CPA Service on Nonprofit Boards
A Cautionary Perspective

By Darryl C. Spurlock and Craig R. Ehlen

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AUGUST 2008 - 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.

CPAs and Financial Expertise

CPAs serving 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 really entails.

But therein 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.)

The roles 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?

To encourage 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.

While this 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.

Despite the 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 matters.

As professionals, 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.”

Picture this 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 expert.

Serve, 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?

CPAs should 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.

The AICPA 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:

  • Recommend that the organization develop a written code of conduct.
  • Recommend that the organization develop a written whistleblower policy (within the code of conduct or in a separate policy).
  • Recommend that the organization develop a written policy for record retention (including provisions for protecting records subject to litigation).
  • Arrange training in “fraud awareness” for the board.
  • Recommend that the organization develop written accounting policies and procedures.
  • Assist in developing a charter for the activities of the finance or audit committee of the board.
  • Recommend that the organization identify internal controls, perform ongoing testing of those controls, and report the results to the board.
  • Meet with the external auditors to discuss audit procedures and findings.

Implementing 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 their participation.

Participation 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.

Darryl 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.




















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