CPA as a Nonprofit Director
Issues to Consider Before Volunteering
Roger B. Daniels, Karen Forrest Turner, and Jesse D. Beeler
DECEMBER 2006 - In
2003, there were approximately 837,000 charitable not-for-profit
entities (NFP) in the United States, excluding foundations
and religious congregations. Of this number, 288,000 charitable
NFPs had gross receipts of more than $25,000 and were required
to file IRS Form 990. Total assets of all these “reporting
NFPs” were $1.76 trillion in 2003, and total expenditures
were $945 billion. In addition, the 66,000 reporting NFP
foundations in the United States (those filing Form 990)
held almost $477 billion in assets and distributed more
than $30 billion in grants in 2003.
for NFPs is provided by a wide range of constituencies,
including individual, corporate, federal, and state donors.
Demand for improved scrutiny over donated funds has increased
the call for CPAs to serve on nonprofits’ boards of
directors. Additionally, many state legislatures are considering
reform of accounting and disclosure requirements to ensure
that NFPs fulfill their charitable missions through proper
use and disclosure of funds.
accounting, control, and governance of nonprofit organizations
have been the subject of debate for decades. Until the late
1970s, the bulk of accounting and reporting standards applied
only to commercial enterprises, with virtually no attention
paid to nonprofits. In 1978, the AICPA issued Statement
of Position (SOP) 78-10, Accounting Principles and Reporting
Practices for Certain Nonprofit Organizations, the
first substantive attempt at addressing the accounting issues
facing nonprofits. The AICPA’s position in 1978 was
that the accounting methods used by nonprofits were outdated
and had not been codified. Inadequate and improper disclosure
of the financial positions and fund usage of these entities
appeared to be widespread.
1987, the American Bar Association promulgated the Revised
Model Nonprofit Corporation Act, which expanded the concept
of legal liability of due care that must be exercised by
directors. In substance, the act requires that nonprofit
directors act “in good faith, with the care that an
ordinarily prudent person in a like position would exercise
under similar circumstances and in a manner the director
reasonably believes to be in the best interests of the corporation.”
Many states have adopted the model act’s provisions
into their laws concerning charitable organizations.
the Sarbanes-Oxley Act of 2002 (SOX) does not specifically
apply to nonprofits at this time, many IRC section 501(c)(3)
entities have adopted SOX provisions “in spirit”
so as to minimize the chance of accounting and control failures.
Increasingly, individuals and companies are withholding
charitable giving when the accounting, control, and governance
of a nonprofit is questionable. The legitimacy of a nonprofit
depends upon its ability to properly account for and control
the use of its funds. Fitch Ratings, which provides credit
ratings for healthcare NFPs, is urging organizations in
the healthcare field to adopt several SOX provisions, including
its requirement that a financial expert serve on an entity’s
authors’ experience with nonprofits has shown that
CPAs are often unaware of the problems they might personally
encounter on a nonprofit board. Gone are the days when a
CPA could sit on a board with no expectation of being held
to a duty to exercise due professional care. In fact, a
CPA could be held to a higher standard of care than other
board members because of the CPA’s professional expertise
and status. What was once seen as an honorary position is,
for CPAs on NFP boards, becoming a professional obligation
to exercise a fiduciary duty. CPAs on NFP boards are increasingly
expected to ensure the proper utilization of assets and
ethical operation of the organization. Before deciding to
serve on the board of an NFP, CPAs should answer a number
of questions—about the organization and about themselves.
considering appointment to an NFP that has been subjected
to an independent financial audit, a prospective board member
will likely rely on the auditor’s assessment of the
adequacy of internal controls. For audited NFPs, problems
with the internal control structure will most likely have
been brought to light and corrective action taken on the
deficiencies. This level of assurance will usually suffice
for new board members. Furthermore, it is important that
all nonprofits, regardless of size, have an audit oversight
committee to ensure that the internal controls are effectively
functioning and that financial information is reliable.
