goals set each year and valid comparable salaries in the sector.

You get the idea. Common sense. A culture of accountability. Give a damn.

Flickr image: By peterjroberts
 

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