Recent conversations in the nonprofit world increasingly surround "good governance" within nonprofit organizations. For years, many looked at good governance as board members contributinglarge sums of money to their organizations, while also making sure thatthe particular organization is following its mission.
No longer is that good enough.
Well-known accounting scandals involving Enron, Tyco andWorldCom have put the spotlight on good governance - not only in thefor-profit world, but also in the world of nonprofits. As we know, thenonprofit sector has not totally steered itself clear of blame.Whatever the case may be - avoiding taxes by conducting activities notconsistent with the organization's mission, fraudulent activities, orsimply misspending funds - many nonprofits are as much to blame astheir for-profit counterparts.
So what does that have to do with good governance?
Well, it's a commonly known fact that an active board canenhance how effective a nonprofit is. But a board that meets often maystill not be exercising the type of governance the particularorganization may need.
FACT VS. FICTION
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'teven begin to scratch the surface of effective governance. What is mostimportant is how the board exercises appropriate oversight overmanagement.
* 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 thegovernance necessary to be successful and compliant with pertinent lawsand regulations. What is adequate for a small organization, forexample, 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 anorganization governs itself. Especially because of recent allegationsof misspent funds at many nonprofits, donors are becoming moreinterested in the governance of organizations. Donors feel a laxgovernance structure can lead to their money being spentinappropriately. Lenders also want to see that an organization is wellgoverned.
While not technically a requirement within the InternalRevenue Code, the Internal Revenue Service will review anorganization's exemption application and annual information returns todetermine whether organizations have instituted certain policies thatdemonstrate effective governance.
THE NEW FORM 990
To improve its review of the governance of nonprofitorganizations, the IRS has increased the number of questions on the newForm 990, mainly in Part VI. Due to the public transparency of the Form990, Part VI is not an area that nonprofits should take lightly.Potential donors can now easily see what important policies anorganization has in place, and what it lacks. Some of the key questionsthat now must be answered by organizations concern governance in theareas of:
* Conflicts of interest. Does the organization have apolicy, and does it require key employees (officers, directors,trustees) to disclose annually any interests that could give rise toconflicts of interest?
* Executive compensation. As this is now a key focus areain both the for- and nonprofit sectors, what type of process does theorganization 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 theorganization's governing body? This question also requires adescription of the process the organization goes through to allow forreview of the form.
Another important issue is whether the following policiesare in place: a written whistleblower policy; a written documentretention and destruction policy; and, if an organization has investedin, participated in or contributed assets to a joint venture or similartaxable entity, a policy whereby the organization evaluates itsparticipation.
Outside of required answers to new Form 990 questions, itis considered best practice for nonprofit organizations to demonstratethe following aspects of sound governance:
* Fundraising. Organizations must determine if theirsolicitations meet applicable state and federal law, and are done ingood faith. Additionally, only funds that are congruous to anorganization's mission and existence should be accepted.
Strong financial oversight. Organizations should determineif the board has a member(s) that can exercise the proper due diligenceover the books, records and financial statements of an organization.The formation of an audit committee to conduct many of these tasks isalso encouraged. Other areas of strong financial oversight include howexpenses are allocated on a functional basis, the accounting forrestricted donor assets and revenues, revenue recognition, and thecreation and monitoring of a budget.
* Bylaws. Organizations must be aware of all provisions,whether they are being followed, and if the appropriate updates arebeing made.
* Internal controls. Organizations must decide if thecontrols in place are suitable for the organization and if they arebeing 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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