Not-for-profit organizations’ boards are justifiably passionate about their causes and eager to help their organizations. However, in today’s increasingly regulated climate, board members, who come from diverse backgrounds and may have little financial expertise, can feel overwhelmed by the regulations that are their duty to follow.
This second edition provides not-for-profit board members and financial managers with the essential fiduciary knowledge and indispensable leadership guidance that they need to meet the challenges of the current not-for-profit environment. This book contains the following:
- Financial and ethical guidance for real-life situations
- Practical leadership advice for novice and experienced board members
- Assistance for not-for-profit managers tasked with governance challenges
- Tools, checklists, and templates based on common sense management techniques
Table of Contents
Notice to Readers iii
About the Authors v
Preface vii
Acknowledgments ix
1 Increased Complexity and Mounting Challenges: Time to Prepare 1
Call to Action 6
Conclusion 6
2 Roles of the Board and Management 9
Governance in the 21st Century 10
Purpose of the Governing Board 11
Board Committees 12
Legal Responsibilities of the Board 13
Lesson Learned 13
Lesson Learned 13
Lesson Learned 14
IRS Form 990 and Governance 14
Frameworks for Good Governance 15
Panel on the Nonprofit Sector Framework - Good Governance Model 16
Legal Compliance and Public Disclosure 17
Effective Governance 20
Conclusion 30
Appendix A - Comparison of Key Objectives of the Board of Directors With the Good Governance Framework and Questions From IRS Form 990 32
Appendix B - Example Dashboard for Board Evaluation 35
Appendix C - Sample Board Self-Assessment Document 37
3 Legal and Ethical Imperatives for Leadership 39
Legal Accountability 40
Ethical Accountability 41
Who is Accountable for Accountability? 43
How to Instill Ethical and Legal Accountability 44
Honest Communications 44
Strong Relationships 44
Internal Controls 45
Clear Expectations 45
Skilled Boards 45
Involved and Informed Boards 45
Financial, Document, and Ethics Audits 45
Compliance Officers 46
Resolving Dilemmas 46
What About WholeHealth? 48
Conclusion 49
4 When Management and the Governing Board Disagree 51
The Head Game 52
Communication 53
Constructive Norms 55
Negotiation 57
Assisted Resolution 59
Conclusion 60
5 Understanding the Financial Statements of Nonprofit Organizations 61
Characteristics of Nonprofits 62
Responsibility for Financial Information 62
Basis of Presentation for Financial Information 63
Cash Basis of Accounting Versus Accrual Basis 63
Basic Financial Statements 64
Footnotes to the Financial Statements 65
Fund Accounting 66
Assets 70
Liquidity 70
Cash and Cash Equivalents 71
Revenue, Receivables, and Deferred Revenue 72
In-Kind Contributions 75
Long Term Contributions 76
Conditional Promises to Give 77
Endowments 78
Split Interest Agreements 79
Agency Transactions 81
Nonprofit Serves as a Conduit for Cash or Noncash Donations 81
Nonprofit Solicits Funds for Another Nonprofit Organization (Unrelated) 82
Nonprofit Holds Funds for Another Nonprofit Organization (Unrelated) 82
Nonprofit Enters Into Transactions With Related Foundations 83
Inventories 83
Prepaid Expenses and Investments 84
Alternative Investments 84
Property and Equipment 85
Liabilities 85
Accounts Payable and Accrued Expenses 85
Mortgages and Notes Payable 86
Net Assets 86
Revenues and Expenses 86
Conclusion 87
6 Risk Management 89
Some Risks Can Be Mitigated With Insurance 89
Cyber Risk - A Growing Threat 90
Risk in a Complex World 90
A Nonprofit’s Most Important Resource 91
Risk Management Approach 93
Enterprise Risk Management 93
ERM Component One 94
ERM Component Two 94
ERM Component Three 94
ERM Component Four 95
ERM Component Five 96
ERM Component Six 96
ERM Component Seven 99
Example Application of a Risk Management System to a Nonprofit Organization 99
ERM in Smaller Nonprofit Organizations 102
Risk Management Committee 103
Crisis Management 104
Revisiting Uncertainty 105
Conclusion 105
Appendix A - Risk Management Checklist 107
7 Internal Controls: What Every Executive and Board Member Needs to Know 113
Characteristics of Nonprofits 113
Internal Control Defined 114
COSO Framework Updated for Changing Times 115
Distinguishing Error From Fraud 116
Controls for Smaller Organizations 118
Elements of Internal Control 119
Control Activities 121
Designing a System of Internal Control 123
Entity Controls 123
Control Activities 127
Antifraud Programs and Controls 131
Misappropriation of Assets 131
Fraudulent Financial Reporting 132
Revenue Recognition and Management Override 132
Control Environment 133
Fraud Risk Assessment 133
Information and Communication 133
Monitoring 134
Billing Schemes, Check Tampering, and Expense Fraud 136
Use of Analytical Techniques to Identify Unusual Disbursement Transactions for Investigation 140
Skimming and Larceny 141
Payroll Fraud 143
Controls Over Noncash Items 146
When Processing is Outsourced 146
Cybersecurity and Not-for-Profits 147
Internal Controls Evolve 148
Conclusion 149
Appendix A - 2013 COSO Framework 17 Principles - Summary 150
8 Focus on Tax-Exempt Status 155
Nonprofit Organizations and Tax-Exempt Status 156
IRS Filings 157
Differences Between Nonprofit and Commercial Organizations 158
Recognition of Tax-Exempt Status 162
Lobbying 164
Public Charity or Private Foundation 166
Public Support Test for Charitable Organizations 167
Test 1 (509(a)(1)) - Compute the Public Support Percentage 168
Test 2 (509(a)(2)) - Compute the Public Support Percentage 169
Supporting Organizations 170
Charitable Contributions 172
Filing Form 990 175
Unrelated Business Income 177
IRS Audits 179
Conclusion 180
Appendix A - Guide for the Board’s Review of Form 990 181
Appendix B - Important Filings for Tax-Exempt Organizations 185
Appendix C - Governance Policies and Procedures 188
9 The Courage to Lead 189
Moral Courage 189
Barriers to Ethical Action 191
Strategies for Ethical Action 194
Have a Clear Compass 194
Know Your Objective 195
Seek Advisers and Allies 195
Walk the Walk 196
Understand Change Strategies 196
Practice Considerate Communication 197
Conclusion 197
10 Change Management 199
Understanding Change 200
Be Clear About What You Want 202
Assess Before You Act 203
Create Awareness and Urgency 204
Create a Powerful Coalition 205
Communicate 207
Address Obstacles and Blockers 208
Create Short TermWins 210
Give People the Tools to Succeed 210
Solidify Changes 211
Suggestions for Sonja 212
Be Clear About What You Want 212
Assess Before You Act 212
Create Awareness and Urgency 213
Create a Powerful Coalition 214
Address Obstacles 214
Communicate 215
Create Short Term Wins 215
Give People the Tools to Succeed 215
Solidify Changes 215
Conclusion 215
11 Integration for Action 217
Case One: AWoman Scorned 217
Prevent 218
Address 219
Improve 220
Case Two: The Indeterminate Sentence 221
Prevent 222
Address 225
Improve 225
Case Three: Your Turn 226
Sustained Success 227
Conclusion 227
Glossary 229
Bibliography 235
Suggested Reading 239
