nonprofit audit committees

How Does a Nonprofit Board Know When a CEO Is “Just Minding The Store?”

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How Does a Nonprofit Board Know When a CEO is “Just Minding The Store?”

By Eugene Fram

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David Director (DD) has been the chief executive of a nonprofit for about 15 years. Currently, the organization has a budget of $1.5 million, mainly from governmental contracts and a sprinkling of donations. The nonprofit employs about 20 people full and part-time, and annually serves about 500 people in dire need.

Following is an abstract of the board’s evaluation of DD as the CEO.

High Job Satisfaction: * DD enjoys his work and his position as a chief executive. Staff turnover is very low, and last year, DD led a board-staff committee to configure the new sign in front of the building. An engaging personality, he is liked by both board and staff. He has good press relationships and frequently uses press releases to call attention to client success stories.

A Healthy Organization: During DD’s tenure, revenue growth has averaged about 2% annually. Client growth has been in the same proportion. Organizational finances are is good shape with a balanced budget plus a modest yearly surplus. He has a dashboard to monitor finances.

A Fully Engaged Board: Board members enjoy working on committees such as the new sign campaign (see above), the annual dinner-dance and selecting endowment investments. The audit committee only meets once a year after the completion of the financial audit and its accompanying management letter has been received.

Positive Community Impact: DD keeps records of clients who exit the programs each year, but has been unable to track their long-term impact on the community.

The big question is whether or not DD is just minding the store? I argue that he is.
This hypothetical organization is typical of the types of nonprofits I have encountered over a long time period. The basic fault is that the board is composed of well meaning people attracted to the mission as well as the personality of the chief executive. As a result, the operations of the organization are kept at a steady state with the active minutiae  support of the board. Their rationale for this support is the need to focus on the mission. There also might be a mistaken view that the board must protect staff positions.

Some directors come to the conclusion that there is little one can do to drive change, but stay on to enjoy the networking relationships that can develop. Others who join the board resign quickly, citing work pressures. Still others decline board invitations.

A number of other hints are contained in the case:
• Low staff turnover and DD’s interest in the sign committee. The committee can spend hours talking about its color and lettering!
• Revenue and client growth percentages are very low, probably supported by certainty, to date, that government dollars will continue to be available.
• The committees cited don’t contribute much to clients.  These are management not  boards tasks.
* Many directors who don’t have financial responsibilities seem to get some satisfactions out of making decisions about moving endowment assets around. A robust audit committee meets more than once a year. It is not unusual for fraud to occur in such a situation.
• There is no strategic planning indicated. Nonprofits, like these, also can confuse a SWAT analysis with a strategic plan. Where financial or behavioral objectives are established, measurement outcome data are not included to more rigorously assess outcomes and impacts.
• DD evidently does have the ability to become an effective development person but prefers to spend his time on smaller operational items, such as the new sign committee.
• DD does not provide any strategic insights or vision on trends in his service field. This gap needs to be closed, especially where most of the board members’ experiences are outside those of the nonprofit’s mission.

Summary
In my opinion, there are thousands of nonprofits like the one described. Making changes in their governance or operations is difficult; culturally changes can only take place after a long tenured CEO leaves. Since they never measure up to what they could be, are those organizations with “store minding” leadership limiting the financial and human (board and management) resources needed to serve more clients in dire need?

*Categories described by Molly Polidoroff, Executive Director, Center for Excellence in Nonprofits, Redwood City,

 

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Nonprofit & Business Directors Must Be Vigilant – Board Liability Costs Could Be $2.2 Million!

Nonprofit & Business Directors Must Be Vigilant – Board Liability Costs Could Be $2.2 Million!

By: Eugene Fram

The personal cost of director inattentiveness is made painfully clear in an important federal appeals court decision. The U.S. Court of Appeals decided the decision, in re Lemington Homes, on January 26, 2015 for the Third Circuit. … [T]hese difficult facts arose from a small, nonprofit organization. … (more…)

Once Again! What Does Nonprofit Board Oversight Mean?

Once Again! What Does Nonprofit Board Oversight Mean?

By: Eugene Fram

I have a daily subscription to Google Alerts on “Nonprofit Management” and “Nonprofit Governance.” Every week, several nonprofit case stories surface, related to inadequate oversight by nonprofit boards of directors. Many of the cases result in huge losses to the nonprofits. Following is my personal list of what I consider to be reasonable board oversight responsibilities, to attempt to help nonprofit boards of directors to avoid such losses.
Financial Related Actions
• At least half the board should be able to analyze the monthly or quarterly financial statements. Have voluntary information sessions available for those who do not have the skills.
• The board chair needs to be alert to “teachable moments” during board meetings. When a complex financial or board related legal issue arises, the chair needs to make certain that all have a basic understanding of what is involved. Otherwise some directors will sit quietly and nod their heads in agreement!
• Make certain that an external audit is conducted at least every two years, and the board is involved in the selection of the external auditor from a list of two or three suggested by board members and/or management.
• Be certain the organization has either a comprehensive assessment committee, finance committee, and/or audit committee. (Some states require nonprofits to have an audit committee once the organization has specific annual revenues.)
• Be alert to the development process for filing critical reports –Examples: IRS 990s, employee tax withholdings and both state and federal tax reports. With the recent expansion of the 990 Form, the board and/or audit committee needs to be involved with the development of the form and responding to the 28 new questions related to nonprofit governance.
• Make certain the board has developed or is developing a current strategic plan and that it becomes a useful document.
• Be especially alert when financial reports are frequently late or one or more directors perceive financial personnel are inadequately skilled.

