Paying careful attention to factors that may compromise an organization’s financial integrity can often take a back seat to more immediate issues. However, the cost of compromising that integrity can be steep. Here are some tips on how nonprofit boards can provide financial oversight:
Have Good Governance Policies
Maintaining financial integrity within your nonprofit begins at the top, with leadership consistently applying strict controls over financial, legal, and operational functions. Nonprofit leaders must fully educate themselves on their fiduciary duties of loyalty, care, and obedience as well as exempt organization responsibilities that, if breached, could endanger the organization’s exempt status.
Establish Financial Controls
Financial integrity depends on financial controls that detect and help prevent problems. Effective financial controls within a nonprofit can include:
- Creating policies and procedures that clearly delineate the roles and responsibilities of everyone within the nonprofit and monitoring those to ensure compliance;
- Routinely assessing the exposure to risk so the organization is ready to act in case of financial mismanagement, a security violation, a poor act by a staff member, or any other circumstances that present an organizational risk;
- Conducting independent financial audits and legal evaluations to protect the nonprofit’s tax-exempt status;
- Maintaining sufficient financial resources to deal with unforeseen circumstances (e.g., COVID-19); and
- Ensuring that nonprofit leaders have timely, accurate, and reliable financial reports to help with decision-making.
Maintain Consistent Oversight
While a board member or director may delegate their tasks to others in the organization, such as staff members or committees, or even to people outside of the organization, such as professionals, they must do so with a proper amount of oversight. This oversight can take various forms. Often it will be handled via standardized procedures. These may include mechanisms such as reviewing financial statements and putting in place discrete governance policies, such as executive compensation policies, reimbursement policies for travel and expenses, conflict of interest policies, and whistleblower policies, among others. For such policies and procedures to suffice as oversight, the board or director must perform due diligence to ensure that the policies or procedures are being followed.
Set Appropriate Compensation
The IRS has parameters for what is permissible for tax-exempt nonprofits in setting executive compensation levels. An executive compensation policy for the organization should set the process for determining and documenting executive compensation. Recently, the IRS issued its annual program letter that detailed the agency’s areas of focus in 2021. One of those areas is excess compensation by tax-exempt organizations.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 245-3177 or reach out to us through our contact page.