In smaller organizations, the CPA’s role as an audit
committee member will often be more involved.
considering an appointment to an NFP board that has not
been subjected to an independent audit, some level of due
diligence will be necessary to determine whether internal
controls are adequate to safeguard assets, as well as to
ensure that the accounting information system produces reliable
results, funds have been used appropriately, and operational
efficiency is present.
the widely accepted framework developed by the Committee
of Sponsoring Organizations (COSO) of the Treadway Commission
has become the standard for the assessment of an entity’s
internal control structure, CPAs considering serving on
an NFP board may want to consider the old trilogy of control
environment, accounting system, and control procedures.
Recent experience has demonstrated that consideration of
these three factors will allow a prospective board member
to gain an understanding of the NFP’s control environment.
comfortable with an NFP’s control environment is critical.
A CPA must have confidence in the operating personnel. The
board minutes may aid in identifying problems in the control
environment. Interviewing key operating staff can also help.
one of the authors began serving on an NFP board where there
were allegations of financial mismanagement and unaccountability
in the use of restricted public funds. After interviewing
the executive director and other key staff, it was determined
that the organization’s problems were multidimensional.
Both the executive director and the existing board members
were responsible for the public scandal that surrounded
the organization. Several board members were neither engaged
with nor informed of the scandal; others had inherent conflicts
interviewing the executive director, it was determined that
the individual was simply unaware of the legal issues surrounding
the use of restricted funds. The individual in question
also appeared to suffer from “founder’s syndrome,”
where the person who founds an organization is unable to
differentiate the affairs of the organization from his own.
Often, such founders are unable to delegate, feel threatened
by independent board members acting as stewards, and believe
that the organization is “theirs” because they
board members should identify and understand the organization’s
control procedures. This includes asking whether adequate
control procedures exist and are implemented by operating
management, and whether the organization uses internal monitoring
of transactions to ensure propriety. The board should monitor
and review the procedures on a regular basis. Many organizations
have a control procedures manual but don’t use it.
The adequacy and implementation of control procedures will
be more critical for unaudited NFPs as opposed to those
that have undergone an independent audit. Generally, smaller
organizations tend to be unaudited and, therefore, demand
more oversight and intervention by the board.
CPA deciding whether to serve must also understand and determine
the adequacy of an entity’s accounting system to ensure
proper accounting for funds. Because of the stewardship
requirements related to accounting for the donation and
use of restricted funds, and the even more rigorous requirements
mandated by grants from state and local governmental sources,
it is imperative for the NFP to have an efficient, effective
accounting system. It is important that the system provide
accrual and fund-based accounting that matches contributed
funds with the specific purpose for which they were intended.
A number of proprietary systems are widely available.
board member should determine whether an NFP reliably files
its Form 990 each year and pays its payroll taxes. In the
case of the organization’s Form 990, a CPA should
independently verify any uncertainty by requesting copies
from the state attorney general’s office. One of the
authors recently dealt with an NFP that was being investigated
by a state’s attorney general for failing to provide
accurate 990 filings. It was determined that the accounting
system and control procedures were inadequate to facilitate
preparation of the Form 990. After only one month on the
board, a CPA was asked to comment on the adequacy of the
990, which had been prepared by a reputable CPA firm. After
hours of due diligence, the new board member regretfully
concluded that much of the information on the tax return
was implausible and unsupported by documentation. The new
CPA board member was placed in an awkward and acrimonious
position toward a colleague in the community.
that all payroll taxes have been accounted for properly
is also important. A careful evaluation of cash disbursements
to the proper taxing authorities will usually suffice. Verification
from taxing authorities that an NFP is current on its payroll
taxes will be important if any doubts exist.
directors may want to examine board minutes to determine
whether salaries and compensation levels have been approved
and the appropriate payroll taxes applied. There have been
instances where the management simply granted themselves
payroll increases without board approval.
potential board member must evaluate her position, as well
as that of other board members, to determine if potential
conflicts of interest exist. The “operational test”
of IRC section 501(c)(3) prohibits private inurement; that
is, where an individual’s private interest is served
at the expense of the charitable entity serving the public
good. Prior to 1996, the IRS could enforce the prohibition
against private inurement only through the revocation of
an entity’s tax-exempt status. In 1996, Congress added
provisions to the IRC that allow the IRS to tax individuals
or entities that receive “excess” benefits.
