The members of nonprofit boards have a number of responsibilities. One of those is addressing the legal accountability of the organization. A nonprofit must follow the applicable local, state and federal laws. These encompass issues such as governance, solicitation of funds, service delivery, personnel, and other areas. Each member of the board should be aware of the laws and regulations that govern the organization and be certain that a process is in place to ensure the nonprofit remains in compliance.
Nonprofit organizations can run afoul of legal restrictions in a number of ways. Examples include fraud and embezzlement, telemarketing scams, misappropriation of funds, excessive compensation, using charitable funds inappropriately, participating in prohibited transactions, and others. Penalties vary, depending on the nature and reason for the illegal activity. Consequences could include fines, restitution, revocation of tax-exempt status, or other actions. And of course, there may be irreparable damage to the organization’s reputation.
Nonprofit leadership requires an understanding of legal compliance. This is a complex and extensive area, and legal noncompliance is not always easily detected. Some organizations are lulled by the thought that since they are nonprofit, no one would consider doing anything illegal. Others are simply unaware of the requirements that govern their activities. Creating strong internal controls, communicating clear expectations regarding behavior and legal compliance, and employing the oversight of skilled, involved and informed board members are pieces of an effective program to ensure legal compliance.