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CPAs & ADVISORS

FIDUCIARY RESPONSIBILITY IN NOT-FOR-PROFIT BOARDS

PHILANTHROPY ADVISORY COUNCIL

Presented byJoyce Dulworth, Partner, BKD, LLP Michael Earls, Manager, BKD, LLP

June 27, 2013

CHANGING LANDSCAPE FOR NOT-FOR-PROFITS

Greater scrutiny being placed on not-for-profits—particularly public charities [501(c)(3) organizations]Response to high-profile scandals in the not-for-profit worldContinued trickle down effect of Sarbanes-Oxley What does this mean?

Role of Board and Audit/Finance Committees is crucial for good governance and evolvingExpectation gap between the general public (including donors, watchdog groups and regulatory authorities) and the members of these bodies regarding the scope of their fiduciary duties is narrowing

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CHANGING LANDSCAPE FOR NOT-FOR-PROFITS

Where is this greater scrutiny coming from?Congress (Senate Finance Committee)IRS (Form 990)State Attorney GeneralsWatchdog groupsDonors

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FINANCIAL OVERSIGHT ROLE OF BOARDS AND AUDIT COMMITTEES

Important to remember there are no current mandates other than fiduciary duty to donors, members, beneficiaries, etc.Efforts of the Board and Audit Committee are meant to supplement the assessments of others

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FIDUCIARY DUTYWhatever their mission or size, all organizations should establish appropriate policies and procedures so that:

Boards and Officers understand their fiduciary responsibilities

Purposes of the organization are carried out Assets are managed properly Organization operates for the public good

Failure to meet these obligationsis a breach of fiduciary duty

and can result in financial and other liability for the Board and/or its Officers

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FIDUCIARY DUTY

Who is responsible?Board of Directors, Finance/Audit Committees and Management share fiduciary responsibilityBoard of Directors and Finance/Audit Committees also share the duties of Care, Loyalty and Obedience

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FIDUCIARY DUTYCare—requires that you act with the care that a reasonably prudent person in a similar position would use under similar circumstances, i.e., must act in an informed mannerLoyalty—requires that you place the interests of the organization over your own personal interests and refrain from using your position of trust to further your own personal gain, i.e., must act in good faithObedience—requires that you perform your duties in accordance with applicable statutes and with the organization’s bylaws and policies, i.e., must effectively carry out the purposes of the organization

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FIDUCIARY DUTY

Primary responsibility of the Board of Directors and Management is to ensure that the organization is accountable for its programs and finances to contributors, members and government regulators

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FIDUCIARY DUTY

Accountability requires that the organization:Comply with all applicable laws and regulationsAdhere to the organization’s missionCreate and adhere to conflict of interest, ethics, personnel and accounting policies

The development and maintenance of internal controls will help to ensure accountability

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FIDUCIARY DUTY

Accountability requires that the organization:Protect the rights of members and donorsPrepare and file its annual financial report with the IRS and appropriate state regulatory authorities and make the report available to all members of the Board and any member of the public who requests it

The development and maintenance of internal controls will help to ensure accountability

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INTERNAL CONTROLSWHAT ARE THEY AND HOW DO THEY HELP?

How do they help?Increase likelihood that . . .

Financial information is reliable so Management and the Board can depend on accuracy and make sound decisionsAssets and records of organization are not stolen, misused or accidentally destroyedOrganization’s policies are followedLaws and regulations are followed

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FIDUCIARY DUTYBoard of Directors and Management share responsibility for setting a tone of trust and accountability by:

Reviewing or establishing written policies for:Code of EthicsConflicts of interestManaging investmentsPurchasing practicesExpense reporting, etc.

Creating a safe environment to address governance issues

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FIDUCIARY DUTY

What else can be done?Practice risk management

Establish appropriate internal controls

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INTERNAL CONTROLSWHAT ARE THEY AND HOW DO THEY HELP?

What are they?Systems of policies and procedures that promote and protect sound management practices—both general and financialProvide the organization with the ability to record, process, summarize and report financial data consistent with assertions of management in the financial statementsEvery organization is different; therefore, nature and extent of control environment will varyAs organizations evolve, so should their system of controls

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INTERNAL CONTROLS PREVENTING FRAUD & ABUSE

Establishing adequate internal control procedures is the best deterrent to internal fraud and embezzlementCost/benefit decisions must be madeRisk assessment and tolerance levels of Management must be different than those of auditors, i.e., what is material to a donor or a member vs. other users of financial statements?Perfection not expected—no system of controls can prevent collusion

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INTERNAL CONTROLSWHAT OTHER STEPS ARE IMPORTANT IN PREVENTING FRAUD?

Next to controls, most effective strategy is to create an environment “hostile” to fraud

Define acceptable and unacceptable activities— provide in writing to staff and volunteers

Provide procedures to report suspected fraud— provide in writing to staff and volunteers

Fully investigate suspected fraudTreat offenders in a consistent manner

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FINANCIAL OVERSIGHT ROLE OF THE BOARD OF DIRECTORS

Board is ultimately responsible for:Establishing and maintaining effective internal controls over financial reportingSetting the proper toneCreating and maintaining a culture of honesty and high ethical standardsEstablishing appropriate controls to prevent, deter and detect fraud and illegal acts

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IRS CHANGES TO FORM 990

Significant redesign of Form 990Designed to enhance transparency and provide IRS and public with a realistic picture of the organizationPortion of the form requires governance information

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BOARD CONSIDERATIONS WITH THE FORM 990

Board should review its existing governance policies and consider:

Conflict of interest policyWhistleblower policyDocument destruction and retention policyInvestment policy including risks associated with alternative investmentsPolicy requiring safeguarding exempt status with respect to transactions and arrangements with related organizations and individualsNecessity and makeup of an audit or finance committee

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BOARD CONSIDERATIONS WITH THE FORM 990

The federal tax Form 990 is a public document which is a useful tool to donors, regulators and others.

Other significant changes/questions for the Form 990:Disclosure of relationships with board members and between board members (ODTKE)Any review by a governing body or delegated body?Disclosure of process for review of executive compensation

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OTHER RISK CONSIDERATIONSBenchmarking

Compare to peer groupsMonitor trendsRed flags

Compensation practicesRebuttable presumption testSelecting comparablesDocumentation

Independent voting membersPercentage based on IRS definition of independence

Media communicationPreparation?

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