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Wednesday, December 12, 2012

Board Financial Responsibilities


Put Best Practices in Motion
Members of nonprofit boards of directors likely joined because they had a passion for the organization’s mission and that contribution is one that is essential to every nonprofit.

But even if board members are enthusiastic, wise or skillful, they may not fully understand that all board members, regardless of the skills they bring to the table, have a fiduciary responsibility to be good stewards of the public’s money. And nonprofit accounting is quite unique—so much so that oftentimes board members with a strong understanding of for-profit accounting often are quite perplexed the first time they encounter nonprofit financial statements.

With these challenges, how can a board assure fiscal responsibility? Strong board operating procedures, the right committee structures and appropriate training provide the platform for effective fiscal oversight and sound decision making.

The Board Treasurer
One governance best practice is to make sure that at least one board member is a CPA or experienced equivalent — to provide insight into the nonprofit’s finances and explain financial matters to board members who are less financially savvy. Typically designated the board treasurer, this person facilitates transparency of the organization’s financial health to the full board and the public.

A good treasurer will be able to convey complicated nonprofit concepts into an understandable manner and will have the willingness to answer all questions from fellow board members, no matter how basic they may be.

However, it is not the treasurer’s duty to maintain the nonprofit’s books and records—the chief financial officer (CFO), controller or bookkeeper generally handles that responsibility. The treasurer typically interfaces with the CFO monthly, bimonthly or quarterly, depending on the frequency of board meetings, and reviews the financial information for accuracy and reasonableness.

The treasurer also compares actual and budgeted numbers and the relation to prior year results. They also identify any unusual activity, such as a drastic decrease in cash contributions or significant expense variances and help determine whether appropriate responses have been taken. This information is the presented to the full board.

Design by Committee
Most boards are supported by committees, and that includes the financial front.

Finance Committee

  • The finance committee, which is usually chaired by the board treasurer, is comprised of financially savvy individuals, not all of whom have to be board members. Typical oversight duties are to:
  • Set up or review annually the nonprofit’s internal control policies and procedures,
  • Recommend an investment policy to be approved by the board and oversee the investment portfolio in the absence of an investment committee,
  • Prepare or review for board approval an annual operating budget at the beginning of the fiscal or calendar year,
  • Review and approve monthly financial statements, reconciliations and budget to actual reports,
  • Review the Form 990 tax return, and
  • Manage cash flow when planning future capital expenditures and during crises.

If the nonprofit operates without a compensation committee, it is usually left to the finance committee to  review and recommend the salary of its CFO and Executive Director. This usually entails looking at salary surveys and comparable businesses to see if the recommended compensation is reasonable.

Audit Committee
If the organization has an annual audit, a best practice is to have an audit committee composed of individuals who have financial experience and are independent from the board and staff. In California, it is a requirement for most organizations with revenues exceeding $2 million.

The audit committee’s main responsibility is the oversight of the annual audit process, including interviewing audit firms, obtaining fee quotes and recommending the appointment of an independent auditor. The auditor selection process should be conducted without influence from management to avoid conflict of interest.

The audit committee will meet with the audit firm and discuss the nature, timing and scope of the audit, including areas of focus. After the audit, the committee will meet with the auditor to review a draft of the audited financial statements, discuss any issues identified in the audit, and review any letter to management prepared by the auditor, including possible recommendations to strengthen internal controls.

Once the committee agrees with the audit results, it will recommend that the board accept the audit and findings as prepared. The key aspect of this committee is that it is they, and not the CFO, to whom the auditors report.

There are rules as to how many members of the audit committee can also belong to the finance committee. However, for smaller organizations the duties of the audit and finance committee can be combined under the audit committee.

Needs to Understand
All board members will review a number of reports to gauge the nonprofit’s financial health. Thus, they should possess at least a basic understanding of:

  • The statement of financial position, which summarizes the total assets, liabilities and net assets of the organization at a specific point in time,
  • The statement of activities, which sums up the nonprofit’s activities for a specific period from a revenue and expense viewpoint,
  • The statement of cash flows, which summarizes the cash inflows and outflows during the year from operating, investing and financing activities, and
  • The statement of functional expenses, which groups natural expenses into the functional expenses of program, management and general, and fundraising.

Additionally, comparisons of monthly budgeted amounts vs. actual figures identify where the organization under- or over performed in its fundraising efforts and was effective or inefficient in controlling various costs.

Training and Consultation
The fiduciary duty of board members is shared by all, and if your talents do not lie in this area, it would be well-advised to understand the basics (which cannot be covered in a short article).

We often times come to nonprofit retreats and spend some time explaining basic nonprofit accounting concepts to non-accountants. If this sounds like something your organization may need, please contact us to arrange it.

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