To Strengthen a Nonprofit Oversight Function, Find the Right People

By Michael McNee

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APRIL 2005 - Many experts say that predicting the future is often a matter of noting which way the trends are heading and envision them continuing in that direction. It doesn’t take a crystal ball, then, to realize that the Sarbanes-Oxley Act (SOA) will have an impact on the nonprofit sector. Nonprofits must be prepared to actively reassure diverse publics, including regulators and individual donors, that their control systems are airtight. Some nonprofit organizations, to allay public concerns about fraud, have already declared that they are adhering or intend to adhere to SOA.

Enhancing Controls and Financial Reporting

The definition of good practice is evolving in a clear direction: Nonprofit organizations face increasingly stringent requirements for sound financial controls and oversight. Therefore, nonprofits must act now not only to enhance financial reporting, but also to add new layers and protections for independent financial control at the board level. For some nonprofits, this may mean creating or strengthening an audit committee. For others, strengthening procedures within the existing finance committee structure may suffice.

Establishing audit and financial oversight functions in a nonprofit organization starts with identifying and recruiting directors and audit and finance committee members who have relevant professional experience. To attract people with this expertise, the organization might try the same methods it uses to hire an accounting firm, although board and committee members with financial expertise are not necessarily accountants. Resources include the CPAs on Boards program that a group of organizations, including the NYSSCPA, recently launched. Or, a nonprofit can ask its CPA firm to recommend individuals from other firms. Good recommendations may also come from other board members or colleagues in the business community.

Prospective directors typically express two major concerns about serving on a nonprofit board: the risk of liability, and the time commitment. A good fit is more likely if the prospect is sympathetic with the organization’s mission; has a prior track record of committee or board service; or has a basic understanding of, or a demonstrated interest in, working with nonprofits in some capacity.

A nonprofit’s directors and officers (D&O) policy should contain guarantees against liability and should share that information openly with potential board, audit, or finance committee members. Moreover, the nonprofit should assure a prospective director that the organization will be fully receptive to any recommendations about strengthening the organization’s financial controls.

The prospective director should be educated about the organization’s mission and the positive impact it has had. Appeal to the prospect’s altruism. Remind accountants that service on a nonprofit board often involves activities that qualify for continuing professional education credit. If the individual remains reluctant, the organization should look elsewhere. A director who takes on the task halfheartedly will not be an asset to the organization.

Trying New Approaches to Attract the Right People

A nonprofit may have to become more flexible to attract the right people, given the increasing demand for directors with oversight credentials. An organization may need to reconsider its approach to another concern voiced by many prospective board members: the personal fundraising or donation commitment.

If an organization has difficulty recruiting board or committee members with suitable oversight expertise, it may need to consider lowering or dropping its fundraising expectations for such individuals. If competition for experienced financial professionals gets intense enough, organizations may even need to consider monetary compensation for board and committee members who will be contributing to the organization’s fiscal health.

Michael McNee, CPA, is partner-in-charge of the nonprofit industry group of Marks Paneth & Shron LLP, New York, N.Y. He is a member of the NYSSCPA’s Not-for-Profit Organizations Committee.




















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