Individuals often agree to serve on a nonprofit’s board because they have a strong passion for the organization. While this passion is important, overseeing the finances is equally important. Board members need to make certain that decisions not only support the mission, but also maintain the financial health of the organization.
Beyond legal requirements to do so, it’s important for board members to provide strong financial oversight to keep the trust of stakeholders and the general public. No one wants to see an organization they care about receive bad press because of the finances.
Inadequate Oversight Isn’t Uncommon
Causes of inadequate oversight include a lack of knowledge, information, and time, among other things. The effects of inadequate oversight can ruin good organizations and result in personal damages for board members. Consider the following example:
A nonprofit nursing home found itself in the news after two residents died due to neglect. The deaths were the culmination of years of poor management and financial decisions which led to deteriorated services. The board was aware of the missteps and even secured a grant to search for a new administrator, but those grant funds were never used. A lawsuit followed in which certain individuals were found to have breached their fiduciary duties. Due to the breach, board members were required to pay a portion of $2.25 million in compensatory damages. In addition, five board members were required to pay $350,000 of punitive damages each.
Improving Financial Oversight
Most boards will never find themselves in situations as dramatic as the example above, but it highlights the importance to provide appropriate financial oversight. Boards can help organizations avoid financial pitfalls by strengthening the oversight provided, here are some key ways to improve:
- Remind board members of their fiduciary responsibilities – Board members will be held responsible (as a group, possibly as individuals) if something goes wrong and proper oversight wasn’t provided. Each board member needs to pay attention to the finances – it isn’t appropriate to assume someone else is doing that.
- Provide training to the board – Financial training should be a part of board orientation and continue throughout an individual’s term. If your organization is fortunate to have financial expertise within the board or staff, ask those individuals to teach some of the basics. Otherwise, TD&T and many other organizations provide financial training for nonprofit board members.
- Try to recruit individuals with appropriate financial expertise to the board – Hopefully, you can get at least two individuals with strong financial expertise to join your board. As you search, keep in mind that significant “corporate” financial expertise may not always mean strong nonprofit financial expertise.
- Consider establishing a finance committee – A separate committee can do most of the legwork on financial oversight and give summaries/recommendations to the full board. The committee needs some board members, but it can include other individuals as well. This provides an opportunity to involve individuals with financial expertise who cannot commit to being a full board member.
- Review your financial procedures & policies manual – Key points to keep in mind:
- Are proper financial controls in place?
- Are existing polices/procedures followed?
- Are updates needed based on staffing or program changes?
Don’t reinvent the wheel – if asked, many nonprofits are willing to share information with other nonprofits.
- Hold management accountable to provide usable information – The board must expect management to provide accurate and timely financial information, which is put in context with how it relates to the organization’s goals, budgets and programs. The information should be specific about the current circumstances and presented in a way that all board members understand.
- Consider engaging a CPA firm – Many successful boards engage outside accounting assistance, even if board members possess strong financial expertise. When selecting a firm to work with, make sure they have strong experience in the nonprofit sector and understand the challenges your organization faces. A strong firm will work with your organization to determine the appropriate level of service needed.
TDT Could Be Your CPA Partner
If you want to consider the benefits and services a CPA firm can provide, please contact our nonprofit professionals at TDT. We can help you find the right fit for your needs to help promote proactive financial oversight.