Minimum expectations for board members

In casual conversation today I mentioned to a business attorney that a board level project was on hold until I completed minimal due diligence checks on the company in discussion. He asked what I meant. I explained that a CPA is expected to verify certain information about a new business client. He seemed more confused. After all, he said, there was a prominent local attorney and another CPA already on the board. Surely they had already taken case of this. But as I looked closer, within an hour I found several glaring problems that must be addressed before I can tackle the planned project. The experience prompted this blog post.

These are just five basic issues that a prospective board member should check before joining the board of any company:

  1. Existence. Make sure that the company legally exists. Sometimes a business operates as ABC INC or XYZ LLC for years but a check of the state’s business filings shows that no such organization exists. In this case, additional questions are necessary.
  2. Business licenses. Make sure that the company is authorized to do business in the state(s) where it operates. Start by checking business registration records and then look for licenses in key business lines. A plumbing company, for example, might be a registered contractor but might not be licensed to install septic systems that is a major line of business.
  3. Consistency. Make sure that the name and employer identification number (EIN) match up across the company’s major accounts. You may find inconsistent ID numbers and variations of a name. Perhaps trade names or brand names are an issue.
  4. Insurance. In this litigious business environment, it may make sense to only be involved in a board of a company that provides proof of insurance for board members. This is usually called  a directors and officers policy.
  5. Financial statements. You don’t need to b a financial wizard to check the basics of the financial statements. For example, does the bank account statement match the amount on the financial report given to board members? Is there a statement of what is owned and owed (usually called a balance sheet), a statement of money action (called a statement of cash flows) and a reconciliation of how much the company earned and spent (income statement).

This list is not meant to be exhaustive. In fact, just the opposite, this list is meant to serve as a starting point.