This article by Kate Sphar appeared in our February 2014 Newsletter| Making Nonprofits Stronger
Leslie and I love our jobs. We work with a lot of really fantastic people at organizations that are doing meaningful work in their communities. Over time, we have seen nonprofit leaders become smarter and more savvy about how they manage. In the ten years I have been a consultant to nonprofits, I have seen the level of financial acumen among my clients increase significantly overall.
Of course, that doesn’t mean there isn’t room for improvement. Perhaps it is because of the increased sophistication of nonprofit managers that we see Boards “checking out” financially. Even in this day and age of increased scrutiny on nonprofits, we still encounter Board members who aren’t aware of their responsibility regarding the agency’s financial health and solvency. They should take notice of the numerous local nonprofits that have faced instances of misappropriation or theft, bringing to light how crucial is it that both Board and staff understand potential financial risks and ensure that their organizations are operating in a fiscally sound way. Nonprofits of all sizes, from universities, to the United Way, to a small volunteer fire department, face the risk of fraud, from both inside and outside the organization.
But not all risk looks like these obvious cases of criminal behavior, Boards have to be vigilant as to their financial decision-making in all regards. As recent events at Conneaut Lake Park and the August Wilson Center illustrate, a Board of Directors can potentially be held liable for a “breach of trust”, in the form of misuse of organizational assets or poor/nonexistent planning.
So let’s debunk the Top Three excuses we hear as to why Board members aren’t more aware and engaged in their fiduciary responsibilities:
Moreover, we often find that Boards don’t actually understand what staff members’ and contractors’ responsibilities are. I can’t tell you how many times I have heard a Board member say that they were disappointed their contract bookkeeper hadn’t solved their strategic financial issues. Bookkeepers are hired to keep the books! Executive Directors, too, are often ascribed financial acumen that many will admit they do not have. Financial roles are not interchangeable, and just because someone performs a duty related to organizational finances does not mean they have the capability (or capacity) to act as a CFO. If you need strategic financial guidance, you have to invest in it (or convince it to join your Board).
The bottom line is that every Board member needs to understand all aspects of its financial systems. Ask yourself some questions:
Of course, that doesn’t mean there isn’t room for improvement. Perhaps it is because of the increased sophistication of nonprofit managers that we see Boards “checking out” financially. Even in this day and age of increased scrutiny on nonprofits, we still encounter Board members who aren’t aware of their responsibility regarding the agency’s financial health and solvency. They should take notice of the numerous local nonprofits that have faced instances of misappropriation or theft, bringing to light how crucial is it that both Board and staff understand potential financial risks and ensure that their organizations are operating in a fiscally sound way. Nonprofits of all sizes, from universities, to the United Way, to a small volunteer fire department, face the risk of fraud, from both inside and outside the organization.
But not all risk looks like these obvious cases of criminal behavior, Boards have to be vigilant as to their financial decision-making in all regards. As recent events at Conneaut Lake Park and the August Wilson Center illustrate, a Board of Directors can potentially be held liable for a “breach of trust”, in the form of misuse of organizational assets or poor/nonexistent planning.
So let’s debunk the Top Three excuses we hear as to why Board members aren’t more aware and engaged in their fiduciary responsibilities:
- “There are other people on the Board who are paying attention to the financials; so I don’t really need to.” You know Jane, the Board Treasurer, who is diligently reviewing the financial statements each month? Well, you and Jane have the exact same fiduciary responsibilities and potential liabilities. So it is only to your benefit to review financial statements and ask questions. There is no such thing as a “non-financial person” when it comes to being on a nonprofit Board. If you are not comfortable with reading financial statements, ask your other Board members or the Executive Director (or us!) where you can get some help. There are tons of resources and trainings available to get Board members up to speed.
- “We have a financial policies and procedures manual. So that should protect us.” Due to the increased requirements of the 990, a lot of nonprofits are putting into place certain policies, like a Conflict of Interest, Document Destruction, or Whistleblower Policy. But responsibility does not end there. Every organization should have financial controls that outline how financial transactions are handled – who makes decisions and signs off on all types of transactions, how financial assets and liabilities are valued and tracked, and how data is kept secure. There are lots of templates available for financial controls manuals on the Internet; but I have found the best source for a sample document can be other nonprofit organizations that are like yours. Many nonprofits are happy to share their financial policies and procedures as an example to others who need assistance.
Most importantly, those policies and procedures should be reviewed on a regular basis (annually) to ensure they are being followed and are still appropriate for the organization. As staffing, programs and operations change, your financials controls may have to change as well. - “That’s the Executive Director/CFO/bookkeeper’s job.” For those large enough and/or lucky enough to have dedicated financial staff, it is often tempting to lay all responsibility at the feet of the staff. But as I’ve noted, when something goes wrong at a nonprofit, it is the Board that will be held liable first.
Moreover, we often find that Boards don’t actually understand what staff members’ and contractors’ responsibilities are. I can’t tell you how many times I have heard a Board member say that they were disappointed their contract bookkeeper hadn’t solved their strategic financial issues. Bookkeepers are hired to keep the books! Executive Directors, too, are often ascribed financial acumen that many will admit they do not have. Financial roles are not interchangeable, and just because someone performs a duty related to organizational finances does not mean they have the capability (or capacity) to act as a CFO. If you need strategic financial guidance, you have to invest in it (or convince it to join your Board).
The bottom line is that every Board member needs to understand all aspects of its financial systems. Ask yourself some questions:
- Financial staff and Board responsibilities. Which staff members have financial responsibilities? What expertise or training does each person have? What role does each person have? Is the Board playing its role appropriately?
- Financial reporting. Are we getting timely, accurate and appropriate reports? Do I understand what they say? Does the information help the Board make decisions?
- Financial controls. Do we have financial controls in place that are right for the organization? Are they being followed? Are they easy to find?
- Financial planning. Do our strategic plans relate to our financial reality?