“The buck stops here.”  President Truman’s famous quote aptly describes the ultimate responsibilities to which the board of directors of a nonprofit organization is charged.  One important duty of the board is to ensure that the organization possesses the financial and other resources necessary to realize its vision and carry out its mission.  This article will provide a brief overview about the financial stewardship of nonprofit boards of directors.

Frequently, people who serve on nonprofit boards have a passion for the mission but less enthusiasm and interest in the financial, legal and regulatory side of the organization.  In order to effectively fulfill their governance obligations, board members need to spend the time and effort to obtain the necessary expertise to ensure that regulatory compliance, accurate financial reporting, and good stewardship of the organization’s assets is achieved.

Nonprofit organizations vary in their missions, but share three financial characteristics that distinguish them from investor-owned entities:

  1. They receive contributions of resources.
  2. They provide goods and services, or both, for reasons other than to make a profit.
  3. There are no ownership interests (The absence of ownership interests is by far the most important requirement for tax exempt status under the Internal Revenue Code).

Financial stewardship is not solely the responsibility of the treasurer or finance committee.  Understanding how to do the following will provide all board members with the tools to carry out their responsibility for financial oversight of the organization:

  • Read the financial statements
  • Analyze the information and assess risk in the organization
  • Evaluate the organization’s internal control structure for financial reporting
  • Protect the organization’s tax exempt status.

Nonprofits have three basic financial statements depending on the type of organization.  These statements should be provided regularly (preferably monthly) to the board members and must be read together to have a complete picture of the organization.  Certain funding sources or lending institutions may require information more frequently than annually.

  • Statement of Financial Position (also referred to as a balance sheet)
  • Statement of Activities (also referred to as a statement of revenues and expenses)
  • Statement of Cash Flows (serves as a bridge from accrual-based accounting to the inflows and outflows of cash)

Footnotes provide the user with additional information about accounting policies and important aspects of the account balances and classes of transactions.  Analytical comments about variances from budgets are also useful in assessing performance.

In order to analyze the financial information, it is prudent and useful to monitor performance against clearly defined targets; such as a board approved budget.  Through the use of a budget, the board of directors can exercise control over expenditures and major financial commitments for the organization.

Financial reporting risk can be mitigated through the use of qualified, independent financial audits or reviews on an annual basis as appropriate to the size and scale of the organization.  The auditor should be engaged and the process overseen by the board.

Management is responsible for the content of the organization’s financial information including adopting sound accounting policies.  In addition, it should establish and maintain controls over the authorization, recording, processing, and reporting of transactions and events.  The board of directors is responsible for management oversight.  Internal control is the process designed to provide reasonable assurance that

  • the entity has accurate and reliable financial reporting;
  • the entity complies with applicable laws and regulations, contracts and grant agreements; and
  • management’s objectives are met regarding the effectiveness and efficiency of operations.

It is important to keep in mind the size (budget) and complexity (regulation, sophistication of information technology, number of locations) when assessing internal control.

The terminology and definitions dealing with concepts relating to nonprofit organizations can be confusing.  Nonprofit is a type of organization, not-for-profit is a type of activity, and tax exempt it a status granted through sections of the Internal Revenue Code that is recognized, or not recognized by the IRS.  All tax exempt organizations have an annual reporting requirement to the Internal Revenue Service on a Form 990 (or 990-N or 990-EZ).

Board members need an understanding of the issues that nonprofits must consider related to obtaining and maintaining tax exempt status in order to perform important monitoring activities.  Tax regulations are vast and complex, and they are subject to change.  It is prudent to consider enlisting the advice of a tax professional who specializes in the area.

Nonprofit board members do not need to have the same depth of knowledge as those who work in the accounting function.  However, they do need enough knowledge of the financial statement contents, internal controls used and compliance with tax exempt requirements to perform their duties related to financial oversight.

If you have questions about any of the topics raised above, we at Align welcome the opportunity to work with you to address questions or needs.

Bill Benskin, CPA
Align Vice President