Are you considering a position serving on a non-profit board?
When you serve on a board, you are a director of the organization and that comes with responsibilities. You may be wondering about these responsibilities with regards to a non-profit – and how to select the right organization to serve.
This article will help you better evaluate non-profits so that you can do your due diligence and make a well-informed decision about whether or not they’re right for you…
Nonprofit organizations: fundamentals
To become a non-profit, an organization essentially makes a deal with society (vis-à-vis the IRS and various state-level agencies) whereby it gets an exemption from income taxes and, in exchange, it must follow certain rules.
Mainly, it is supposed to exist to make society a better place rather than to make a profit for someone. This is the main difference between a non-profit and a for-profit entity.
The governing board of the non-profit (i.e. the board of directors) serves at the top of the organization.
They set the policy of the organization and support the non-profit’s chief executive in the implementation of that policy.
As you may imagine, being a board member is a really big deal. If something goes seriously wrong within the organization, the government and society will look to the governing board for answers and accountability.
Due diligence for serving on a non-profit board
When considering a board position, do your due diligence and put the non-profit through a vetting process. There are many things to evaluate and below we consider the main financial/fiscal perspectives.
Of course, you want to serve on the board of a non-profit that is doing great things. However, it is also important to consider whether the organization promotes transparency and accountability, manages its resources prudently, and manages risk well.
Looking at financial statements and reports is a good start. Some of these are publicly available while others you’ll need to request from the non-profit.
I recommend that potential board members review the following information:
IRS Form 990 – available from guidestar.org. Each 990 will contain a financial summary that covers two years and detailed financial statements for the most recent year, as well as other information. The bottom half of page 6 relates to best practices and is particularly useful. If the organization in question has implemented most or all of the best practices on page 6, it is more likely to be considered as trustworthy and well-managed. The questions ask about how the non-profit deals with conflicts of interest, setting and approving executive compensation, and whistleblower policies, amongst other things.
The most recent audit or review – if the organization undergoes an annual independent audit or review by a CPA (simply having this annual process in place is a good sign), ask for a copy of the auditor’s report. Audit reports must be furnished to members of the public upon request, so it is not really a big deal to ask for it. The audit gives an overview of the non-profit’s financial position and activities and provides an independent expert’s professional opinion on its financials. If you’re feeling bold, ask if the auditor issued a management letter as part of the audit (it’s not subject to public disclosure requirements, so they don’t have to share it with you). The management letter discloses any significant deficiencies or material weaknesses discovered by the auditor. Find out if any such weaknesses have been reported and how the board addressed them. Also, ask if there were any ‘audit journal entries’, adjustments to the books that the auditors proposed as part of their engagement. A long list of adjustments can be a sign that the organization has a hard time maintaining accurate financials throughout the year.
Insurance coverage – from a risk management perspective, having proper insurance in place is critical, including (but not necessarily limited to) general liability, property, workers’ compensation and directors’ & officers’ coverage.
Accounting policies and procedures (P&P) manual – this describes the various fiscal controls that a non-profit has employed to safeguard its assets, manage risk, ensure timely and accurate financial reporting to senior management and the board of directors, and comply with laws and funding source requirements.
Internal financial statements – In addition to the annual audit and tax returns, board members should regularly receive internal/interim financial statements, including statements of financial position, activities with budget vs. actual amounts, functional expenses, and cash flows. Each examines an organization’s finances through a different lens, and together give an overview of its financial position and activities. I recommend asking to see a recent “board packet” of financials and finding out how frequently such items are distributed.
Before serving on a non-profit board, find out where the organization stands in each of the above areas and you are far more likely to make the right decision.