The CPA as a Nonprofit Director
Issues to Consider Before Volunteering

By Roger B. Daniels, Karen Forrest Turner, and Jesse D. Beeler

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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.

Funding 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.


The 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 The AICPA’s position in 1978 was that the accounting methods used by nonprofits were outdated and had not been codified.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.

In 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.

While 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 board.

The 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.

Internal Controls

When 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.

When 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.

While 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.

Becoming 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.

Recently, 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 of interest.

In 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 founded it.

Prospective 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.

The 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.

Tax Filings

A prospective 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.

Verification 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.

New 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.

Conflicts of Interest

The 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 of interest.

Board Minutes

Important 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.

Pending Legal Matters

When 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.

Liability Insurance

As 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.

Operating Management

Another 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.

Board’s Level of Knowledge and Engagement

Serving 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.

Nonprofit 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 performance.

Board Member Compatibility

Before 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 mission.

Mission Compatibility

Finally, 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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Roger 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, Colo.; and
Jesse D. Beeler, PhD, CPA
, is a professor of accounting at Millsaps College, Jackson, Miss.





















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