Other Governance Actions

• Be alert to the system used for developing new programs. Be wary when new programs are described such as “mind-boggling.” However, be certain that all reasonable opportunities are examined in a robust manner. Otherwise the organization may be a candidate for long-term disruption, like Eastman Kodak.
• Although engaging the CEO is the only hiring decision the board makes, it still has a responsibility to understand the strengths and weaknesses of promotable internal staff. This will require some board interactions with these staff persons
• Make certain that the organization has a knowledgeable CFO. No board member should have to worry about the safety of the organization’s financial assets.
• Directors need to be ready to raise questions, even if they fear the questions may appear to be inadequate ones.
• Nonprofit operational transparency is critical in the 21st century. Malfeasance, in any format, must not be covered–up for the “sake of the organization’s reputation.”

“Trust But Overview &Verify.”

How Seriously Does Your Nonprofit Board Take the Matter of Ethics?

How Seriously Does Your Nonprofit Board Take the Matter of Ethics?

By Eugene Fram

Most board members are aware of their obligation to ensure their nonprofit’s compliance with certain standard regulations e.g. making tax payments, submitting IRS Form 990s and/or avoiding potential fraud. But what I have found missing in the nonprofit environment is a sense of director responsibility to provide for and sustain a viable ethics program. (more…)

Nonprofit Audit Committee Members Must Take Vigorous Actions

Nonprofit Audit Committee Members Must Take Vigorous Actions

By: Eugene Fram

Many nonprofit board members overtly adopt a “nice guy” syndrome. Because of their community or industry connections, they inherently avoid internal or external conflict and consciously sweep red flags under the rug. (Remember Penn State.) (more…)

Nonprofit Fraud Robs Charities of Substantial Dollars

http://www.huffingtonpost.com/eugene-fram/nonprofit-fraud-robs-char_b_4276111.html

“According to a Washington Post analysis of the filings from 2008-2012 … of more than 1,000 nonprofit organizations, … there was a significant diversion of nonprofit assets, disclosing losses attributed to theft, investment frauds, embezzlement and other unauthorized uses of funds.” The top 20 organizations in the Post’s analysis had a combined potential total loss of more than a half-billion dollars. One estimate, by Harvard University’s Houser Center for Nonprofit Organizations, suggests that fraud losses among U.S. nonprofits are approximately $40 billion a year.

The Possibility Of Fraud – A nonprofit Board Alert

The Possibility Of Fraud – A nonprofit Board Alert

By: Eugene Fram

“According to a Washington Post analysis of the filings from 2008-2012 … of more than 1,000 nonprofit organizations, … there was a ‘significant diversion’ of nonprofit assets, disclosing losses attributed to theft, investment frauds, embezzlement and other unauthorized uses of funds.” The top 20 organizations in the Post’s analysis had a combined potential total loss of more than a half-billion dollars. *

One estimate, by Harvard University’s Houser Center for Nonprofit Organizations, suggests that fraud losses among U.S. nonprofits are approximately $40 billion a year. **

Vigilant nonprofit boards might prevent many of these losses. Here’s how:

• Have an audit committee charged with reviewing the overall results of a yearly independent audit conducted by an outside auditor.
• Carefully oversee executive compensations, pension benefits and other finance activities.
• Conduct a yearly review of conflict-of –interest policies. And be certain that employees sign a conflict-of-interest statement.
• Assure new hires are well vetted for honesty by searching background.
• Meet with external auditors at specified times, including an executive session without management present.
Ask the auditors:
1. Have they perceived any fraud problems?
2. Are internal controls adequate, e.g., those handling financial matters must take at least two weeks vacation per year so their duties can be temporarily assigned to others?
3. Are financial records accurate? To what extent were material mistakes located or was there an increase in non-material mistakes?
4. Do the proper managers or officers properly authorize activities and expenditures?
5. Do all assets reported actually exist?
6. Is the organization performing any activities that might endanger its tax-exempt status? For example, provide misinformation on the IRS Form 990.
7. Is the organization paying its payroll taxes, sales taxes and license fees on time? ***

Trust But Verify

Some directors argue boards can do little to prevent fraud. I argue that every director should know enough about finances to raise issues about questionable activities. At the least, everyone in the organization should be alerted to the fact that board members are paying attention to the possibility of fraud. That knowledge, in itself may deter some people from trying to steal.

* Joe Stephens & Mary Pat Flaherty (2013) “Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits,” Washington Post, October 23rd.

**Janet Greenlee, Mary Fischer, Teresa Gordon & Elizabeth King, “An investigation of the fraud in nonprofit organizations: occurrence & deterrents, “ Working Paper#35 hauser-center@harvard.edu.

***More actionable details can be found: Eugene Fram & Bruce Oliver (2010) “Want to avoid fraud? Look to your board,” Nonprofit World, September-October.
Eugene Fram (2013) “Preventing and managing leadership crises in nonprofit organizations, “ in Handbook of Research on Crisis Leadership in Organizations, Andrew J. DuBrin, editor, London, Edward Elgar International Publishing.