Executive Perspective on Top Risks for 2014 – Comparison of for-profit concerns with those of tax-exempt organizations

Protiviti reported their survey results from executives in the for-profit sector regarding their Top Ten Risks for 2014:

  • Regulatory changes and scrutiny
  • Economic conditions
  • Uncertainty surrounding political leadership
  • Succession planning for key employees and board
  • Organic growth
  • Cyber threats
  • Organizational resistance to change
  • Privacy and identity security system protection
  • Compliance with healthcare reform legislation
  • Volatility in financial markets

Other concerns include setting appropriate executive compensation and addressing the growing demands of compliance oversight.

Not surprising, the risk concerns stated above are very similar to those experienced by executives in the tax-exempt sector. Why is that? To remain viable within a commercial setting, a for-profit business must remain healthy, relevant and profitable. To compare, a tax-exempt organization must also remain healthy and relevant in order to meet its mission statement into the future.  The similarity is the need for relevance and strong financial health.  The contrast is that the goal of a for-profit enterprise is solely profitability, not the specific product or service it provides. This differs fundamentally from a tax-exempt organization that exists to accomplish its mission. In other words, for the tax-exempt organization, financial health is a means to accomplish its goal, not the goal itself.

Using a Dashboard to Communicate With Your Board

2010 Ford Fusion HybridKeeping the board informed of the performance of a nonprofit organization is necessary to assist the board members in exercising their responsibilities in governing the organization. This may be easier said than done, given the amount of data and information that is available. Often an effective tool is the use of a document that highlights the goals of the organization and its progress in meeting those goals – a dashboard.

Creating a dashboard begins with an assessment of the operational, programmatic, and financial goals of the nonprofit. These goals are those that will enable the organization to grow and/or maintain its ability to meet its mission. Once these goals are set, the next step is an assessment of the metrics to be used to measure progress in attaining those goals.

An effective dashboard to present to the board will include a listing of the overall goals of the organization, current objectives to achieve those goals, and the units of measurement. Next, a summary of the progress in meeting those objectives, using the metrics, will give the users of the dashboard an understanding of the financial and operational health of the organization.

The dashboard can be tailored in many ways to meet the needs of the organization and board. Some have red, yellow and green “status lights” to quickly identify areas where adjustments in operations may be necessary. Some include narratives to more fully describe important highlights. And some include graphic information to demonstrate trends and other information.

Presenting information the board needs to govern the organization in a way that is easy to understand and act upon will enhance the overall effectiveness of the organization in meeting its mission.

Take a Look at Your Bylaws

bylawsIn their formative stage, nonprofit organizations usually create bylaws to govern their organizations. Some nonprofits create short documents that have only a few bylaws and others include a significant amount of detail. But then the bylaws are often put away in a drawer and forgotten.

As time goes by, situations change and your organization may no longer be in compliance with your bylaws. Pull them out and review them periodically to see whether they are still appropriate for your organization. If so, be sure you are following them. If they no longer fit the organization, amend them to reflect your current operations and needs.

Some states have statutes that dictate the content of bylaws. Review current statutes and compare your bylaws for any missing content.

Even if you determine no changes need to be made to your bylaws, the time spent in reviewing them as a committee or board will likely be well spent. The discussions about the way your organization is governed and operated are healthy and serve as a helpful reminder to your board of their responsibilities.

A Plea to Board Members

questionRecently I participated in the presentation of our audit to the executive committee of a client – something we do with regularity. The presentation was fairly typical – an overview of the financial statements, explanation of the required communications, and suggestions for improvements in operations and internal controls. There wasn’t really anything in the meeting that was out of the ordinary. Unfortunately, the response of the committee members was not all that uncommon either. It was dead silence. In spite of multiple requests for comments or questions, not a single member had a question or comment.

How can this be? Those charged with governance of an organization have a responsibility to gain an understanding of the financial operations of the organization and to familiarize themselves to the best of their ability. Not every member is a financial expert, and they don’t have to be. But each member should do their best to understand what is going on.

So please, if you are on a board, audit or finance committee, or participating in other ways in the governance of an organization, ASK QUESTIONS! If you don’t know something, ask. If something isn’t clear, ask. If references are made to situations or activities that you are unaware of, ask. An inquisitive mind and willingness to ask questions is one of the greatest attributes you can bring to your organization.

Addressing Fraud Risks

hand-in-cookie-jarWhile performing audits of nonprofits, we work with management of organizations to identify risks that may cause the financial statements to be materially misstated due to fraud. Sometimes these conversations start with the executive director or other member of the management team claiming they have no risks of fraud, because their employees are all committed to the mission of the organization and would never steal from them. Maybe their bookkeeper has been there for years, and they have complete trust in him/her.

Unfortunately, that is an environment that can be conducive to fraud. When management is unable to look at the situation dispassionately, without putting personalities and personal feelings into it, a fraud can occur. All too often an embezzlement of thousands or hundreds of thousands of dollars is uncovered and it is the trusted bookkeeper or long-time employee who hatched the scheme.

Strong organizations identify the risks of fraud and put controls in place to mitigate those risks. Board members and management evaluate the controls to be certain they are being followed. They ask questions and investigate things that don’t look right. They understand the controls protect their employees as well as the organization. Many nonprofits use outside consultants to perform an internal control examination to address process weaknesses – before the shock of a fraud is uncovered.

Nonprofit Executive Compensation

IRS Form 990 has a number of items requiring information regarding the compensation of the executives of the nonprofit organization. One of the questions asks for details regarding the methods used to establish compensation for the CEO/Executive Director.

It is often recommended that nonprofits organizations establish a compensation committee to establish executive compensation. Organizations without a compensation committee may use the executive committee for this task. Most nonprofit organizations involve the board in some way (through committee or as a whole), in order to fulfill the fiduciary responsibilities as a board member. Often this includes a board vote on the compensation.

Those charged with the determination of compensation can use a number of tools to accomplish this task. Many organizations use their human resources personnel or independent consultants to analyze comparable salaries. It is common to use various salary studies to compare the organization with other nonprofits. It is less common to compare the organization with similar for-profit entities. The analysis is most commonly performed on an annual basis.

Strong nonprofit governance includes a policy that enables the board to make fair and reasonable compensation decisions.

Board Responsibilities and Legal Accountability

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.