It has long been sound practice for nonprofit organizations to have a member or members on their Board of Directors with accounting or financial experience. Legal, governance and ethical responsibilities are such that at least one person on the board should have more than a passing understanding of budgets, financial statements and nonprofit tax law. Applying for grants, implementing capital reserve funds, fundraising—all require good financial judgment if the nonprofit organization is to run efficiently and effectively.
In addition, new financial statement reporting requirements and the expanded IRS Form 990 nonprofit tax return make it even more important for accounting and financial literacy to be part of a nonprofit board’s makeup. So does the increasing public demand for transparency in all organizations—especially those we donate money to.
If you’re a new organization or if you’re considering bringing new members on your board, you might be thinking you need high-profile individuals who would add prestige to your board. That is all well and good, but what about also inviting someone who isn’t well known but has sterling financial/accounting credentials? Here are five key reasons why financial/accounting experience is so important.
Basic responsibilities demand financial insight
The legal, governance and ethical responsibilities of a nonprofit board all include activities that require keen financial understanding and insight.
- Legal responsibilities. Boards should ensure prudent use of all assets for the nonprofit’s effectiveness and sustainability. This includes not only making decisions in the best interests of the organization and knowing and obeying all applicable laws, but also complying with all IRS and state laws concerning required filings and lobbying activities. It’s important to remember that, if the IRS suspects any fraudulent behavior or a donor sues for misuse of his or her contributions, the entire board is held responsible, not just the organization itself or the treasurer.
- Governance responsibilities. Boards should approve the CEO’s, Executive Director’s, or top management official’s compensation, review the annual IRS Form 990—which has become more complex in recent years—and provide for appropriate internal accounting roles so that all assets are used in accordance with their intended purpose. In addition to considering policies on whistle blower protection and document retention and destruction, the board is also responsible for the oversight of establishing policies on acceptance of gifts—both cash and non-cash varieties.
- Ethical responsibilities. Board responsibility for the organization’s assets extends to evaluating both staff and other board members to determine that each member is performing ethically concerning those assets. (Interestingly, the IRS found in a study of nonprofit audits that fraud was more frequently committed when there was one main board member who had the control.) Boards also define performance expectations for themselves and for staff members to be sure everyone’s judgment and ethical values reflect those adopted by the organization. For example, I know of an incident in which a board member questioned discrepancies between fundraising donations and cash deposits. It turned out a staff member had been pocketing some of the checks he was responsible for depositing. That’s good work by a financially literate board member who knew what to look for!
Board 101: The ability to read financial statements
In my work, I’ve seen many board members “zone out” when it comes time to review an organization’s financial statements. Putting a budget together, analyzing and approving it and comparing budget with actual numbers are financial skills that many successful people just don’t have. This technical knowledge is critical to an effective board, however.
Board members with these skills can keep the board’s focus where it needs to be, and ensure that items are reported correctly. They will also know the right questions to ask. How will building repairs affect the investment strategy? How do we plan for the potential loss of a grant? How do we conduct and report fundraising activities in different states? These are all questions that a financial/accounting person can answer, and teach others on the board to answer as well.
Someone who can do and teach
Someone on the board must be able to review, understand and explain to other members the organization’s annual budget and financial health of the organization. The stereotype of the gray-haired, introverted accountant with an eyeshade and an adding machine is a thing of the past. Today’s financial, accounting and tax experts are typically extroverted individuals who not only know how to look at the numbers and assess the big picture, but also to communicate what they see to others.
Gone are the days when organizations bring in accountants just to do their tax returns. Financial/accounting experts are also there to teach board members and staff how to keep their fingers on the financial pulse of the organization, and read it correctly. They must have excellent language skills, and they must be able to condense many details into short, bullet-point nuggets that get the message across.
This is especially important when it comes to navigating the maze of fundraising rules and regulations. For example, if you sponsor an auction or a bingo game, are you required to and how do you register? If more than one state is involved in your fundraiser, do you have to pay an annual filing fee? The individual state regulations that govern charitable solicitation are really an attorney’s bailiwick, but understanding them often becomes an accountant’s responsibility because they fall under the broad category of “fundraising.”
Avoid a seat-of-the-pants approach
A nonprofit board should have a member who can recommend and work with the organization’s staff on financial policies and procedures, including the organization’s investment policy, the timing of grant proposals, and the approach to fundraising. How do you book a grant even though you haven’t received it yet? How do accurate forecasting and budgeting help you make the most productive use of the money you raise? How do you develop the most beneficial investment policy? How do you set up a debt repayment schedule so the pay-down is reasonable and your program services do not suffer from funds being diverted?
