“Management is doing things right; leadership is doing the right things.”
The three presidential debates that I watched with my wife, Betsy, served as the core idea for the topic of this column. In a touch of irony, listening to the two presidential candidates tell us how the country is in a shambles and neither one of them feels that the other is presidential material prompted me to reflect and provide advice for tax-exempt board members.
More specifically, we have been developing “Best Practice Templates” for each of our clients in the tax-exempt sector. You know from reading this column and other sources that the level of expectation for a volunteer tax-exempt organization board of directors has increased exponentially in the past several years.
The Nonprofit Revitalization Act (NPRA) and its subsequent amendments have resulted in the exponential increase in governance responsibilities for tax-exempt boards. I have provided below a list of questions that are directed at both required board activities and what we consider to be best practices. Accordingly, at the end of each question, the “R” refers to a legal requirement and the “BP” refers to a best practice that is not yet a legal requirement.
The questions are as follows. Any “no” answer is something that requires both board and management follow-up to determine its applicability to your organization.
Remember that I have always said that policies and procedures must be both practical and S.A.F.E. The acronym refers to scalable to your organization’s size, affordable, feasible and enforceable as the evaluation requirements for determining the necessity for procedural or policy change.
1. Does the board or designated audit committee of the board oversee the accounting, financial reporting and audit of the financial statements? (R)
2. Does the audit committee retain or renew the retention of the independent auditors? (R)
3. Does the audit committee review the results of the audit and related management letter with the auditors at least annually? (R)
4. Does the audit committee review the audit scope and plan with the auditors prior to the audit’s commencement? (R)
5. Upon completion of the audit, does the audit committee review and discuss the following with the auditors: (R)
Any material weaknesses in internal controls identified by the auditors?
Any restrictions on the scope of the auditor’s activities or access to requested documents?
Any significant disagreements between the auditors and management?
6. Does the audit committee annually review and document the performance and independence of the auditors? (R)
7. Are only independent directors allowed to participate on the audit committee? (R, subject to NPRA amendments)
8. Is the organization prohibited from participating in related party transactions, unless they are determined by the board to be fair, reasonable and in the organization’s best interest? (R)
9. Are all directors, officers or key employees who have an interest in a related party transaction required to disclose to the board/committee the material facts of their interest? (R)
10. Is the board/committee required to review related party transactions for the following: (R/BP)
Consider alternative transactions (if available) prior to entering into the transaction?
Approve the transaction by a majority vote?
Contemporaneously document in writing the basis for the approval, including the alternatives considered?
11. Does the organization prohibit any related parties from participating in the deliberations or voting related to these transactions? (R)
12. Does the conflict of interest policy define the specific circumstances that constitute a conflict of interest? (BP)
13. Does the COI policy have procedures for disclosing a conflict of interest to the audit committee/board? (R)
14. Does the COI policy require that the person with the conflict of interest not be present at or participate in audit committee/board deliberations or vote on the matter giving rise to such conflict? (R)
15. Does the COI policy prohibit any attempt by the person with the conflict to improperly influence the deliberations or voting on the matter giving rise to such conflict? (R)
16. Does the COI policy have procedures for disclosing, addressing and documenting related party transactions? (R/BP)
17. Does the COI policy require that existence and resolution of the conflict be properly documented? (R)
18. Does the COI policy require that prior to the initial election of any director, the director shall sign and submit to the board secretary a written statement identifying: (R, major area of noncompliance)
Any entity of which the director is an officer, director, trustee, member, owner or employee with which the organization has a relationship?
Any transaction in which the organization participates in which the director might have a conflict of interest?
19. Does the COI policy require that each director annually submit such written statement (identifying the transactions above) to the board secretary? (R)
20. Does the board have an established policy regarding a dollar authorization threshold for the CEO? (BP)
I must emphasize that the vast majority of boards will not have a perfect score related to the questions above. Compliance with regulatory requirements is important and necessary, but it must be balanced with the assessment of the policy and procedure as being both practical and S.A.F.E.
Gerald J. Archibald, a CPA, is a partner in charge of management advisory services at the Bonadio Group, and is known for his expertise in nonprofit and tax-exempt accounting, management and governance issues. He can be reached at (585) 381-1000 or firstname.lastname@example.org.