Service on Nonprofit Boards
A Cautionary Perspective
Darryl C. Spurlock and Craig R. Ehlen
- Most CPAs have long believed in the importance of “giving
back” to the communities we serve, and willingly practice
that belief by serving on nonprofit boards as well as encouraging
younger staff members to become involved in community service. Recent
changes in the regulatory and legal environment, however, have given
CPAs reasons to reflect on that practice. Before deciding whether
the profession’s approach to service on boards should change,
it is worth reexamining the roles CPAs play.
and Financial Expertise
on nonprofit boards commonly serve as 1) president, or chairperson
of the board; 2) a member of the executive committee; 3) treasurer;
4) a member or chair of the finance or audit committee; or 5)
some combination of these positions. CPAs are in high demand to
serve in these positions for a simple reason: They are perceived
as having broad business acumen, solid organizational skills,
and strong personal drive. Most important, other board members
probably turn to the CPA as the “financial expert”
in their midst, even though they might not agree on what that
lies the potential problem: What constitutes a “financial
expert” in the nonprofit environment? In the wake of the
financial debacles including Enron, WorldCom, and Tyco, the provisions
of the Sarbanes-Oxley Act of 2002 (SOX) now require every public
company to identify a “financial expert” on its audit
committee. The SEC’s definition of an “audit committee
financial expert” is both lengthy and expansive, encompassing:
1) the required level of knowledge of GAAP and financial statements;
2) experience in preparing, auditing, and analyzing financial
statements; 3) understanding internal controls; and 4) understanding
the functions of an audit committee. (SOX also includes many provisions
emphasizing the roles of both management and the board in the
process of deterring and detecting fraud.)
of the public company director and especially the “audit
committee financial expert” have become so important that
people in these positions are usually paid (quite handsomely)
for their services. This is in stark contrast to the typical nonprofit
board member, whose service is generally voluntary or pro bono.
Yet, if having a “financial expert” on the audit committee
is a best practice for public companies, might it not be of at
least equal importance for nonprofits?
board members to accept the responsibility of being a “financial
expert,” the SEC has tried to soften the perception of the
inherent responsibilities. The SEC is quick to point out that
a financial expert: 1) has no greater securities law legal exposure
because of this designation; 2) has no extra burden beyond the
duties and responsibilities of fellow board members; and 3) does
not relieve other board members of their obligations.
SEC mandate currently applies only to public companies, many believe
that nonprofit organizations are quite similar to public companies
in that they operate in a public environment (e.g., fundraising).
Many believe that nonprofits should voluntarily adopt certain
provisions of SOX, and, in fact, many national nonprofit organizations
have begun this transition.
SEC’s position regarding the level of legal responsibility
of the “financial expert” on the board, the authors
are concerned about the public’s perception and expectations.
Isn’t it likely that the public (including the constituencies
of the nonprofits whose boards we sit on) expects more of CPAs
than from other board members when it comes to financial matters
because they perceive CPAs to be more capable? Based on the authors’
personal experiences serving on nonprofit boards, our colleagues
do expect us as CPAs to be more competent in dealing with financial
CPAs are continually concerned with client perceptions and expectations—with
the appearance of independence, not just with the technical rules.
Perception is typically of paramount importance in matters of
independence, in public behavior, and in choosing clients. In
developing audit plans and performing audits, CPAs concern themselves
with clients’ perceptions and expectations. Shouldn’t
CPAs have that same level of concern about serving on nonprofit
boards? After all, “Perception becomes reality.”
scenario: You have been on an organization’s board for a
number of years and currently serve as treasurer. You go to the
nonprofit’s office for its regularly scheduled monthly board
meeting, arriving a little early in order to visit with your fellow
board members, many of them business associates, some of them
clients, all of them friends. The executive director enters the
conference room ashen-faced, saying: “We just discovered
that our bookkeeper has been embezzling funds, apparently for
a number of years. The total amount has not yet been determined,
but it appears to be substantial.” Can you see your fellow
board members slowly turning to look in your direction? Despite
the fact that SOX does not (yet) apply to nonprofits, in the eyes
of your fellow board members you are perceived as the financial
with Eyes Wide Open
No one is
seriously suggesting that CPAs not serve on nonprofit boards—the
profession has much to contribute to nonprofit organizations in
local communities. The SEC recognizes CPAs’ skills in its
definition of “financial expert,” and mandates that
one such person be a member of a public company’s audit
committee. Shouldn’t that same level of skill and expertise
be available to nonprofit organizations?
make an honest assessment of their role and of the expectations
of nonprofit organizations, their boards, and their public constituencies.
They cannot avoid being perceived as financial experts, and must
discharge their responsibilities as board members with this expectation
in mind. CPAs should use their knowledge for the benefit of the
nonprofit organizations which they serve. More specifically, CPAs’
knowledge of internal control systems can help the board discharge
its oversight responsibility in order to see that management develops
an environment conducive to the deterrence and detection of fraud.
has an excellent resource, “The AICPA Audit Committee Toolkit:
Not-for-Profit Organizations,” to assist CPAs in becoming
more effective nonprofit board members. Based on the toolkit,
and the authors’ own experiences, the following are some
suggestions for CPAs to consider when serving as financial experts
on nonprofit boards:
that the organization develop a written code of conduct.
that the organization develop a written whistleblower policy
(within the code of conduct or in a separate policy).
that the organization develop a written policy for record retention
(including provisions for protecting records subject to litigation).
training in “fraud awareness” for the board.
that the organization develop written accounting policies and
in developing a charter for the activities of the finance or
audit committee of the board.
that the organization identify internal controls, perform ongoing
testing of those controls, and report the results to the board.
with the external auditors to discuss audit procedures and findings.
any of these steps brings a nonprofit’s management and board
one step closer to providing the environment necessary to appropriately
discharge their fiduciary responsibility to the public. On the
other hand, if an organization’s management and board or
committee members are not willing to take the necessary steps
to discharge their fiduciary responsibilities, CPAs should reconsider
on nonprofit boards is a positive and commendable endeavor for
CPAs to undertake. But we should serve with our eyes wide open
to our responsibility in serving as the perceived “financial
expert” on these boards.
C. Spurlock, CPA, CFE, is managing partner of Umbach &
Associates, LLP, Evansville, Ind.
Craig R. Ehlen, DBA, CPA, CFE, is a professor of
accounting at the University of Southern Indiana, Evansville, Ind.