Financial/accounting professionals can help answer these questions and avoid the seat-of-the-pants approach that some boards—without the necessary financial/accounting experts among their membership—unfortunately use today. That person can make everyone on the board good stewards of the organization’s assets and supporters of sound policies and procedures. In doing so, that person can give the organization a more confident future.
Financial/accounting professionals can also help establish the best accounting methods for an organization. What are the differences between cash and Generally Accepted Accounting Principles (GAAP) accounting? What internal controls and financial tracking need to be in place to dictate what the organization reports to the IRS? These professionals are also good with the software side of financial procedures—suggesting which accounting packages are best for the organization’s needs, and recommending the right resources for installation and training. This knowledge can help ensure the organization’s staff can work productively and efficiently.
New requirements demand more financial/accounting savvy than ever before
Financial Accounting Standards Board (FASB) requirements are now stricter than ever before regarding nonprofit financial statements. Specifically, nonprofit organizations must split expenses by both their nature and function (i.e. programming, administrative and fundraising) when reporting those activities on the financial statement. Although these changes are good because they allow the public to look at an organization’s financial statements and see exactly what was spent and where, they require more detailed effort and earlier reporting practices, both for tax returns and for audits. A financial/accounting expert on the board can help ensure these new requirements are met, as well as help set up the approach of splitting expenses between the function categories.
In addition, the Exempt Organization Office of the IRS releases an annual work plan indicating where they will focus their energies for the next year. For the last several years, Unrelated Business Income Tax (UBIT) has been on the list. UBIT must be paid when a charitable organization has business (not charitable) income, and UBIT tax and penalty dollars help the IRS’ bottom line. An accounting/financial expert would be able to help calculate the allocation of direct and indirect expenses to lower your organization’s tax bills and IRS exposure.
The growing public demand for transparency—especially in organizations that accept donations—also requires a more intense financial focus by nonprofit boards. That demand drove voluminous changes in IRS Form 990 in recent years. Today, the form is extremely detailed. Those details can’t be overlooked, especially when watchdog groups like the BBB Wise Giving Alliance (BBB WGA) and Charity Navigator are grading your organization heavily based on the information included on your tax return. Guiderstar.org makes it easy for anyone to go online and check an organization’s tax return with the click of a mouse.
What’s more, the economic upturn is raising additional financial questions for nonprofit organizations. Simply put, people are donating more money to charitable causes than they did three or four years ago. It’s a good problem to have, but how do you deal with increased donations in the most prudent way? Start a capital reserve? Pay off debt? Expand the building? Invest in the organizations infrastructure? Boards need to plan carefully how to manage increasing contributions, and be sure they don’t get careless now that times are a little easier.
What to look for
A nonprofit organization with no financial or accounting people on its board of directors recently asked if I would teach a class on what a board or audit committee should know from a financial perspective. It’s another example of the surprising lack of financial expertise on nonprofit boards. But it doesn’t have to be that way.
If you want to bring financial/accounting expertise to your board, here are three qualities to look for when you start your search:
- Passion and energy toward the nonprofit and what you are trying to accomplish. It is difficult to find someone with all the right accounting/financial qualifications, but if someone is passionate enough about the organization, he or she can research and learn.
- Technically proficient financial skills and the ability to communicate. Look for someone who can help others who do not know their way around a financial statement or other financial documents.
- Experience working with nonprofits. Even if you have difficulty finding someone with direct financial/accounting experience, anyone who has worked with nonprofit organizations can usually bring valuable experience to your board. If that nonprofit experience was with a quality organization, it more than likely includes a basic understanding of nonprofit financial issues—experience that can be shared with others.
Should you consider being more specific and narrowing your search to a CPA? There are advantages. Because CPAs can lose their licenses if convicted of fraud, felony, professional malpractice or ethic violations, your organization would have another layer of protection with a licensed CPA on your board. On the other hand, you limit yourself from broader choices. Financial planners, investment professionals, bookkeepers and others with financial/accounting experience can bring many of the same values to your board and give you a wider pool of candidates to choose from—even though they all don’t carry the license of a CPA.
It’s also a good idea to make it clear to new candidates that you want your board to do more than simple financial oversight. Bringing financial literacy to your board can take you a step further, helping you chart a realistic course to your future, and build the financial model to get you there.