Building effective governance at not-for-profit organizations

Recent conversations in the nonprofit world increasingly surround "good governance" within nonprofit organizations.

For years, many looked at good governance as board members contributing large sums of money to their organizations, while also making sure that the particular organization is following its mission.

No longer is that good enough.

Well-known accounting scandals involving Enron, Tyco and WorldCom have put the spotlight on good governance - not only in the for-profit world, but also in the world of nonprofits. As we know, the nonprofit sector has not totally steered itself clear of blame. Whatever the case may be - avoiding taxes by conducting activities not consistent with the organization's mission, fraudulent activities, or simply misspending funds - many nonprofits are as much to blame as their for-profit counterparts.

So what does that have to do with good governance?

Well, it's a commonly known fact that an active board can enhance how effective a nonprofit is. But a board that meets often may still not be exercising the type of governance the particular organization may need.


Fiction: A board that meets often satisfies most of the important elements of effective governance.

Fact: The amount of times the group formally meets doesn't even begin to scratch the surface of effective governance. What is most important is how the board exercises appropriate oversight over management.

This includes:

* What types of expertise does each board member bring? Financial expertise? Legal expertise? Operational expertise?

* Are there any subcommittees in place to oversee specific projects?

* What accountability is there for activities conducted that do not meet the mission of the organization?

Fiction: There is basically a "one-size-fits-all" approach that organizations must follow to exercise good governance.

Fact: The size of an organization has a large effect on the governance necessary to be successful and compliant with pertinent laws and regulations. What is adequate for a small organization, for example, obviously wouldn't suit a large university or hospital.

Fiction: Other than the nonprofit organization itself, no other parties are concerned with the organization's governance.

Fact: Many other parties are interested in how well an organization governs itself. Especially because of recent allegations of misspent funds at many nonprofits, donors are becoming more interested in the governance of organizations. Donors feel a lax governance structure can lead to their money being spent inappropriately. Lenders also want to see that an organization is well governed.

While not technically a requirement within the Internal Revenue Code, the Internal Revenue Service will review an organization's exemption application and annual information returns to determine whether organizations have instituted certain policies that demonstrate effective governance.


To improve its review of the governance of nonprofit organizations, the IRS has increased the number of questions on the new Form 990, mainly in Part VI. Due to the public transparency of the Form 990, Part VI is not an area that nonprofits should take lightly. Potential donors can now easily see what important policies an organization has in place, and what it lacks. Some of the key questions that now must be answered by organizations concern governance in the areas of:

* Conflicts of interest. Does the organization have a policy, and does it require key employees (officers, directors, trustees) to disclose annually any interests that could give rise to conflicts of interest?

* Executive compensation. As this is now a key focus area in both the for- and nonprofit sectors, what type of process does the organization go through to determine the compensation of key employees?

* Board meetings. Are there records of meetings held by the governing body?

* The Form 990 itself. Was a copy provided to the organization's governing body? This question also requires a description of the process the organization goes through to allow for review of the form.

Another important issue is whether the following policies are in place: a written whistleblower policy; a written document retention and destruction policy; and, if an organization has invested in, participated in or contributed assets to a joint venture or similar taxable entity, a policy whereby the organization evaluates its participation.


Outside of required answers to new Form 990 questions, it is considered best practice for nonprofit organizations to demonstrate the following aspects of sound governance:

* Fundraising. Organizations must determine if their solicitations meet applicable state and federal law, and are done in good faith. Additionally, only funds that are congruous to an organization's mission and existence should be accepted.

Strong financial oversight. Organizations should determine if the board has a member(s) that can exercise the proper due diligence over the books, records and financial statements of an organization. The formation of an audit committee to conduct many of these tasks is also encouraged. Other areas of strong financial oversight include how expenses are allocated on a functional basis, the accounting for restricted donor assets and revenues, revenue recognition, and the creation and monitoring of a budget.

* Bylaws. Organizations must be aware of all provisions, whether they are being followed, and if the appropriate updates are being made.

* Internal controls. Organizations must decide if the controls in place are suitable for the organization and if they are being followed by appropriate staff.

A nonprofit that demonstrates good governance will find that this can have a direct link with its overall success.

John McCarthy, CPA, is manager of assurance services at Braver PC.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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