Thus, under the notion of “excess benefit,”
both the individual board member and the organization’s
employees may be held liable for improper or inefficient
use of contributed assets if this results from a conflict
insights about an organization can be gained by reviewing
the minutes of its board meetings. The quality of the minutes
can reveal the involvement of board members; identify important
pending legal matters; highlight vital aspects of operations;
and allow a prospective board member to gain an understanding
of the operating environment of the organization. The prospective
board member should be concerned if minutes are inadequate
or nonexistent. Additionally, concerns should arise if minutes
do not appear to be contemporaneous (i.e., if they are produced
long after the meetings were held). Nonexistent or inadequate
board minutes make it difficult to identify potential problems.
minutes are reviewed, they should be evaluated for discussion
concerning litigation or matters that could pose legal problems
in the future. Before joining a nonprofit board, a CPA should
request permission to contact the organization’s legal
counsel to determine if there are pending legal issues.
In one case, a new board member learned at the first board
meeting attended (with members of the media present) that
charges of child molestation had been made against volunteer
staff of the nonprofit. Any prospective board member will
benefit from understanding such delicate matters prior to
agreeing to serve. Not making such inquiries could result
in embarrassing publicity that could impact the CPA board
member’s practice and standing in the community.
noted previously, a CPA board member may be held to a higher
standard and face greater potential liability due to the
CPA’s professional expertise in financial and legal
issues. Before agreeing to serve on a nonprofit board, a
CPA must make certain that he will be indemnified in the
case of litigation against the NFP. The CPA should inquire
as to the existence of liability insurance and review any
policies to ensure the coverage is adequate.
requirement that the Fitch Ratings group suggests for NFPs
in the healthcare field is to adopt and implement a code
of ethics. Because operating management is critical in the
implementation of any such code, any prospective board member
must be certain that the management team is reputable and
can be counted on to “do the right thing.” To
this end, a CPA may wish to do some level of background
check on key members of the NFP’s management team.
Level of Knowledge and Engagement
on a board that is disengaged from its fiduciary obligations
can be dangerous. In some cases, board members are appointed
because of their standing within the community or personal
relationships with other board members or the organization’s
founders. Regardless of their background, it is no longer
acceptable for board members to skirt their stewardship
obligations over the entity’s finances and operations.
boards must consist of informed and diligent directors.
Again, one of the best ways to ascertain board involvement
is by reviewing the minutes of board meetings. A prospective
board member may also wish to talk to various board members
about the organization to get a feel for their level of
involvement and how much they know about the organization’s
committing to serve, a prospective board member should determine
the current composition of the board. Because most CPAs
serve on nonprofit boards as a form of community service,
the experience should be pleasant and satisfying. If the
board is composed of people whom the CPA knows he doesn’t
like or with whom he disagrees on major issues facing the
organization, board service will probably result in a negative
level of personal satisfaction. Conflict among board members
often prevents the board from fulfilling the organization’s
the prospective CPA board member must ask herself, “Do
I strongly believe in the organization’s mission?”
If she cannot be a strong advocate for the organization
and receive gratification from service to the organization,
it may be better to look for other service opportunities.
It is imperative that the mission of the organization be
compatible with one’s own values and belief system.
Whether the organization assists the homeless, provides
AIDS relief, funds cancer research, or supports minority
issues, the CPA must understand and appreciate the mission
and care about the people who will benefit.
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B. Daniels, PhD, CPA, is an associate professor of
accounting in the School of Business and Economics of the
College of Charleston, Charleston, S.C.;
Karen Forrest Turner, PhD, CPA, is an assistant professor
of accounting at the University of Northern Colorado, Greeley,
Jesse D. Beeler, PhD, CPA, is a professor of accounting
at Millsaps College, Jackson, Miss.