I’ve kept count. This month marks the 10th nonprofit board, most of them small charities, where I’ve resigned due to inadequate internal management controls.
That does not mean that there was fraud or noncompliance at the ten organizations. While we recognize that fraud occurs in nonprofits at a shocking rate – some sources say 40% of charities – my role is not to detect fraud or address this issue. My response means that the risk of financial mismanagement was high and that the boards were not making adequate progress toward good governance procedures.
This also does not mean that I won’t support these nonprofit organizations. In most cases I will continue as a donor, adviser, or compensated service provider. It just means that professional standards do not allow me to continue as a board member.
This blog post, however, does not focus on these ten nonprofits with inadequate management policies, but rather on the many more with errors in their governance and financial management policies.
The Dos and Donts
The US Treasury and state governments publish clear guidance for nonprofits. In those areas where guidance is not clear, the method to allow the nonprofit to clarify its own policies is clear. This post is not meant to delve into any of this guidance but rather just to emphasize that it does exist and that it’s meaning is clear. Unfortunately, my anecdotal experience is that very few have bothered to read the applicable authority or study this topic before offering advice to others. I see many tax practitioners, including some CPAs and attorneys, either deliberately or unwittingly providing false information.
If we were to single out one useful starting reference for good governance of nonprofits from a federal government perspective, it would be this IRS publication: https://www.irs.gov/pub/irs-tege/governance_practices.pdf Some states have additional requirements that tend to be more technical or procedural in nature; not so much focused on big picture governance..
The original publication of an IRS guide called is believed to have contained an error not supported by law or Service policy. Two of the nation’s prominent associations of nonprofit organizations have longstanding misinformation published on their web sites. The error states: “Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service.” Again, this was never based on law or IRS policy. This misinformation has been debunked by reputable authorities, attorneys, and nonprofit writers, yet the misinformation persists. We do not know why this published misinformation persists or it’s original source. Some suggest that an old IRS publication might actually have been the source of the problem. To clarify, all currently published IRS guidance is believed to be reliable. Yet I would estimate that at least once a month I hear of a misinformed nonprofit executive or adviser where their misunderstanding can be traced back to published errors by one of these two nonprofit associations.
While this post is not meant to review the applicable law, I would suggest that small nonprofits consider the following practical tips:
1) Try to have one board member who practices nonprofit accounting or legal field
2) Provide training to board members. Don’t assume that they have the knowledge or skills to run a nonprofit
3) Executives and advisers should read the applicable published guidance for nonprofits
4) Do not avoid paying reasonable compensation for services or rents to closely affiliated persons. These relationships quite often build the backbone of successful nonprofit organizations.
5) Have a clear conflict of interest policy that focuses on disclosure and avoiding abuse, rather than cutting out potentially valuable relationships. Examples are publicly available.
6) Have a clear financial management practices policy. A small organization can usually begin the process by borrowing and adapting the wording of a policy of a similar organization.
7) Review the conflict of interest policy and the financial management policy annually at a board meeting.